The Accounting and Review Services Committee (ARSC) has issued three exposure drafts of Proposed SSARS, 1) Preparation of Financial Statements, 2) Compilation Engagements and 3) Association with Financial Statements on October 23, 2013. The proposed SSARS would be effective on or after December 15, 2015 with early implementation permitted.
In the current public accounting environment, it has become increasingly difficult to determine whether the accountant or management has prepared financial statements due to advances in technology relating to accounting software applications and cloud computing. The three proposed SSARS have been developed to provide consistency in practice.
Preparation of Financial Statements
This proposed SSARS treats the preparation of financial statements as a nonattest service, which mirrors the AICPA’s Professional Ethics Executive Committee’s revised Interpretation No. 101-3 “Nonattest Services.” The Preparation of Financial Statements becomes a new service, which is in addition to existing compilation and review attest engagements. The ARSC has created requirements and guidance when the accountant has been engaged to perform a preparation service. Some of the highlights are as follows:
- The accountant is not required to be independent of the entity or need to be concerned if the financial statements are intended to be used by third parties.
- A signed engagement letter is required (signed by the accountant and management).
- The accountant is required to obtain an understanding of the financial reporting framework (GAAP, Income Tax Basis, Cash Basis, etc.) adopted by management and to prepare the financial statements pursuant to that framework.
- The accountant is not required to issue a report on the financial statements, but is required to include a statement or disclaimer on each page of the financial statements which is intended to avoid misunderstanding by the users as to the accountant’s involvement with the financial statements.
- The financial statements can omit note disclosures.
- This preparation service is not subject to peer review.
After the accountant has prepared the tax return at year-end, the client requests a set of financial statements. The client engages the accountant to prepare financial statements. The accountant prepares the financial statements and is not required to issue a report, but will include a statement or disclaimer on each page.
This proposed SSARS is a repositioning of the existing compilation standards. Some of the more significant changes are as follows:
- The accountant is required to issue a compilation report only when engaged to perform a compilation service. As a result, the accountant is no longer required to issue a report when engaged to prepare the financial statements. The accountant would comply with the new Proposed Preparation of Financial Statements standards when engaged to prepare financial statements, which is a nonattest service.
- A compilation engagement no longer differentiates between general use financial statements and those not expected to be used by third parties. As a result, management use only financial statements have been eliminated.
- The compilation report has been revised to look significantly different from a review or audit report.
- An engagement letter is a requirement of existing compilation standards, however it is now required to be signed by the accountant and management.
An accountant is engaged by the client to compile financial statements in order to comply with provisions of a contract or agreement, such as a covenant in a loan document. The accountant compiles the financial statements and issues a compilation report.
Association with Financial Statements
The Association with Financial Statements becomes a new service, which is in addition to existing compilation and review attest engagements, and would apply regardless of whether the accountant prepared financial statements. This proposed SSARS addresses situations when the accountant permits the use of his or her name in a document containing financial statements that the accountant has not prepared, compiled, reviewed, or audited. The ARSC has created requirements and guidance when the accountant is associated with financial statements. Some of the highlights are as follows:
- The accountant should read the financial statements for obvious material misstatements.
- The accountant is not required to issue a report on the financial statements, but is required to include a notation or disclaimer on each page of the financial statements which is intended to avoid misunderstanding by the users as to the accountant’s involvement with the financial statements.
- This service is not subject to peer review.
A client would like to include financial statements in a document or some other written communication. The accountant has not prepared, compiled, reviewed or audited the financial statements. The accountant can then be associated with the financial statements once they have read the statements for obvious material misstatements and include a notation or disclaimer on each page.
All of the preceding information is subject to change pending final approval by the ARSC. The ARSC met on May 20-22, 2014 to discuss these exposure drafts of the three Proposed SSARS, including the comment letters received. There will be developments coming out of future meetings, which are scheduled for August 19-21, 2014 and November 11-13, 2014.
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