November 2000

AICPA Accounting and Review Services Committee Issues Ssars No. 8

By Andrew M. Cohen, CPA

The AICPA Accounting and Review Services Committee recently issued an amendment to the original Statement on Standards for Accounting and Review Services. SSARS No. 8, Amendment to SSARS No. 1, Compilation and Review of Financial Statements, was modified and issued after the 85 comment letters received during its 180-day exposure draft period had been given careful consideration.

Substantive Changes

In addition to many minor editorial changes, the committee made two substantive changes to the ED, the most significant pertaining to the definition of “submission”:

Presenting to a client or third parties financial statements that the accountant has prepared generated either manually or through the use of computer software.

The committee determined that a definition of submission that established a “bright line” rule covering all circumstances surrounding submission was not possible. During deliberations, the committee determined that “prepare” was a more suitable term than “generate.” Further, the committee did not attempt to solve the issue of “who pushes the button” and concluded that the accountant must use professional judgment when submitting in compliance with the standards. However, SSARS No. 8 makes the question of “who pushes the button” less meaningful and controversial. Its main provision is that if the accountant submits financial statements that are not reasonably expected to be used by a third party, the financial statements can be issued without a report. The performance standards under SSARS No. 1 still apply, and communication to management is still required.

The second substantive modification is the communication to management. The ED included two types of communications: Either before or at the time the statements were submitted, the accountant could draft an engagement letter or issue a letter to management describing the understanding regarding the services to be performed and the limitations on the use of the financial statements.

The committee abandoned the concept of a letter to management. Many practitioners were opposed to this provision, citing that a one-way letter was not good business sense. The amendment as issued requires the accountant to document an understanding with the entity through an engagement letter, preferably signed by management. This provision should not be confused with the provision that when a report is to be issued, the accountant should establish an understanding with the entity, preferably in writing, regarding the services to be performed. Under the amendment, the accountant must document the understanding through an engagement letter when the financial statements are not for third-party use. Although the letter is not required to be signed by management, this may make good business sense. The rationale behind this provision (and the amendment itself) was to give CPAs greater freedom in delivering market-driven financial statement services to their clients. Each CPA firm will need to set its own policy ba based on its assessment of its risk management requirements.

Other Comments

The committee also addressed comments received in other areas. For example, some respondents were unhappy with the definition of “third party.” By including all parties except members of management knowledgeable about the nature of the procedures applied and the basis of accounting and assumptions used in preparing financial statements, this definition would consider certain members of management or absentee owners to be third parties. Some respondents thought that management should not be considered a third party.The committee discussed this point at length and concluded that members of management who were not knowledgeable about the financial statements could become knowledgeable, and decided that no changes were necessary. In certain situations, professional judgment will be required to determine third party status. In the name of public protection, it is imperative that this type of service (compilation without reporting) should be allowed only for use by management who are knowledgeable about the nature of the procedures applied, the basis of accounting used, and the assumptions included in preparing the financial statements.

The committee also revisited the use of the legend. In the committee’s opinion, the legend must be required to remind management that the financial statements are not intended for third-party use.

Some comments suggested that SSARS No. 8 should be available for interim financial statements only. The committee determined there should be no distinction between interim and annual financial statements.

Although the AICPA bylaws indicate that an engagement will be subject to peer review if a report is issued in connection with the engagement, whether this service should be subject to peer review is open to debate. Because this service is not available for third-party use, protection of the public interest should not be an issue. The final determination will be up to the Peer Review Board, AICPA board of directors, AICPA Council, and boards of accountancy in those states that require peer review for licensure. Under the proposed Uniform Accountancy Act (UAA), many more states will likely decide to require peer review for engagements where a report is issued.

SSARS No. 8 will be effective for financial statements submitted after December 31, 2000; the ARSC will issue wrap-around guidance to answer anticipated questions about the amendment. In addition, the 2000–2001 Compilation and Review Alert will also address this issue.

SSARS No. 8 permits the accountant to submit financial statements without a report when such financial statements are not reasonably expected to be used by third parties. However, the accountant must document the understanding with the entity through an engagement letter—preferably, one signed by management and including the following:

The engagement letter should also address other areas, if applicable:

Each page of the financial statements should state clearly: “Restricted for management’s use only” or “Solely for the information and use by the management of [name of entity] and are not intended to be and should not be used by any other party.” A sample engagement letter is included in Appendix D of SSARS No. 8.

If the CPA is engaged to compile the financial statements but not report on them, because they are not reasonably expected to be used by third parties, the performance requirements for compilations included in SSARS No. 1 must be followed:

If the accountant reasonably expects the financial statements to be used by third parties, the accountant must report on those statements in accordance with SSARS No. 1. Nothing in the amendment precludes the CPA from reporting on the financial statements even when they are not reasonably expected to be used by third parties.

In December 1999, the ARSC issued another ED, Financial Statements Included in Written Business Valuations. Based on the comment letters received, the committee determined it had insufficient knowledge and experience and needed to formulate a conceptual framework for criteria that would exempt an engagement from SSARS No. 1 requirements. The committee also looked at the relationship between SSARS No. 6, Reporting on Personal Financial Statements Included in Written Personal Financial Plans, which requires a report (although exempted from SSARS No. 1), and the ED, Financial Statements Included in Written Business Valuations, which does not require a report. Upon determining that it needed to address this inconsistency, the ARSC deferred the ED on business valuations for further consideration. The committee will continue to study this area and will discuss it at future meetings.

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

Thomas W. Morris

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