How to Prepare for the New SSARS 21 Preparation and Compilation Standards

Planning now will save you time at year-end

I don’t know about you, but I’m wondering where the first six months of 2015 went. Soon it will be December 31, 2015, and the financial statements we issue with calendar year-ends will be subject to the new SSARS 21 guidance. Between now and then, we need to:

  • Learn the requirements of SSARS 21
  • Decide if we will issue financial statements using the preparation or compilation guidance
  • Prepare our new engagement letters
  • Update our compilation report language
  • Decide how we desire to organize our files for each service
  • Develop or purchase forms to conform to the new standards
  • Decide who can issue our various financial statement deliverables (monthly, annual, preparation, compilation)
  • Determine how to track our preparation engagements (since this is a new service)
Picture is courtesy of DollarPhotoClub.com

Picture is courtesy of DollarPhotoClub.com

Once January 1, 2016, rolls around (and you are really busy again), you will be glad you took steps now to ease your transition to SSARS 21. Here are a few tips.

Learn the Requirements of SSARS 21

How can you learn about the new standards? A CPE course will help. Also, I will soon publish my new book on Amazon which will provide you with a quick guide to the standards. Don’t want to buy a book? Read my post SSARS 21 – The Lowdown, which will give you a quick overview. Either way, understanding the new standards will aid you in making the decision about whether to continue issuing compilation reports or start using the preparation of financial statements option.

By subscribing to my blog, you can download:

  • Sample preparation financial statements and
  • A sample preparation engagement letter

Decide How to Issue Financial Statements

Once you have a good understanding of SSARS 21, you will know whether you desire to issue financial statements using:

  • Section 70 of SSARS 21 (Preparation of Financial Statements) or
  • Section 80 of SSARS 21 (Compilation Engagements)

In terms of expected engagement time, I don’t see a substantial difference in the two options.

Both options allow/require the following:

  • The accountant can omit substantially all disclosures
  • A signed engagement letter must be obtained
  • The cash flow statement can be omitted
  • Selected disclosures can be provided
  • General purpose (e.g., GAAP) or special purpose (e.g., tax-basis) reporting frameworks can be used

One main difference: you will issue a report for compilations. A report is not issued for preparation engagements (though a disclaimer can be provided).

Preparing Engagement Letters, Reports, and File Structure

How can you create higher quality and efficiency? Create templates.

What is a template? It’s simply a model set of work papers

Electronic templates provide you with a set of work papers to begin your new engagements. While an electronic template is best, even a paper-based model will enhance your quality and efficiency.

Your preparation engagement template could include the following sample documents:

  • An acceptance and continuance form
  • Engagement letter
  • A form documenting judgments and consultations
  • Tax-basis financial statements including:
    • Sample financial statements with appropriate financial statement titles
    • An appropriate legend on each page (if that option is used), or
    • Disclaimer (if that option is used)

A compilation engagement template could include the following sample documents:

  • An acceptance and continuance form (include your consideration of independence)
  • Engagement letter
  • A form documenting judgments and consultations
  • GAAP financial statements including:
    • Compilation report
    • Sample financial statements with appropriate financial statement titles
    • Sample note disclosures

The key is to create templates of the work products you expect to issue most often. If you expect your preparation of financial statement engagements to include tax-basis and GAAP statements, then create templates for each.

Does your firm have a concentration in one niche? Maybe your company issues several physician practice compilations. If so, create a physician practice compilation template.

When creating your templates, compare your engagement letters to your sample financial statements to see if the following agree:

  • Financial statement titles
  • The individual financial statements (e.g., balance sheet)
  • The basis of accounting
  • Supplementary information
  • Departures from the applicable basis of accounting

How else can you increase quality?

Once you’ve created the templates, vet them with relevant AICPA peer review checklists. For example, use the compilation-without-disclosure peer review checklist to review your compilation-without-disclosure template. AICPA peer review checklists are free and can be downloaded at the AICPA website. Use the most recent checklist (they are often updated ).

Minimum Documentation

SSARS 21 states that the minimum documentation requirements are as follows:

Document

Preparation of

Financial Statements

Compilation

Engagement letter

Yes

Yes

Financial statements

Yes

Yes

Accountant’s report

N/A

Yes

Consider establishing minimum work paper requirements. What work papers are required for each type of engagement? Will your firm require a preparer sign-off for each work paper? When the partner or manager reviews the work papers, will she initial each reviewed work paper or just a summary review sheet?

Authority to Issue Deliverables

Determine who has the authority to issue financial statements and compilation reports. Here are a few questions to consider:

  • Who has authority to issue financial statements using the preparation guidance?
  • Who has authority to issue financial statements using the compilation guidance?
  • Will your firm require a second partner review of each initial preparation engagement?
  • Will a second partner review your firm’s annual compilation reports?

