SSARS 21 – A Summary of Preparation Services and Compilation Engagements

An overview of preparation of financial statements and compilation engagements

Today I listened to the AICPA SSARS 21 webcast. The speakers were Michael Brand (the chair of ARSC) and Mike Glynn (senior technical manager). They did an excellent job of presenting the SSARS 21 information.

Here is my summary of what I heard along with a few personal observations.

SSARS 21

Effective Date

SSARS 21 can be early implemented. The effective date is for financial statements ending on or after December 15, 2015. Also, interim (e.g., monthly) financial statements for the year 2016 will be performed in accordance with SSARS 21.

SSARS 21 – A Summary of Preparation Services and Compilation Engagements

So you are required to use SSARS 21 for your financial statements with periods ending December 31, 2015 and for all periods thereafter. You can apply SSARS 21 today (SSARS 21 was issued on October 23, 2014, and can be early implemented).

The effective date is based on the financial statement period-ends (e.g., 12/31/2015) and not the report date (e.g., January 20, 2016).

You do have to implement the standard in its entirety.

For now, you can apply the standard on an engagement-by-engagement basis; in other words, you can use SSARS 19 for ABC client and SSARS 21 for XYZ client. (It’s probably wiser to adopt SSARS 21 firm-wide, for all clients–to avoid confusion.) Of course, when the effective date of SSARS 21 occurs (December 15, 2015), you can no longer use SSARS 19.

Prepare and Present

The definition of “prepare and present”–the old trigger for issuing a compilation report–has blurred with the advent of cloud computing. For years, questions such as following have been asked:

  1. “Did you [the CPA] push the button” to create the financial statements?
  2. Am I (as a CPA) required to issue a compilation report?

SSARS 21 clarifies the trigger: the decision to issue a compilation report is based solely upon whether the CPA is engaged to do soand not upon whether the accountant prepares and presents (submits) the financial statements to the client.

Preparation of Financial Statements (Section 70)

Preparation of financial statements is a nonattest, non-assurance service. A signed engagement letter is required; the letter should be signed by management and the accountant. Evergreen letters (those that have no ending) are discouraged (not by the standard, but by common sense). The Peer Review Board recently issued an exposure draft to exclude preparation services from peer review; the final determination as to whether preparation services will be exempt from peer review has not been made at this time (October 23, 2014).

Section 70 applies whenever the accountant is engaged to prepare financial statements (and is not engaged to issue a compilation, review or audit report).

You are not required to be independent to prepare financial statements (since preparation is considered a nonattest service).

The accountant can omit disclosures if the client does not need them.

When preparing financial statements in accordance with a special purpose framework/OCBOA, the accountant is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements.

Section 70 requires the use of a legend on each page of the financial statements stating no assurance is being provided. If management refuses or cannot include the legend, the accountant could issue a disclaimer report, perform a compilation engagement, or resign.

An example of a 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]

AICPA Code of Conduct Considerations

The AICPA Code of Conduct prohibits the CPA from being associated with financial statements that are misleadingSo if a client desires for the CPA to issue financial statements that are clearly misleading, then the CPA should not do so–even under the Preparation standard.

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If the CPA prepares the financial statements for an audit or a review client, then Interpretation 101-3 (Independence) applies. The CPA needs to determine that the client has sufficient skill, knowledge, and experience (SKE) to assume the responsibility for the statements; if the client does not possess sufficient SKE, the CPA is not independent (and can’t perform an audit or a review). Independence is not required to issue a compilation report, but the lack on independence must be noted in the compilation report.

Compilation Engagements (Section 80)

The compilation report is shortened to differentiate it from audit and review (assurance) reports. The compilation report will not include paragraph headers; ARSC omitted the headers to distinguish compilation reports from assurance service reports (e.g., audits, reviews) that do include headers.

Section 80 requires an engagement letter signed by both the accountant and management/those charged with governance.

Section 80 can be applied to financial statements with or without disclosures.

A sample 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]

Accountants will still add additional paragraphs to the compilation report when applicable. Examples follow:

  • When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA
  • Disclosures omitted
  • Lack of independence
  • Known Departure From the Applicable Financial Reporting Framework
  • Supplementary Information Accompanies Financial Statements and the Accountant’s Compilation Report Thereon

Key Differences in Compilation and Preparation Services

 Compilation ServicesPreparation Services
When does the standard apply?Engaged to compileEngaged to prepare
Is an engagement letter requiredYesYes
Is the accountant required to determine if he or she is independent of the client?YesNo
If the accountant is not independent, is that fact required to be disclosed?YesN/A
Does the engagement require a report?YesNo - legend required that no assurance is provided
May the financial statements go to users outside of management?YesYes
May the financial statements omit notes?YesYes

For a more expansive summary, click here.

Questions

If I assist a client with entries on their computer system (bookkeeping assistance), am I required to issue a compilation report?

No. Bookkeeping assistance (a nonattest service) does not fall under the SSARS guidance.

Can I issue management-use-only financial statements under SSARS 8?

SSARS 8 no longer applies (once SSARS 21 is implemented). SSARS 21 provides a “Preparation” option which is similar to SSARS 8. The “Preparation” option allows you to provide financial statements to clients without a compilation report.

Can the accountant use one engagement letter to cover preparation services and compilation services?

Yes. If the accountant, for example, provides monthly financial statements for eleven months (as a preparation service) and compiled statements for the year-end, then one engagement letter can be used to cover both services. Alternatively, two separate engagement letters can be used, one for the preparation service and one for the compilation service.

 Update to Post

My SSARS 21 book is available on Amazon.com. You can see the book by clicking here: Preparation of Financial Statements & Compilation Engagements.

For a SSARS 21 Preparation Services Questions and Answers post, click here.

The above pictures are courtesy of DollarPhoto.com.

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17 thoughts on “SSARS 21 – A Summary of Preparation Services and Compilation Engagements

  1. Thank you, Charles. Very helpful summary–especially since SSARS 21 is in “Backorder” status on AICPA website (even for members).

  2. Yes, I think that’s the most interesting piece going forward. Will lenders accept financial statements without a compilation or review report? Also how much litigation will occur as a result of the preparation services?

  3. Great information. Thank you, Charles. It should be interesting to see the lender’s community reaction. I would assume they would require or prefer at least a review level, so I guess they will not accept prepared financial statements, except for interim financial statements. While in the short run SSARS 21 will help practitioners performing this service, on the long run it should also be interesting to see the direction of the accounting quality index (not a real one).

  4. I appreciate the article and I will definitely try to catch the next webinar. I am pulling back from auditing and will no longer do any “report-style” statements. The only financial statement I will have that goes to a third party will be one that I do the write-up for and one vendor requires an annual financial statement. I want to make sure I do what’s required, but no more than that, since I suspect the the statement does nothing more than fill up space in the vendor’s file.

    • Mark, if your firm only does Preparation engagements and no compilations, reviews, audits (or other attest engagements), then your firm will not be subject to Peer Review (based on the AICPA rules). Your state board of accountancy may require your participation in a peer review program even if the AICPA does not, so you’ll need to check with them as well.

      If your firm participates in a peer review program (some firms elect to participate though not required), the Preparation engagements can be picked as a part of the review process.