February 2000


By Andrew M. Cohen

In December, the AICPA's Accounting and Review Services Committee (ARSC) issued two important exposure drafts on Statements on Standards for Accounting and Review Services (SSARS). The committee believes these two statements will give CPAs greater freedom in delivering market-driven financial statement services to their clients.

"Assuming these exposure drafts become 'law,' the changes are long overdue, and major steps in the right direction to help CPAs give their clients what they want and need," said Robert Israeloff, past chair of the AICPA and past president of the NYSSCPA. "The current standards impose a duty to issue a report that the client does not want, need, or even, in many cases, understand; what [clients] really want is financial information for their guidance."

Changes in Compilation Standards

The first ED will amend SSARS No. 1, relating to compilation engagements, and will include conforming changes to other applicable SSARS and interpretations. The ED addresses the communication and performance requirements of unaudited financial statements of a nonpublic entity submitted to a client that are not expected to be used by a third party. The ED would be effective for financial statements submitted on or after September 1, 2000, and early application is encouraged.

This ED defines "third party" as all parties except for members of management that are knowledgeable about the nature of the procedures applied and the basis of accounting or assumptions used in preparing the financial statements. Management or absentee owners could be considered third parties if they are not knowledgeable about the financial statements. "Submission" is also redefined as presenting to a client or third parties financial statements that the accountant has generated either manually or through the use of computer software.

The ED permits an accountant to submit financial statements without a report when such financial statements are not expected to be used by third parties. However, the accountant must either obtain an engagement letter signed by management or issue a letter to management documenting an understanding with the entity regarding the services to be performed and the limitation on the use of the financial statements. The documentation of the understanding should include the following:

* Nature and limitations of the services to be performed;
* Management's responsibility for the entity's financial statements;
* Acknowledgement that no opinion or any other form of assurance on the financial statements is being provided;
* Acknowledgement of management's representation and agreement that the financial statements are not to be used by third parties; and
* Acknowledgment that the financial statements cannot be relied upon to disclose errors, fraud, or illegal acts.

In addition, the documentation of the understanding should address the following, if applicable:

* The omission of substantially all disclosures and the statement of comprehensive income or the statement of cash flows, if applicable, required by GAAP;
* The possibility that material departures from GAAP, or an other comprehensive basis of accounting (OCBOA), may exist and the effects of those departures, if any, on the financial statements may not be disclosed; and
* Lack of independence.

The ED includes examples of these communications.

The accountant should also include a reference on each page of the financial statements, such as "Restricted for Management Use Only" or "Solely for the information and use by the management of [name of entity] and is not intended to be and should not be used by anyone other than the specified party."

Even if the accountant is engaged to compile the financial statements but not to report on them, because they are not expected to be used by third parties, the accountant must follow the performance requirements of a compilation, such as the following:

* Possess or obtain a general understanding of the industry.
* Possess or obtain a general understanding of the client's business.
* Take certain actions if the information supplied by the client appears to be incorrect, incomplete, or otherwise unsatisfactory for the intended use.
* Read the completed financial statements and consider whether they appear to be appropriate in form and free of obvious material errors.

If the accountant reasonably expects the financial statements to be used by third parties, she must report on those statements in accordance with SSARS No. 1. In addition, the accountant is not precluded from reporting on financial statements even when the financial statements are not expected to be used by third parties.

Financial Statements as Part of Business Valuations

The second ED exempts historical financial statements and normalized financial statements included in a written business valuation from the applicability of SSARS No. 1.

The committee issued this ED because, when the purpose of financial statements is solely to assist in developing and presenting the business valuation of an entity, the users of the statements don't need the statements to conform with GAAP or OCBOA and departures are acceptable. This ED would be effective upon its issuance.

Both EDs are posted on the AICPA website (www.aicpa.org). The deadline for submitting comments is June 9. Because of the importance of these EDs, CPAs are encouraged to join the debate by reading the EDs and submitting their comments. *

Andrew M. Cohen, CPA, is a partner of M.R. Weiser & Co. LLP and a member of the AICPA Accounting and Review Services Committee.

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