If you provide compilation services and/or prepare financial statements, new proposed standards will potentially impact how your firm performs these engagements. A second exposure draft has been issued by the AICPA Accounting and Review Services Committee (ARSC) with three new proposed standards that represent the feedback and comments that were received to the first exposure draft. Your feedback is requested again and ARSC is seeking comments from CPAs on your views of these proposed standards by May 2, 2014. This article highlights what the three standards entail and outlines some simple steps you can take to submit comments for consideration.
The proposed standards in the exposure draft are as follows:
- A revised compilation standard that would provide requirements and guidance to an accountant when engaged to perform a compilation engagement on historical financial statements
- A new preparation standard that would provide requirements and guidance when an accountant is engaged to prepare financial statements for a client but has not been engaged to perform a compilation, review or audit with respect to those financial statements
- A new association standard that would provide requirements and guidance when an accountant agrees to permit the use of his or her name in a report, document or written communication that also includes financial statements with respect to which the accountant did not issue a compilation, review or audit report and the accountant may or may not have prepared the financial statements
The proposed revised compilation standard would modify the applicability of current compilation literature. Currently, AR section 80, Compilation of Financial Statements, applies when an accountant is engaged to report on compiled financial statements or submits financial statements to the client or to third parties. Submission is defined as “prepare and present.” Submission worked well as a trigger for the compilation service when SSARS No. 1 was issued in December 1978, however cloud computing and other technology being used today have made it difficult to determine who (or what) has prepared the financial statements.
For example, take a situation where an accountant performs bookkeeping services for a client. Perhaps the accountant has access to the client’s cloud computing system and makes a few journal entries to record payroll tax payments, sales tax payments and depreciation expenses for a given period. The company’s internal bookkeeper records certain recurring expenses such as utilities and office expenses. At the end of each month, the bookkeeper prints out a copy of the financial statements for presentation to the Board of Directors. Has the accountant prepared those financial statements? The bookkeeper? The application itself? The ARSC proposal would eliminate the need for the accountant to determine an answer to that difficult question by eliminating the submission requirement and making the compilation literature apply when the accountant is engaged to perform a compilation service.
Since the accountant would follow the compilation standard when engaged, the accountant would always be required to issue a compilation report. However, to differentiate the non-assurance compilation report from assurance (review and audit) reports, the ARSC has proposed to streamline the report so that the standard report is just one paragraph with no headings. The proposed standard would retain the existing requirement that the accountant modify the accountant’s compilation report whenever the accountant’s independence is impaired. The accountant would be required to obtain an engagement letter signed by both the accountant and the client’s management. The proposed standard can be applied to financial statements with or without disclosures.
The proposed new preparation standard would apply when the accountant is engaged to prepare financial statements but is not engaged to perform an audit, review or a compilation on those financial statements. A report would not be required – even when financial statements are expected to be used by or presented to a third party. Instead, the accountant would be required to include a legend on each page of the financial statements stating that no assurance is being provided. The proposed SSARS would require that the accountant obtain an engagement letter signed by both the accountant and the client’s management. Like all other nonattest bookkeeping/accounting services engagements, the accountant would not be required to consider whether he or she is independent. The proposed standard can be applied to financial statements with or without disclosures.
The proposed compilation and preparation SSARSs would result in a bright line between accounting (preparation) and reporting (compilation) services. The accountant would not have to be concerned about whether the financial statements would be used internally or would be used by third parties (including Boards of Directors). The following table illustrates the similarities and differences between the two proposed services:
1 When an accountant is engaged to prepare financial statements, the accountant is required to include an adequate statement on each page of the financial statements indicating that no CPA provides any assurance on the financial statements. If the accountant is unable to include an adequate statement on each page of the financial statements, the accountant is required to issue a disclaimer on the financial statements.
|When does the standard apply?
||When an accountant is engaged to perform a compilation
||When an accountant is engaged to prepare financial statements
|Is an engagement letter required?
|Is the accountant required to determine if he or she is independent of the client?
|If the accountant is not independent, is that fact required to be disclosed?
|Does the engagement require a report?
|May the financial statements go to users outside of management?
|May the financial statements omit notes?
