The American Institute of Certified Public Accountants (AICPA) has rolled out the long-awaited update of its accounting and review standards. Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, represents one of the AICPA’s most significant revisions of its nonaudit standards since 1979.
Among other things, the guidance creates a bright line between accounting (or preparation) services and reporting (compilation or review) services and lays out distinct requirements for each type of service. As a result of the changes, some businesses may opt to move to a different level of service to report their future financial results.
The AICPA uses the prefix “AR-C” to distinguish the revised accounting and review standards from the old (“AR”) ones. For example, AR-C 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, includes the general principles for all engagements performed under all the SSARSs and is intended to replace AR 60, Framework for Performing and Reporting on Compilation and Review Engagements. As CPA firms implement SSARS No. 21 during the next year, they’ll implement three additional clarified standards.
- AR-C 70 applies when the accountant is hired only to prepare financial statements, without providing any level of assurance. (See below for more information on this new level of service.)
- AR-C 80 applies to compilation engagements, where the accountant assists management in presenting financial information in the form of financial statements without attempting to obtain or provide any assurance that no material modifications should be made to the financial statements. The accountant is required to issue a compilation report also.
- And AR-C 90 covers engagements where the accountant provides the user with the assurance that he or she isn’t aware of any material modifications that should be made to the financial statements to conform to the applicable financial reporting standards.
The clarified standards supersede all existing guidance, except AR Section 120, Compilation of Pro Forma Financial Information. The AICPA expects to clarify this section and publish it for public comment, along with proposed requirements and guidance related to compilation of prospective financial information, in 2015.
Much of the change prompted by SSARS No. 21 will occur behind the scenes as accountants work on their preparation, compilation, and review engagements. But business owners will likely notice the following changes:
“Preparation of financial statements” added.
The clarified standard establishes preparation of financial statements as a separate type of nonattest service that may be used by a third party in addition to management. Accountants have long performed this service for clients when they prepared tax returns or compiled, reviewed, or audited their financial statements.
The clarified guidance, which spells out when and how to conduct these engagements, should prove especially helpful when clients want their CPAs to prepare financial statements, but don’t require a compilation or review report. For example, a preparation service could be appropriate if another CPA will use the client’s financial statements to perform the annual review or audit.
To ensure that financial statement users won’t be misled, the standard requires that each page of prepared financial statements include a legend stating that no assurance is being provided. Alternatively, the accountant can issue a disclaimer report indicating that no assurance is provided — or move the client up to a compilation (or review) engagement.
When applicable, the face of prepared statements (or the footnotes) must describe any special purpose framework, such as the cash or income tax basis of accounting, used to prepare the financial statements. The report must also disclose any significant deficiencies in prepared financial statements, including departures from special purpose frameworks or inadequate disclosures.
“Management use only” compilation agreements eliminated.
If a CPA has been providing preparation service for your business, you’ll need to either upgrade to a full-fledged compilation (or review) engagement or simply settle for the prepared financial statements (as described above) when the new guidance takes effect.
Under previous guidance, standard compilation reports generally run three paragraphs. SSARS No. 21 reduces the standard compilation report to a single paragraph. Another paragraph must be added, though, if the statements are prepared under a special purpose framework.
In addition to identifying any special purpose framework used, review reports may be required to add emphasis of matter (EOM) and other matter (OM) paragraphs when the accountant believes a significant matter exists that must be brought to the attention of stakeholders so they can better understand the financial statements. EOMs elaborate on concerns already disclosed in the footnotes. OM paragraphs address matters that aren’t covered in the footnotes.
Engagement letter signatures required.
For prepared, compiled, and reviewed financial statements, accountants will now be required to obtain an engagement letter signed by both the CPA and management. After adopting SSARS No. 21, accountants will issue compiled financial statements only if they’ve been specifically engaged to do so.
What it means for you
SSARS No. 21 doesn’t take effect until periods ending on (or after) Dec. 15, 2015. CPAs are allowed to implement the guidance earlier, but most will probably need some time to adapt their practices and systems. That means your 2014 year end results will likely be reported under the existing guidance.
In light of the clarified guidance, you may decide to adjust the level of service to report next year’s financial results.
For more information on this topic, or to learn how Baker Tilly specialists can help, contact our team.