The CPA Journal

SSARS No. 8: New Guidance for Compilation Engagements

By Thomas A. Ratcliffe

Although the Accounting and Review Services Committee (ARSC) put an end to plain-paper financial statement engagements with the December 1978 issuance of Statement on Standards for Accounting and Review Services (SSARS) No. 1, Compilation and Review of Financial Statements, the accounting profession has continued to debate the issue. Rapid advances in information technology and low-cost software have enabled even the smallest of reporting entities to record its own transactions and prepare its own financial statements. Nevertheless, many nonpublic entities rely on their CPAs for varied accounting and business advisory services that often include the preparation of financial statements, even if only for management use.

When the ARSC issued SSARS No. 7, Omnibus Statement on Standards for Accounting and Review Services, in November 1992, practitioners supposedly had complete clarification of when a compilation report needed to be attached to the financial statements. In many cases, however, the guidance in SSARS No. 7 has not been followed or has been ignored.

In October 2000, the ARSC issued SSARS No. 8, Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements. SSARS No. 8 provides communication and performance requirements for unaudited financial statements where there is no expectation that the financial statements will be utilized by third parties. Exhibit 1 provides a flowchart summary of the conclusions reached in SSARS No. 8.

The Issue and the Solution

Many reporting entities that need timely financial information for management’s use may not need that information in the form of financial statements that comply, in all material respects, either with generally accepted accounting principles (GAAP) or an other comprehensive basis of accounting (OCBOA). ARSC has concluded that a compilation report may not be necessary for these types of reporting entities and has developed new compilation engagement guidance that allows “restricted use” financial statements to be compiled without following the reporting guidance in the SSARSs. Nonetheless, the performance standards in the SSARSs must still be followed.

The Nonreporting Option Explained

If the financial statements are not expected to be used by a third party, the new guidelines in SSARS No. 8 provide the following communication options:

A compilation report may be issued in accordance with the reporting requirements of SSARS No. 1 (essentially, the status quo).

An understanding of the engagement with the client may be documented through an engagement letter, preferably signed by management, regarding the services to be performed and the limitations on the use of financial statements.

If the engagement letter approach is used, documentation (see Exhibit 2) of the understanding of the engagement in the engagement letter should include the following statements:

The nature and limitations of the services to be performed are described in the letter.

A compilation is limited to presenting, in the form of financial statements, information that is the representation of management.

The financial statements will not be reviewed or audited.

No opinion (or any other form of assurance) on the financial statements will be provided.

Management has knowledge about the nature of the procedures applied, and the basis of the accounting and assumptions used in the preparation of the financial statements.

The financial statements reflect management’s representation and it is agreed that they are not to be used by third parties.

The financial statements cannot be relied upon to disclose errors, fraud, and illegal acts.

If applicable, the required documentation should also note the following statements:

Material departures from GAAP or OCBOA may exist and the effects of those departures on the financial statements may not be disclosed.

Substantially all disclosures and the statement of cash flows may be omitted.

The CPA may lack independence with respect to the client.

A reference to supplementary information is included in the financial statement package.

In those cases where a compilation report is not issued, CPAs must include a reference on each page of the financial statements indicating that they are “Restricted for Management’s Use Only.” Other phraseology that may be utilized in this financial statement legend could be “Solely for the Information of and Use by Management of Ann Wholesale, Inc., and Not Intended to Be and Should Not Be Used by Any Other Party.”

Performance Standards for all Compilations

When a CPA is engaged to report on compiled financial statements and the statements are, or reasonably might be expected to be, used by a third party, a compilation report still must be attached to the financial statements. In all circumstances, CPAs will be required to comply with the SSARS performance guidelines when they are compiling financial statements.

The performance standards for compilation engagements, whether or not a report is issued as a result of the engagement, are as follows:

The CPA should possess a level of knowledge of accounting principles and practices used in the industry in which the entity operates that will enable the compilation of financial statements appropriate in form for that industry.

The CPA should possess a general understanding of the nature of the entity’s business transactions, the form of its accounting records, the stated qualifications of its accounting personnel, the accounting basis on which the financial statements are to be presented (e.g., GAAP, OCBOA), and the form and content of the financial statements.

The CPA should read the financial statements and consider whether they appear to be appropriate in form and free from obvious material errors.

CPAs are not required to make inquiries or perform other procedures to verify, corroborate, or review information supplied by the reporting entity. In cases where a CPA does make inquires that reveal unsatisfactory information, she should obtain additional and revised information. If management refuses, the CPA should withdraw from the engagement.

Other SSARS No. 8 Issues

Besides the communications options it makes available, SSARS No. 8 makes a fundamental change in the definition of “submission” of financial statements. By modifying this definition, the ARSC believes that the majority of SSARS applicability problems faced by the profession will be solved. Under SSARS No. 7, submission of financial statements was defined as presenting to a client (or others) financial statements that the CPA has 1) generated, either manually or through computer software, or 2) modified, by materially changing account classifications, amounts, or disclosures directly on client-prepared financial statements. Under SSARS No. 8, submission of financial statements is defined as presenting to a client (or third parties) financial statements that the practitioner has prepared either manually or through computer software.

Although CPAs must still use their professional judgment in determining whether they have prepared or presented a financial statement, SSARS No. 8’s modification to the submission of financial statements addresses issues associated with today’s technological environment while maintaining a minimum level of service.

The ARSC anticipates that SSARS No. 8’s new nonreporting alternative will be widely adopted in practice. SSARS No. 8 is effective for financial statements submitted after December 31, 2000; there is no provision for early implementation.

Thomas A. Ratcliffe, PhD, CPA, is dean and eminent scholar in accounting and finance at Troy State University, Troy, Ala.

Editor:
Robert H. Colson, PhD, CPA
The CPA Journal

This Month | About Us | Archives | Advertise| NYSSCPA

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.

ACCOUNTING