Recent Developments in Compilation and Review Standards
By Andrew M. Cohen, CPA
The AICPA Accounting and Review Services Committee (ARSC) recently issued Statement on Standards for Accounting and Review Standards (SSARS) 9, Omnibus 2002, and two interpretations to SSARS 1. The first interpretation, “Applicability of SSARS 1 When Performing Controllership Services or Other Management Services,” and the second, “Use of ‘Selected Information—Substantially All Disclosures Required by Generally Accepted Accounting Principle Are Not Included,’” became effective upon issuance. Omnibus 2002 was issued to include revisions to existing SSARS that have accumulated over time. The revisions did not warrant the issuance of separate standards.
The auditing literature allows an accountant who may be associated with financial statements of a public entity, but has not audited or reviewed such statements, to state that she has not audited them. The same guidance also applies to compilation and review engagements. SSARS 1 has been revised to include language that may be appropriate under such circumstances. This revision was necessary to give an accountant language to use when her name is included in a client-prepared communication and she has not compiled or reviewed the financial statements, or when an accountant includes client-prepared financial statements in a document prepared by her but not compiled or reviewed by her. The approved language for this situation is:
The accompanying balance sheet of X Company as of December 31, 20XX, the related statements of income and cash flows for the year then ended were not audited, reviewed, or compiled by us and, accordingly, we do not express an opinion or any other form of assurance on them.
The accounting literature does not require the statement of retained earnings to be presented as a separate financial statement. Accounting Principle Board (APB) 12 requires disclosure of a change in capital. This can be done through the preparation of a separate statement, in the notes to the financial statements, or as part of another basic financial statement. In addition, the example reports in SSARS 1 currently do not refer to the statement of comprehensive income (required by SFAS 130, if applicable). The Omnibus includes two footnotes to SSARS 1, which state that: the statement of retained earnings is not a required statement and, if not presented as a separate statement, the reference in the compilation and review report is not needed; and, if the statement of comprehensive income is presented, reference should be made in the appropriate paragraphs of the report.
SSARS currently does not specifically require the signature of the accounting firm or the accountant on a compilation or review report. The Omnibus revises SSARS 1 to require a signature. The required signature can be manual, stamped, electronic, or typed.
SSARS 1 requires the accountant to obtain a representation letter from management. The guidance was not specific about the content of the letter, the dating of the letter, and current management’s responsibility regarding previous years. The Omnibus revises the guidance and requires specific representations as follows:
In addition, the Omnibus requires representations from management for all periods covered by the accountant’s report. For example, if the accountant’s report covers comparative financial statements, the representations obtained at the completion of the most recent review should address all periods covered. Because the accountant is concerned with events occurring through the date of the report that may require adjustment to or disclosure in the financial statements, the representations should be made no earlier than the date of the accountant’s report. If current management was not present during all periods covered by the accountant’s report, the accountant should nevertheless obtain written representations from current management for all such periods. A revised sample representation letter can be found in Appendix F of SSARS 1.
SSARS 1 includes guidance on reporting for supplementary information. The guidance was unclear with respect to separate reporting on supplementary information in a compilation report. The Omnibus explicitly allows a separate report on supplementary information in a compilation report, consistent with guidance on supplemental information in a review report.
SSARS did not refer to the Statements on Quality Control Standard (SQCSS) and the relationship of those statements with SSARS. The Omnibus clarifies that although an effective quality control system is conducive to compliance with SSARS, deficiencies in or noncompliance with a firm’s quality control system do not, in and of themselves, indicate that an engagement was not performed in accordance with applicable professional standards.
SSARS 4, “Communications Between Predecessor and Successor Accountants,” provides guidance on communications between predecessor and successor accountants regarding acceptance of the engagement. Although SSARS does not require such communication (it should be noted that SAS 84 does), it may reflect good business sense. The Omnibus redefines a successor accountant as an accountant who has been invited to make a proposal for an engagement to compile or review financial statements and is either considering or has already accepted the engagement. A predecessor accountant has been redefined as an accountant who has reported on the most recent compiled or reviewed financial statements or was engaged to perform but did not complete a compilation or review of the financial statements, or who has resigned, declined to stand for reappointment, or been notified that his or her services have been (or may be) terminated. The Omnibus also clarifies suggested successor inquiries and includes a sample successor acknowledgment letter, which the predecessor might use when granting access to his workpapers. The sample letter can be found in Appendix A of AR section 400 in the codification of SSARS; it is similar to the one found in SAS 84 and is likewise not required but may make good business sense.
Omnibus 2002 was effective upon issuance.
Controllership and Management Services
For years, accountants have been taking two different positions when providing controllership or management services. Some accountants took the position that they were working for their client and were not required to compile the financial statements that they prepared. Others believed that although these were not traditional accounting services, they should compile the financial statements they prepared and note the lack of independence, if applicable. ARSC had addressed this issue several years ago and did not come to a conclusion on reporting requirements. ARSC took a look at this issue again and issued Interpretation 21 of SSARS 1. The interpretation indicates that if the accountant is in the practice of public accounting (as defined by the AICPA’s Code of Conduct) and is not a stockholder, partner, director, officer, or employee of the entity, the accountant is required to follow the performance and communication requirements of SSARS 1, including the disclosure of a lack of independence, if any. Notwithstanding the requirements of this interpretation, if the accountant submits financial statements that are not expected to be used by third parties, the accountant can submit the financial statements without a report. The accountant, however, must obtain an engagement letter from the client and will also be subject to the compilation performance standards (SSARS 8).
If the accountant is in the practice of public accounting and is also a stockholder, partner, director, officer, or employee of the entity, the accountant may either comply with SSARS 1 or communicate, preferably in writing, the accountant’s relationship to the entity. Without the communication option above, accountants that are directors or treasurers of a not-for-profit organization may have been forced to compile the organization financial statements under SSARS if they had prepared them. The following is sample wording that may be used by an accountant when also a stockholder, partner, director, officer, or employee:
The accompanying balance sheet of Company X as of December 31, 20XX, and the related statements of income, and cash flows for the year then ended have been prepared by [name of accountant], CPA. I have prepared such financial statements in my capacity as [describe capacity] of Company X.
If the accountant does not practice public accounting, the issuance of a report under SSARS would be inappropriate; however, the above communication may be used.
Some accountants labeled the notes to the financial statements “Selected Information—Substantially All Disclosures Required by Generally Accepted Accounting Principles Are Not Included,” when substantially all disclosures were included, in the hope that they might be in compliance with professional standards if one or more disclosures were omitted. Interpretation 22 of SSARS 1 indicates that this label is inappropriate when more than a few disclosures are included. The omission of one or more notes when substantially all other disclosures are presented should be treated in a compilation or review report like any other departure from GAAP, and the nature of the departure and its effects, if known, should be disclosed. The label is not intended to be used for the omission (intentional or unintentional) of one or more disclosures, and the accountant should use judgment in determining its appropriateness.
ARSC expects to issue an exposure draft in the next several months that will clarify inquiries relating to fraud and enhance the analytical review procedures in the review engagement. The development of these projects can be seen at www.aicpa.org.
Robert H. Colson, PhD, CPA
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