SSARS 21 added a new section to the prior compilation and review standards (SSARS 19) called Preparation of Financial Statements. I’ve received several questions about how this new service–preparation of financial statements–works when a compilation, review, or audit is performed. Those questions include:
Can an accountant perform a compilation and not prepare the financial statements?
Are the preparation of financial statements and the performance of a compilation engagement two separate services?
If an auditor prepares financial statements and audits a company, what is the relevant standard for preparing the financial statements? Is the preparation of financial statements a nonattest service though the audit is an attest service?
Below I provide: (1) a summary of how compilations are changing and (2) a summary of how the preparation of financial statements service interplays with compilations, reviews, and audits.
The Old Compilation Standard
In the past, the performance of a compilation involved one service which encompassed:
- Preparing financial statements,
- Performing compilation procedures (e.g., reading the financials), and
- Issuing a report
How Compilation Engagements are Changing
If an accountant prepares the financial statements and performs a compilation engagement using SSARS 21, she is performing two services (not one). In this case, the performance of the preparation of financial statements is not subject to any formal standard (including SSARS 21).
When an accountant performs both the preparation of financial statements and a related compilation engagement, is AR-C 70, Preparation of Financial Statements, applicable?
“Wait…you’re saying that a new standard called Preparation of Financial Statements was added to SSARS 21, but when the accountant prepares financial statements and performs a compilation engagement, the new preparation standard is not applicable?”
AR-C 70, Preparation of Financial Statements, states that the standard is not applicable “when an accountant prepares financial statements and is engaged to perform an audit, review, or compilation of those financial statements.” So if an accountant prepares financial statements as a part of a compilation engagement, AR-C 70 does not apply.
If AR-C 70, Preparation of Financial Statements, and AR-C 80, Compilation Engagements, were both in play, they would conflict. AR-C 70 requires the accountant to state on each financial statement page that “no assurance is provided” or to issue a disclaimer. AR-C 80 requires the issuance of a compilation report and does not allow the accountant to state that “no assurance is provided” on each financial statement page or to issue a disclaimer.
When the accountant prepares financial statements and performs a related compilation, the creation of the financial statements is a nonattest service with no guidance–not even from SSARS 21.
When a compilation engagement (an attest service) is performed and financial statements are prepared (a nonattest service), two separate services are being performed by the same accounting firm.
The Interplay of Financial Statement Preparation and Other Services
The table summarizes which standard is applicable when:
1. A preparation engagement is performed (alone)
2. Preparation and compilation engagements are performed for the same time period
3. Preparation and review engagements are performed for the same time period
4. Preparation and audit engagements are performed for the same time period
|Preparation of Financial Statements||Compilation Engagement||Review Engagement||Audit Engagement||Standard to Follow|
|Yes||AR-C 70 Preparation|
|Yes||Yes||AR-C 80 Compilation|
|Yes||Yes||AR-C 90 Review|
|Yes||Yes||AU-C Audit Sections|
AR-C 70, Preparation of Financial Statements, applies only in the first example above. When the accountant performs a preparation service and a compilation, review, or audit service for the same time period, AR-C 70 is not applicable–that is, no formal standard applies to the preparation service.
In all the examples listed above, the preparation of financial statements is a nonattest service.
In examples 2, 3 and 4 (where a preparation service and an attest service are provided), your engagement letter should include language about performing nonattest services and how the client will assign someone with suitable skill, knowledge, and experience to oversee the preparation of financial statements service. Such language is only required when a nonattest and an attest service is provided.
SSARS 21 is applicable for periods ending on or after December 15, 2015 and can be early implemented.
New SSARS 21 Book
My new SSARS 21 book is now available on Amazon.com. Click here to see the book: Preparation of Financial Statements & Compilation Engagements.