SSARS 21 Financial Statement Options

SSARS 21 is effective for periods ending on or after December 15, 2015 with early implementation permitted. I am already seeing CPAs early-implementing this standard.

There are basically three options for financial statement issuance (when a review or an audit is not performed):

  1. Financial statements with the words “no assurance is provided” on each page
  2. Financial statements with a disclaimer paragraph
  3. Financial statements with a compilation report

Section 70 (Preparation of Financial Statements) of SSARS 21 provides guidance for options 1. and 2.

Section 80 (Compilation Engagements) of SSARS 21 provides guidance for option 3.

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Extraordinary Items – RIP

The Financial Accounting Standards Board (FASB) just released Accounting Standards Update No. 2015-01 titled Income Statement–Extraordinary and Unusual Items.

Presently (and for many years) a transaction was assumed to be ordinary unless it was unusual in nature (possessing a high degree of abnormality) and infrequent in occurrence (not reasonably expected to recur in the foreseeable future).

With this standard (ASU 2015-01) FASB is eliminating the option to report a transaction as extraordinary; the new standard states the following:

Eliminating the concept of extraordinary items will save time and reduce costs [my bold for emphasis] for preparers because they will not have to assess whether a particular event or transaction event is extraordinary (even if they ultimately would conclude it is not). This also alleviates uncertainty [my bold for emphasis] for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately.

Effective Date

ASU 2015-01 states:

The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities.

Free Download

You can download the new standard here.

Fraudulent Payments Without Being on the Signature Card

Auditors often focus on authorized check signers when considering who can fraudulently disburse funds. But might it be possible to make payments without being on the bank’s signature card?

Courtesy of a DollarPhoto.com

Courtesy of a DollarPhoto.com

Fraudulent Payments without Being on the Signature Card

Here are a few ways to disburse funds without being on a signature card:

  1. Forgery
  2. Unsigned check
  3. Wire transfer (sometimes person can just call or visit the bank)
  4. Electronic bill pay (if person has access to passwords)
  5. Signing checks with accounting software (signature built into accounts payable module)
  6. Use of a signature stamp

Forgery

Since banks don’t usually inspect checks as they clear, a forged check will normally clear the bank.

Unsigned Checks

Again, since banks don’t normally inspect checks as they are processed, an unsigned check can clear the bank.

Wire Transfer

Many times, at the client’s direction, banks allow wire transfers with just one person’s involvement. I have also seen small town business accountants simply drop by the local bank and tell them to move money. Banks, desiring to be accommodating, often do so.

Electronic Bill Pay

Anyone with the right passwords can make payments to themselves or anyone else.

Signing Checks with Accounting Software

This one scares me the most.

Many businesses, in an effort to expedite the disbursement process, have authorized signatures embedded in the payables software, enabling the payables clerk to make a payment to anyone. If the payables clerk has access to check stock, watch out. Even if a second person is normally involved in processing checks with automatic signatures, how easy is it for the clerk to go by in the evenings and make fraudulent payments? This danger increases if the payables clerk also reconciles the bank account.

Use of a Signature Stamp

I cringe every time I see a signature stamp. Why not just ask the authorized signer to just sign plenty of blank checks. (Yes, I am being facetious.)

Just last year I worked on a case where the bookkeeper wrote manual checks to herself and entered payments in the general ledger for the same amounts as those paid to herself but–to mask the payment–entered real vendor names.

Recipe for Disbursement Fraud

Give anyone (1) the ability to sign checks, (2) access to blank check stock and (3) the ability to make the bookkeeping entry, and you have the recipe for theft–particularly if that same person reconciles the bank statement or if the person reconciling the bank statement does not examine the payee on cleared checks.

Reminder – Private Companies can Amortize Goodwill, Avoid VIE Treatment

I know many of you are presently preparing year-end financial statements for small privately-held companies.

This is just a reminder that you can now:

  • Amortize goodwill
  • Not consolidate certain leasing companies due to variable interest entity (VIE) accounting standards

Here are links to prior posts:

Click here for goodwill post.

Click here for VIE post.

Independence and Preparation of Financial Statements

For many years, preparation of financial statements was considered a part of an attest engagement (audits, reviews compilations). No longer.

