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By Carl S. Warren

In September 1995, the AICPA Accounting and Review Services Committee (ARSC) issued an exposure draft entitled, Assembly of Financial Statements for Internal Use Only. This proposed Statement on Standards for Accounting and Review Services (SSARS) provides an exemption from the requirements of SSARS 1 and, in doing so, defines a new level of service by which CPAs can submit financial statements to a client. [See page 8 for an update on the status of the proposed statement.]

Assembly of
Financial Statements

The proposed SSARS defines assembly of financial statements as follows:

Providing various manual or automated bookkeeping or data processing services, the output of which is in the form of financial statements intended for internal use only. The function of assembling financial statements may include preparing a working trial balance, assisting in adjusting the books of account, and consulting on accounting matters.

The proposed SSARS also states that assembly of financial statements does not refer to the mere typing or reproduction of client-prepared financial statements. The proposed SSARS justifies its issuance by suggesting that the current SSARS 1 makes it difficult for CPAs to provide their nonpublic clients with timely, cost-effective services.

Specifically, the proposed SSARS justifies its issuance by indicating that many nonpublic entities look to their CPAs for services that often include assistance in preparing financial statements intended solely for management's use. In these cases, it is argued that management does not need financial statements that comply in all material respects with GAAP or another comprehensive basis of accounting. In such cases, the current SSARS 1 requires the CPA to perform a compilation and to issue a report that includes a separate paragraph describing departures from such principles. In addition, the CPA may incur additional costs associated with adhering to quality control procedures for compilation reports that may be used by third parties. The logistics of preparing the compilation report on firm letterhead may also delay the distribution of the financial statements to the entity.

The final argument set forth in the proposed SSARS is that current technology may create situations where the determination of whether a compilation report has to be issued may hinge on whether the CPA or the client instructs the computer to print the financial statements. The proposed SSARS argues that such situations lack substance for purposes of applying the current SSARS 1 and therefore, the current standards should be revised.

The Test for
Expansion of Services

The ultimate test for any expansion of services that CPAs offer in society is whether the proposed expansion of services has the potential to jeopardize the professional status and reputation of CPAs in society. Does the expansion have the potential to be misused by clients or misinterpreted by third-party users of financial statements?

The primary risk from the proposed SSARS is that clients may improperly distribute "plain paper" financial statements to third parties. The proposed SSARS addresses this issue by requiring a written understanding with the nonpublic entity that the assembled financial statements are to be used for internal use only. The proposed SSARS indicates that the CPA may rely on management's written representation that the statements are to be used for internal use only without further inquiry, unless information comes to his or her attention that contradicts management's representation.

The proposed SSARS inadequately addresses the potential distribution of plain paper financial statements to third parties. The proposed SSARS fails to recognize that once plain paper financial statements are prepared and distributed to a client, the CPA loses effective control over their use and distribution. If assembled financial statements are distributed to a third party, it is highly unlikely that the third party would have access to the engagement letter or written understanding regarding the services performed. In such cases, assembled financial statements that may lack proper disclosures and may reflect unadjusted balances possess a high risk of being misinterpreted by the third party. For this reason, significant changes to the proposed SSARS are necessary.

Necessary Changes to the Proposed SSARS

Before assembled financial statements are allowed as a new level of service, three fundamental changes should be made to the proposed SSARS.

First, the SSARS should require that each page of the assembled financial statements contain a reference that the statements have been assembled for internal use only. The proposed SSARS indicates that the accountant may include a reference such as the following on each page of the financial statements:

"Restricted to Internal Use Only--See Engagement Letter Dated XXXX."

Such a reference should be required. In addition, the preceding wording should be revised. Specifically, the following wording should be included on each page of the assembled financial statements:

"Assembled for Internal Use Only Without Audit, Review, or Compilation."

The preceding wording is an improvement over the proposed SSARS for several reasons. First, use of the term "restricted" may open the CPA to challenge in a litigation setting as to what procedures the CPA used to restrict the use of the financial statements for internal use by the client. The suggested engagement letter (Appendix A of the proposed SSARS) clearly indicates that the assembled financial statements are restricted to internal use, but third parties would normally not have access
to the engagement letter. The phrase "for Internal Use Only" would offer the CPA a better defense in potential litigation.

Second, the exposure draft wording does not communicate the nature of the services that have been rendered. As mentioned previously. As a result, the wording should be changed to include a reference to "Assembled" and "Without Audit, Review, or Compilation." Current users of financial statements are familiar with audit, review, and compilation services and thus, would be alerted to the fact that "assembled" financial statements involve a different level of service. This would reduce the possibility that third party users would misinterpret "assembled" financial statements as either having been audited, reviewed, or compiled.

Finally, the proposed SSARS should be revised to prohibit the inclusion of footnotes in assembled financial statements. The inclusion of footnotes is likely to give the impression that the financial statements are more creditable than warranted. If footnote disclosures are included, then the accountant should be required to report in accordance with general use financial statements under the present SSARS standards.

These changes are necessary to avoid possible misuse or misinterpretation of assembled financial statements to the detriment of the profession. *

Carl S. Warren, PhD, CPA is the Arthur Andersen & Co. Alumni Professor of Accounting at the University of Georgia. The author expresses his appreciation for the helpful comments and suggestions of the Accounting and Auditing Committee of the Georgia Society of CPAs. The comments of Terry Ammons, Ralph Byington, Glenda Leduc, Chris Rouse, Mike Silver, Bob Thornton, and Chip Williams were particularly helpful.

The CPA Journal is broadly recognized as an outstanding, technical-refereed publication aimed at public practitioners, management, educators, and other accounting professionals. It is edited by CPAs for CPAs. Our goal is to provide CPAs and other accounting professionals with the information and news to enable them to be successful accountants, managers, and executives in today's practice environments.

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