The proposed new association standard is essentially the same as AU section 504, Association with Financial Statements. The requirements and guidance with respect to association with unaudited financial statements is being moved to the SSARSs so that the auditing literature deals only with audit matters. The proposed standard applies when the accountant permits the use of his or her name in a report, document, or written communication containing financial statements when the accountant has not issued an audit, review or compilation report. In those cases, the accountant would be required to read the financial statements to see if there are any obvious material misstatements. Either a legend stating that no CPA provides any assurance on the financial statements or a disclaimer report would also be required.
The three proposed SSARS would be effective for periods ending on or after December 15, 2015 and early implementation is permitted.
Practical Tips for Commenting on the Exposure Draft
ARSC is seeking comments from practitioners on seven specific requests posed in the “Changes From Existing Standards” section of the exposure draft, but respondents should not feel obligated to answer every question. If you are interested in commenting as you determine how these proposed standards will impact your practice, performing one or more of the following steps can help you provide feedback to ARSC that would be practical and valuable.
- Reading the Explanatory Memorandum at the beginning of the exposure draft first, especially the section entitled Changes from Existing Standards beginning at the bottom of page 5. This section presents background information about each of the three proposals in the exposure draft and explains ARSC’s rationale for the changes made.
- “Field testing” the exposure draft with your existing clients to determine how the proposed SSARSs would change your practice and methodologies, impact your fees and/or affect your clients, whether positively or negatively.
- Asking other partners and staff in your firm, if applicable, to provide their opinions on the proposals, including delegating the comment process. Consider assigning the three proposed standards for comment to three different individuals, so that writing a comment letter doesn’t fall on just one person.
- Sharing relevant proposed changes to lenders and other financial statement users to solicit their feedback and views on the proposed changes and including their feedback in your comments. Two examples to share with lenders and financial statement users include:
- The proposed legend in the Preparation of Financial Statements section (page 8 of the exposure draft) with suggested language that would be required on each page of the financial statements stating that “No CPA provides any assurance on these financial statements”
- The proposal to change the look significantly between an audit or review report and the compilation report so lenders and other financial statement users clearly understand that the accountant has not obtained any assurance and does not express an opinion, conclusion, nor provide any assurance on the financial statements (see Compilation Engagements on page 9 of the exposure draft)
- Reading the Guide for Respondents on page 10 and including answers to the specific questions ARSC has posed on pages 7-10 of the Explanatory Memorandum
- Considering the following when developing your comments:
- Are you comfortable in applying professional judgment to determine when you have been engaged to prepare financial statements versus to assist in preparing financial statements (Proposed SSARS, Preparation of Financial Statements, paragraphs 1 and A1)?
- Do you understand when to apply the three proposed SSARSs, Preparation of Financial Statements, versus, Compilation Engagements, versus Association with Financial Statements?
- Do you agree with requiring the wording of the compilation report and the wording of the legend in a preparation engagement to be significantly different from the wording in review and audit report so that financial statement users will understand that no assurance is provided in compilation and preparation engagements?
- Sending a comment letter via e-mail by May 2, 2014 to Mike Glynn at firstname.lastname@example.org with your thoughts on the exposure draft. Note that formal letters are not required. An informal e-mail to Mike Glynn will suffice. In your letter, be sure to include:
- Where you agree as well as where you disagree with its conclusions
- If you disagree, discuss how the proposals should be changed including any specific language you recommend
- Any paragraphs in the proposals that are unclear to you
ARSC members read every letter and consider every comment in its deliberations. Your voice is valued and important! If you have any questions about how to comment on the exposure draft or the exposure draft itself, please contact Mike Glynn at email@example.com.