The Professional Executive Ethics Committee (PEEC) recently added guidance to the “Nonattest Services” interpretation as follows:

activities such as preparation of financial statements…are considered outside the scope of the attest engagement, and, therefore, are considered a nonattest service

Consequently, if an accountant prepares financial statements (a nonattest service) and performs an attest service (e.g., audit, review, compilation), then consideration should be given as to whether: 

  • the client makes all management decisions,
  • the client properly oversees the service,
  • the client evaluates the adequacy and results of the service, and
  • the client accepts responsibility for the service

We have, for some time now, included the aforementioned language in engagement letters when we have performed both attest services and nonattest services. But the language referring to nonattest services usually addressed tax preparation, depreciation schedule preparation, bookkeeping and the like. Now preparation of financial statements should be listed as another nonattest service and the requisite language concerning client responsibilities (in the previous paragraph) applies to the preparation-of-financial-statements engagement.

The requirement to treat financial statement preparation as a nonattest service is effective for engagements covering periods beginning on or after December 15, 2014. If you, for example, perform a compilation engagement for January 2015 (i.e., a monthly financial statement), the new guidance is applicable. Of course, with regard to compilations, you can lack independence if it is noted in the compilation report. Not true for reviews and audits. CPAs are precluded from performing reviews and audits if their independence is impaired.

Here is the sample relevant paragraph from Illustration 1 of the compilation engagement letters in Section 80 of SSARS 21:

You are also responsible for all management decisions and responsibilities and for designating an individual with suitable skills, knowledge, and experience to oversee our preparation of your financial statements. You are responsible for evaluating the adequacy and results of the services performed and accepting responsibility for such services.

If other nonattest services are to be provided (e.g., tax return), they are to be listed alongside preparation of financial statements.

The client must accept responsibility for financial statements prepared as a part of an audit or a review for periods beginning after December 15, 2014. So, for example, if a client desires for you to perform a review engagement for the first quarter of 2015, the client must be able to oversee your preparation and accept responsibility for the financial statements. If the client is unable to accept that responsibility, then the accountant is not independent and would be precluded from performing the review engagement.

Simply including the standard language in the engagement letter (that management assumes responsibility) is not the same as management actually accepting responsibility.

Obviously, the determination of whether the client can (or has the ability to) accept responsibility is a subjective one. I anticipate additional guidance to be forthcoming from the AICPA to assist CPAs in making this decision.

Summary Schedule of Prior Audit Findings

OMB Circular A-133 requires auditees to prepare a summary of prior audit findings.

Here are a few things to consider in preparing the summary schedule:

  1. Since the summary schedule may include audit findings for more than one year, the fiscal year in which the finding initially occurred should be included. For example: 2012-04 or 2013-02.
  2. The summary should only address audit findings relative to federal award programs. The summary schedule is a creation of OMB A-133 and, therefore, is not intended to cover prior period Yellow Book findings.
  3. When audit findings have been corrected, the schedule need only list the audit finding and then state that appropriate corrective action was taken.
  4. If there are no prior year findings, the auditee is not required to prepare the summary of prior audit findings schedule.

Prior Year Yellow Book Findings

With regard to Yellow Book findings, the Yellow Book does not require that the status of prior year uncorrected material findings be reported. If the prior year finding exists in the current year, you will report it again–as a current year finding. (The prior year Yellow Book finding should be considered in your planning for the current year audit.)

New AICPA Code of Professional Conduct Effective December 15, 2014

The AICPA’s new Code of Professional Conduct is now effective.

On January 28, 2014, the AICPA Professional Ethics Executive Committee (PEEC) approved the new Code of Ethics Codification. The prior code of ethics evolved over many years without a great deal of structure, making it difficult to find answers to CPA’s ethical and independence questions. The purpose of the new codification is to enhance the clarity and organization of the Code.

You will find the new codification delivers as promised: easy-to-follow and well designed. The AICPA did a fine job with this project.

