Significant Changes to Compilation Standards in the Works

The Accounting and Review Services Committee (ARSC) is meeting May 20-22, 2014 to consider proposed compilation standards.

Attractive businesswoman reading documents

If approved, these changes represent a seismic shift in compilation standards.

ARSC is attempting to reconcile the Professional Executive Ethics Committee’s (PEEC) change in independence standards to those of the compilation and review standards. In 2013 PEEC deemed the preparation of financial statements a nonattest service (effective for years beginning on or after December 15, 2014). Presently compilations, which involve the preparation of financial statements, are considered an attest service (though not an assurance service).

Attest, nonattest – a conflict arose.

It appears that ARSC is proposing to resolve the conflict by parceling out the preparation of financial statements from the compilation service. In other words, the preparation of financial statements will be considered a separate nonattest service, no longer a part of a compilation engagement. ARSC is also proposing to allow CPAs to issue financial statements without a compilation report; existing standards state that if a CPA prepares and submits financial statements, then a compilation report must be issued (in most cases).

The exposure draft includes three sections:

  1. Preparation of Financial Statements
  2. Compilation Engagements
  3. Association with Financial Statements

Key Points

Preparation of Financial Statements

  • Accountants may issue financial statements without a compilation report
  • Preparation of financial statements is a nonattest service and does not require the accountant to be independent
  • Documentation requirements include:
    • An engagement letter or other suitable written documentation
    • A copy of the financial statements

Compilation Engagements

  • Accountants will issue a compilation report (always required) when the accountant is engaged to perform a compilation engagement; the management-use-only option (SSARS 8) will be eliminated
  • A signed engagement letter is required
  • Required procedure: the accountant is to read the financial statements…and consider whether such financial statements appear to  be appropriate
  • If the accountant is not independent, then that fact is required to be disclosed in the compilation report (This is a new dynamic: A4. of the draft states, “The accountant needs to be aware that the performance of the preparation services may impair independence unless the safeguards described in Interpretation No. 101–3 are met.”)
  • Omission of disclosures (and cash flow statement) is still permitted; the use of selected disclosures is still permissible
  • Documentation requirements include:
    • An engagement letter or other suitable written documentation
    • A copy of the financial statements
    • A copy of the accountant’s report

Association with Financial Statements

  • When the accountant agrees to permit the use of the accountant’s name in a report, document, or written communication that includes financial statements with respect to which the accountant did not issue a compilation, review, or audit report, each page of the financial statements (including notes) should include a statement such as:

No CPA provides any assurance on the financial statements

  • Required procedure: the accountant should read the financial statements for obvious material misstatements

The proposed effective date is for periods ending on or after December 15, 2015 (with early implementation permitted).

New Compilation Report Language 

ARSC is proposing “that the compilation report be reconfigured to look significantly different from an audit or review report.” Click here to see a sample compilation report.

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5 thoughts on “Significant Changes to Compilation Standards in the Works

  1. I believe that the propose change will further damage the CPA professional image. A CPA should never prepare/compile/print a financial statement unless he/she believes it is correct. If a CPA is to process bookkeeping and print financial statements regardless of whether there are/are not right, this business activity should be conducted as a separate, completely unrelated to the CPA professional activity.

    • Armando, I do think if a CPA issues financial statements without a report (e.g., compilation report), additional risk is incurred. The report clearly defines what was done and what was not done.

    • I’m not clear on exactly what the “proposal” is. Report required/not required?

      Unless the client or third party requires a review or audit, I do not think that doing the bookkeeping/accounting (compilation) for a client should be considered an attest service. As Charles said, the compilation report clearly discloses what was done and what a compilation is.

  2. My understanding form reading the exposure draft is that the “No CPA provides any assurance…” applies to the proposed Preparation standard (paragraph 12), not the proposed Association standard. Did you read it differently?

    • Ellen, 9.a. of the Association piece states that the language (No CPA provides any assurance) would be used when the CPA is associated; same with Preparation (paragraph 12 as you mentioned). Hope that helps.