In 1978, the Accounting and Review Services Committee (ARSC), a senior technical committee of the AICPA, took a major step for the accounting profession. CPAs' involvement with unaudited financial statements of nonpublic entities was changed by issuing Statement on Standards for Accounting and Review Services (SSARS) No. 1 entitled "Compilation and Review of Financial Statements." This announcement established two distinct levels of unaudited services: the compilation of financial statements and the review of financial statements. SSARS No. 1 provides definitions of each service, guidance regarding the procedures for CPAs to perform, and the reporting requirements for each level of service. These reporting requirements indicate that CPAs associated with compilation engagements should issue a compilation report which explicitly states that the CPA expresses no assurances that the financial statements are in conformance with GAAP. In a review engagement, the CPA's report expresses "limited assurance" that the CPA is unaware of any material modification needed for the financial statements to be in conformation with GAAP.

Shortly after the issuance of SSARS No. 1, speculation arose as to its impact on the practice of public accounting firms. Arnold and Diamond (1981) in Auditing Research Monograph (ARM) No. 4, The Market for Compilation, Review, and Audit Services, addressed the following issues: the nature of shift from formerly unaudit engagements to current compilations and reviews; factors that might influence such a shift; relative costs of the various levels of service; and the overall reactions and attitudes of CPAs and bankers.

Study Objective

In this article, the authors report on their study to update the results of ARM No. 4 by re-examining many of the issues addressed in that study. Specifically, we questioned CPAs about the amount of time involved to perform compilations, with and without disclosures and reviews; the factors that influence the CPAs' recommendations to a lender and a client regarding the level of the service to be provided; and CPAs' attitudes toward a variety of issues associated with the SSARS pronouncements.

The accounting profession has had time to experience compilation and review engagements since Arnold and Diamond's study. Our findings should help in assessing the impact of SSARS pronouncements during the succeeding years.

Background

We sent 275 questionnaires to local, regional, and national CPA firms in 20 cities across the U.S. The firms were randomly selected from large cities (population over one million) and medium-sized cities (population under 750,000). Cities were selected from the northeast, southeast, central, and western regions of the country.

The managing partners in the offices of the potential respondents were asked to participate before the questionnaire was mailed. We received 60 responses representing a 22% response rate.

Results

The results indicate a dramatic difference between local/ regional and national CPA firms in the percentage of clients receiving compilation services. For local and regional firms, these engagements constitute a significant portion of their practice--compilations without disclosures 32%, and compilations with disclosures 22%. For national firms, the average percent of compilation clients is less than 6%. However, the incidence of review engagements is nearly equal among local/regional and national firms (22% and 20%, respectively).

Relative Time/Costs of Compilations, Reviews, and

Audits

We asked participants for an estimate of the percentage of hours and fees required to perform a compilation without disclosures, a compilation with disclosures, and a review relative to an audit of a typical nonpublic client. The respondents were presented with two scenarios involving this nonpublic client with either a continuing or prospective engagement. The difference in responses between the two scenarios is not significant and the results are aggregated in Exhibit 1. Finance interrelationships between the relative hours for each type of service are interesting. On average, films reported that reviews require twice as many hours as compilations without disclosures (52% vs. 26%), and a little over half as many hours as audits (52% vs. 100%). Also, reviews would require about 1.4 times as many hours as compilations with disclosures (52% vs. 36%), while compilations with disclosures require 1.4 times as many hours as compilations without disclosures (36% vs. 26%).

The ratios of fees for unaudit services relative to an audit are approximately equal to the relative number of hours. This relationship indicates that CPA firms charge nearly the same hourly rate for all of these services.

The responses and interrelationship with respect to relative audit hours differ according to the size of the CPA firm, as shown in Exhibit 2. For all types of unaudit services, local and regional CPA firms require a significantly larger percentage of hours than do national firms. Compilations and reviews comprise a larger portion of the practice of smaller firms and, therefore, the firms may be more motivated to provide additional services to their clients within the framework of an engagement to compile or review financial statements.

The results from this survey are compared to those from ARM No. 4 in Exhibit 2. In both studies, local firms require more hours relative to an audit than do national firms. The interrelationships among unaudit services are similar. However, local firms in our sample reported more relative audit hours to perform unaudit services than in the earlier study, while national firms currently require less.

Factors Influencing Recommendation of Service

The questionnaire also surveyed the factors influencing CPAs in their recommendation for accounting service. The CPAs were asked to rank 12 factors in order of their relative importance in such a decision. Again, two different situations involving continuing and prospective clients were presented. In the first situation, a lender of the CPA's audit client is considering changing its requirements to allow a review in accordance with SSARS No. 1, and the lender asks the CPA for advice. In the second situation, a family-owned manufacturer with no significant need for an audit obtained a loan which required some form of CPA association with the financial statements; the prospective clients asks the CPA for a recommendation as to the level of unaudit service which should be performed--compilations with or without disclosures, or a review.

