By Laura Hay, CPA, CAE
Statement on Standards for Accounting and Review Services (SSARS) No. 21 included some of the most significant revisions to compilation and review standards since the 1970s, changing the concept of when a compilation has occurred, and introducing a new level of service called preparation of financial statements. Issued in October 2014, SSARS No. 21 became effective for financial statements for periods ending on or after Dec. 15, 2015, with early implementation permitted.
With new choices in whether to compile or prepare financial statements, how are CPAs educating users, and what factors are clients considering in opting for these levels of service?
Section 60 of SSARS No. 21 outlines general principles for all engagements performed in accordance with SSARSs. Section 60 addresses ethical requirements, professional judgment, engagement level quality controls, and client acceptance and continuance. Section 60 also requires a signed engagement letter for all SSARS engagements.
Section 80 of SSARS No. 21, Compilation Engagements, removed the need for the accountant to determine who “prepared” or “submitted” financial statements, establishing that the compilation literature applies when the accountant is “engaged” to perform a compilation service.
The compilation report was modified to differentiate it from audit and review reports to clarify that no assurance is provided and consists of one paragraph with no headings. Additional paragraphs are required when:
• Using a special purpose framework.
• Management elects to omit substantially all disclosures.
• Disclosing an independence impairment.
• Disclosing known departures from the applicable financial reporting framework.
• Supplementary information accompanies the financial statements.
The management use only exception is no longer an option.
Section 70 of SSARS No. 21, Preparation of Financial Statements, applies when an accountant in public practice is engaged to prepare financial statements but is not engaged to perform an audit, review or compilation on those financial statements. Preparation is a non-attest service and does not require independence.
A report is not required, even when the financial statements are expected to be given to a third party. A legend should be included on each page of the financial statements indicating that no assurance is provided on the financial statements. If the legend cannot be provided, the accountant is required to issue a disclaimer that makes it clear no assurance is provided on the financial statements.
What level of service is appropriate? If a client is not required to have a compilation, how can the CPA help determine the level of service most appropriate to the circumstances?
“We had a number of clients who wanted to be able to print financial statements out of their accounting software and say they were prepared by their CPA firm,” said Terry Jenkins, CPA, of Clark Schaefer Hackett. “Before SSARS 21, we had to be careful to determine when we had ‘submitted’ to the client, triggering the compilation report. The addition of the preparation service has allowed the client to print the statements and reference the firm; my clients are very happy with the option.”
Some implementation challenges included limitations in accounting software for adding a permanent legend to each page of the financial statements. While most accounting software vendors are making modifications to permit the addition of the legend, Jenkins noted that some have character length limitations.
Another implementation consideration has been disclosing other accounting bases or basis departures. “We don’t know whether the client will always think to print a separate document with the financial statements, so our firm has chosen to include disclosure on the face of the financial statement, for example, stating ‘tax basis’ within the account caption,” Jenkins said. “Clients are understanding the value and have been quite willing to sign the engagement letter.”
The changes in SSARS has led to additional conversations with lenders that previously required monthly compilations. As the firm takes on new clients, they are engaging the conversation about which service better meets user needs, noting that there is no difference in assurance provided.
“Every situation is different, so we make sure it’s appropriate for each individual client,” she said.
An additional challenge of the new standard is ensuring that all non-attest services performed are captured in client engagement letters, that management’s responsibility for each of these services is documented, and that engagement letters cover all of the periods for which financial statements and supplemental schedules are provided.
Practice aids can’t address all possible circumstances; CPAs should talk with their peer reviewer if they have concerns about how to address exceptions.
A new Omnibus SSARS is soon to be released from the AICPA Accounting and Review Services Committee moving the guidance for prospective financial statements from SSAEs into SSARSs. CPAs should become familiar with what services will fall under these rules.
Laura Hay, CPA, CAE, is executive vice president of The Ohio Society of CPAs and staff liaison to the Accounting & Auditing Committee. She can be reached at Lhay@ohiocpa.com or 614.321.2241.