AICPA Code of Professional Conduct Table of Contents

AICPA Code of Professional Conduct Table of Contents

Table of Contents

The Code is organized into three parts:

  1. Public practice
  2. Members in Business
  3. All other members (including those who are in between jobs or retired)

Effective Dates

The revised Code is effective as of December 15, 2014. The new conceptual frameworks, however, are not effective until December 15, 2015. 

The Code includes a threats and safeguards framework (not effective until December 15, 2015–this delay is provided to give CPAs time to consider and understand the new framework). CPAs will identify threats and then consider safeguards to mitigate those threats. The CPA will be able to proceed with the engagement if threats–after considering safeguards–are at an acceptable level. The conceptual frameworks (there are two–one for members in practice and one for members in business) are to be used only in situations for which the revised code does not contain a specific rule or requirement.

Access to New Code of Conduct

Access to the revised code is free (you may be thinking, finally something free), and users will be able to save searches and bookmark content.

Access the electronic version of the code here.

Download a free PDF version of the code here.

Independence Standards

For CPAs in public practice, the independence standards are located at 1.200.

Merging of AICPA and Yellow Book Independence Rules

If the threats and safeguards framework sounds familiar, it should. You will recall the GAO issued the revised 2011 version of the Yellow Book which includes similar independence language and approaches.

For many years the AICPA and the GAO went in different directions. The result was independence standards that were quite different. Now, thankfully, they are similar.

Most traveling CPAs are looking for ways to lighten their load, especially with regard to computers. CPAs often need Windows-based computers (since most CPA software packages are Windows-based).

My friend, Donald Vieira, is a CPA in Alaska and flies to remote areas in small Cessnas. Light-weight is of great importance to him.

I found his recent LinkedIn comments interesting:

One item we have been testing is the Microsoft surface 3. It is capable of running all our software, additional monitors, and scanner. But it weighs about 7 pounds less than the laptops. I carry a portable scanner (brother), but no printer. If I need something printed, I’ll use the clients. As our laptops age out, we will probably switch to the surface. I recommend the one with the i7 processor.

And later he said:

We put the i5 cpu version through the ringer and it has done everything. It runs Creative solutions, acrobat, pro series, lacerte. We’ve had two additional monitors hooked up to it using the docking station, a portable scanner. Just be mindful of getting the i7 processor and think about storage. 256 gb might be too little. I’d increase that to the 512 hard drive.

I have not tested the Surface (an iPad looking device), but it sounds like it’s worth a try–especially if you travel a lot. You will also need a blue-tooth keyboard.

SSARS 21 Reports – Preparation, Compilation and Review

Here are sample compilation and review reports

In this post, I provide comparisons of SSARS 19 (old standard) and SSARS 21 (new standard) compilation and review reports.

But first I provide the new SSARS 21 preparation (of financial statements) disclaimer–SSARS 19 had no such disclaimer. (If the accountant chooses not to use the disclaimer, he can put “no assurance is provided” on each page of the financial statements.) For more information about preparation of financial statements, as provided in SSARS 21, click here.

SSARS 21 is effective for all periods ending on or after December 15, 2015 and can be early implemented.

Courtesy of DollarPhoto.com

Courtesy of DollarPhoto.com

Preparation Disclaimer

Using SSARS 21, a disclaimer can be provided by an accountant that prepares financial statements and is not engaged to perform a compilation.

The preparation disclaimer follows:

The accompanying financial statements of XYZ Company as of and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, nor provide any assurance on them.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date]

Compilation Reports

The SSARS 19 compilation report follows:

Accountant’s Compilation Report

[Appropriate Salutation]

I (we) have compiled the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. I (we) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.

Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Date]

The SSARS 21 compilation report follows:

Management is responsible for the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1 and the related statements of income, changes in stockholder’s equity, and cash flows for the years then ended, and the related notes to the financial statements in accordance with accounting principles generally accepted in the United States of America. I (We) have performed a compilation engagement in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. I (we) did not audit or review the financial statements nor was (were) I (we) required to perform any procedures to verify the accuracy or completeness of the information provided by management. Accordingly, I (we) do not express an opinion, a conclusion, nor provide any form of assurance on these financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date]

For more information about compilation engagements, based on SSARS 21, click here.

Review Reports

The SSARS 19 review report follows:

Independent Accountant’s Review Report

[Appropriate Salutation]

I (We) have reviewed the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.

Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require me (us) to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. I (We) believe that the results of my (our) procedures provide a reasonable basis for our report.

Based on my (our) review, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

[Signature of accounting firm or accountant, as appropriate]

[Date]

The SSARS 21 review report follows:

Independent Accountant’s Review Report

[Appropriate Addressee]

I (We) have reviewed the accompanying financial statements of XYZ Company, which comprise the balance sheets as of December 31, 20X2 and 20X1, and the related statements of income, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.

Management’s Responsibility for the Financial Statements 

Management (Owners) is (are) responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Accountant’s Responsibility 

My (Our) responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require me (us) to perform procedures to obtain limited assurance as a basis for reporting whether I am (we are) aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. I (We) believe that the results of my (our) procedures provide a reasonable basis for our conclusion.

Accountant’s Conclusion 

Based on my (our) reviews, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date of the accountant’s review report]

Observations

The Accounting and Review Services Committee (ARSC) intentionally reformatted the compilation report in SSARS 21 to distinguish it from assurance service reports (a compilation is a nonassurance service). Compare the SSARS 21 compilation report above to the SSARS 21 review report (a review is an assurance service).

Notice the sample SSARS 21 compilation report has no:

  1. Report title (e.g., Independent Accountant’s Compilation Report) or
  2. Addressee/salutation
  3. Paragraph headers (and even no separate paragraphs)

I checked with the AICPA, and they advised that a compilation report title and salutation, while not required, is permissible.

Notice the SSARS 21 review report has section headers, as audit reports do. Both reviews and audits are, of course, assurance services–so the reports are formatted similarly.

Other Blog Posts

Here’s some additional SSARS 21 information:

SSARS 21 Book Available on Amazon.com

Are you looking for more information about SSARS 21? My new SSARS 21 book (ranked #1) is now available on Amazon.com. The book focuses on Section 70 of SSARS 21, Preparation of Financial Statements, and Section 80, Compilation Engagements. Click here to see the book on Amazon.com, and use the “Look Inside” feature to see excerpts (including the table of contents).

Comparison of Compilations and Financial Statement Preparation

Here's a summary of how a compilation engagement differs from a preparation service

This post provides a comparison of compilations and financial statement preparation services.

Recently, the Accounting and Review Services Committee of the AICPA issued SSARS 21.

Under SSARS 21, a CPA can use Section 70 — Preparation of Financial Statements or Section 80 — Compilation Engagements. The Preparation option offers some economies of effort, one being that no compilation report is required. But some CPAs have wondered, “What are the difference in the two types of services?”

Here’s a summary.

QuestionPreparing Financial StatementsCompilations
Can notes to the financial statements be omitted?
YesYes
Can the financial statements go to users other management?
YesYes
Considered an assurance service?
NoNo
Considered an attest service?
NoYes
Does the engagement require a report?
No - required wording stating “no assurance is provided” or a disclaimer
Yes - compilation report
Effective for periods ending on or after December 15, 2015 (early implementation permitted)?
YesYes
If the accountant is not independent, is that fact required to be disclosed?
NoYes
Is a signed engagement letter required?
YesYes
Is the accountant required to determine if he or she is independent of the client?
NoYes
Management is responsible for financial statements?YesYes
Minimum documentation
1. Engagement letter
2. Copy of financial statements
1. Engagement letter
2. Copy of financial statements
3. Copy of report
Procedures1. Prepare the financial statements based on the information provided
2. If the accountant becomes aware that supplied information is incorrect or incomplete, request corrected or additional information
1. Read the financial statements
2. Consider whether the financial statements appear appropriate
3. If the accountant becomes aware that supplied information is incorrect or incomplete, request corrected or additional information
4. If the accountant becomes aware that revisions to the financial statements are necessary, request that corrections be made
Is the accountant required to make inquiries or perform other procedures to verify, corroborate, or review information supplied?NoNo
Subject to Peer ReviewNot known at this timeYes
When does the standard apply?
Accountant engaged to prepare financial statements
Accountant engaged to compile financial statements

For additional information about Preparation of Financial Statement engagements, click here.