The results in Exhibit 3 indicate the mean rank of the 12 factors. The rankings of the factors are similar for both continuing and prospective client scenarios, although the rankings of the factors do differ slightly, but not significantly. The 12 factors that have been used in this study are similar to the ones used in ARM No. 4 and the results are similar.

The first and most important set of factors encompasses the preferences of the parties involved and the client's system of internal control. This is not surprising since the CPA should recommend the minimum level of service that meets the needs of users of the client's financial statement which include lenders, vendors, customers, and owners. Internal control considerations are extremely important since they bear directly upon the reliability of the financial data. The least important factors relate to self-interests. The risk of legal exposure, comparative fees, other services provided by the CPA firm, and attitudes towards compilations and reviews received relatively low priority as factors in the decision. These results are particularly informative since they indicate that CPAs react more to the needs of the client and outside user rather than predetermined attitudes and factors related to self-interests.

Attitudes Toward Compilations and Reviews

The last part of the study dealt with the attitudes of CPAs toward compilations and reviews. Respondents were asked to indicate their level of agreement or disagreement with 14 statements regarding their reaction to SSARS pronouncements, the appropriate level of service for nonpublic companies, and legal liability considerations. The responses were measured on a scale from: 1 = strongly agree; to 5 = strongly disagree. The results are presented in Exhibit 4.

Reaction to SSARS Pronouncements

The reactions towards SSARS pronouncements are favorable. The large majority of respondents strongly or mildly agree that the development of compilations and reviews through SSARS pronouncements was a positive step taken by the profession (average response = 1.8) and that SSARS No. 1 represents a positive move to expand accounting services to nonpublic companies (2.2). Also, the CPAs surveyed tend to mildly disagree that SSARS pronouncements entail too many specific standards (3.4) or require too much judgement on the part of accountants (3.6). Few CPAs agree that the pronouncements caused organizational changes (3.5) or created substantial implementation problems within their firms (3.8). Finally, most respondents either mildly agree or are neutral in their opinion that the standards included in the SSARS pronouncements are expressed clearly (2.7). The reactions towards SSARS pronouncements do not differ significantly by firm size.

Level of Service and Legal Liability

Attitudes toward the appropriate level of service and the relative risk of legal liability regarding compilations do vary according to firm size. CPAs from national firms agree more often that CPAs from local and regional firms that compilations without disclosures (2.2 vs. 3.3) and compilations with disclosures (3.2 vs. 4.1) are inappropriate for business financial statements. National firms are also more likely to agree that nonpublic clients should be encouraged to select a review as a minimum level of service (2.4 vs. 3.2). Overall, national firms seems less enthusiastic than local/regional firms regarding unaudit services.

Reviews

CPAs from both firm sizes express similar attitudes toward reviews. Most disagree that nonpublic clients should be discouraged from changing from audit to review (average response = 3.8) and most agree that the risk of legal exposure is greater with an audit than with a review (1.9). Also, the CPAs tend to agree that inquiries of client personnel and analytical review of financial data provide an adequate basis for issuing a review report (2.8).

The opinion of the CPA firms are consistent with the level of unaudited services provided to clients. National firms have a less favorable attitude toward compilations and are infrequently associated with compilation engagements; both sized firms express similar attitudes toward reviews and both perform reviews of financial statements with similar frequency.

Summary

These findings indicate that most CPAs have a positive attitude toward the SSARS pronouncements and the related services. These new services have not caused CPA firms organizational problems nor have there been any significant problems in implementing these standards. As to the appropriate level of service to be provided, national CPA firms tend to discourage the use of compilations without disclosures and recommend a review as the minimum level of service. Furthermore, there is general agreement that inquiries of client personnel and analytical review procedures of financial data provide an adequate basis for expressing limited assurance. It is also reassuring to find that the factors that influence recommendations on types of services relate more to the needs of the clients and outside users than to CPAs' self-interest factors. In short, we conclude that the SSARS pronouncements and their defined levels of service have been an improvement for the profession.

Table : Exhibit 1 RELATIVE HOURS AND FEES

Table : Exhibit 2 RATIO OF HOURS REQUIRED BY FIRM SIZE (AUDIT = 100%)

Table : Exhibit 3 MEAN RANKINGS OF 12 FACTORS INFLUENCING CPA'S RECOMMENDATION FOR TYPE OF SERVICE

Table : Exhibit 4 ATTITUDES OF CPA's TOWARD UNAUDITED SERVICES