Tracking Preparation Engagements

Click here for information about whether your firm is subject to peer review. If your firm is subject to peer review, then your peer reviewer will need to know the number of preparation engagements issued. Here is a post about doing so.

Simple Summary

  • Start now to prepare for the transition to SSARS 21
  • A CPE course will assist you in understanding the new requirements
  • Well designed preparation and compilation templates will:
    • Enhance your firm’s compliance with professional standards, and
    • Increase your efficiency
  • Create templates for those work products that you expect to issue most often (e.g., tax-basis preparation financial statements)
  • In developing your templates:
    • Include the minimum required work papers and reports
    • Vet your templates using the AICPA peer review checklists
  • Determine who has the authority to issue different work products (e.g., preparation, compilation, monthly, annual)

Have You Started?

What about your firm? Have you started your transition to SSARS 21? If yes, are there other tips you would offer?

Note: While SSARS 21 is effective for periods ending on or after December 15, 2015, you can early implement. This post did not cover review engagements (SSARS 21 does encompass reviews).

New SSARS 21 Book

My SSARS 21 book is now available on Amazon.com. Click here to see the book: Preparation of Financial Statements & Compilation Engagements.

Which Standards Should I Follow When I Prepare Financial Statements and Perform a Compilation, Review or an Audit?

Untangling a Confusing Part of SSARS 21

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?

Picture is courtesy of Dollarphoto.com

Picture is courtesy of Dollarphoto.com

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?

No.

“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?”

Yes.

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.

Why?

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.

Meaning?

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.

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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 StatementsCompilation EngagementReview EngagementAudit EngagementStandard to Follow
YesAR-C 70 Preparation
YesYesAR-C 80 Compilation
YesYesAR-C 90 Review
YesYesAU-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.

Are You Prepared for the SSARS 21 Compilation Change?

December 31, 2015 will come quickly

SSARS 21 is effective for years ending on or after December 15, 2015. Here are a few posts that will prepare you for the upcoming changes (and they are significant):

SSARS 21 Compilations: What Changed?

The New Compilation Report — SSARS 21

SSARS 21 Preparation of Financial Statements Service to be Included in Some Peer Reviews

Tracking SSARS 21 Preparation of Financial Statement Engagements

Supplementary Information: Compilation and Preparation Engagements (SSARS 21)

SSARS 21 Reports: Preparation, Compilation and Review

SSARS 21: A Video Overview of the Preparation Standard

SSARS 21 – The Lowdown

Slow-Time Idea: Update December 31, 2015 Compilation and Review Report Language

The Most Efficient Way to Issue Financial Statements

Comparisons Compilations and Financial Statement Preparations — SSARS 21

Look for my coming book on Amazon about SSARS 21 Preparation and Compilation Engagements.

Preparation of Financial Statements, Compilations, Reviews: A Comparison

Have you been wondering how the three services covered in SSARS 21–(1) preparation of financial statements, (2) compilations and (3) reviews–compare to one another? This video provides a brief overview of the three services and what the CPA is required to do for each.

Table Comparing Preparation of Financial Statements, Compilations and Reviews

QuestionPreparing Financial StatementsCompilationsReviews
Can notes to the financial statements be
omitted?
YesYesNo
Can the financial statements go to users other than
management?
YesYesYes
Considered an assurance service?
NoNoYes; limited assurance
Considered an attest service?
NoYesYes
Does the engagement require a report?
No - required wording stating “no assurance is provided” or a disclaimer
Yes - compilation reportYes - review report
Effective for periods ending on or after December
15, 2015 (early implementation permitted)?
YesYesYes
If the accountant is
not independent, is that fact required
to be disclosed?
NoYesMust be independent
Is a signed engagement letter required?
YesYesYes
Is the accountant required to determine if he or
she is independent of the client?
NoYesYes
Is the accountant required to make inquiries or
perform other
procedures to
verify, corroborate,
or review
information supplied?
NoNoIf results of analytics are questionable, inquire of management. Not required to corroborate management's responses with other evidence.
Management is responsible for financial
statements?
YesYesYes
Minimum documentation
1. Engagement letter
2. Copy of financial statements
1. Engagement letter
2. Copy of financial statements
3. Copy of report
1. Engagement letter
2. Copy of financial
statements
3. Copy of report
4. Nature, timing and extent of procedures
5. Results of procedures
6. Significant findings or issues and conclusions reached (including judgments)
7. Communications of fraud or noncompliance with laws or regulations
8. Communications concerning the inclusion of emphasis-of-matter paragraph or other-matter paragraph
9. Representation letter
10. Communications with other firms regarding audited or reviewed components

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
1. Read the financial statements
2. Consider
whether the financial statements conform to applicable reporting framework
3. If the accountant becomes aware that supplied information is incorrect or incomplete, request management's consideration of effect on statements; request response to the accountant; consider effect on limited assurance determination
4. If the accountant believes statements are materially misstated, perform additional procedures to support limited assurance
5. Understand the industry; obtain knowledge of the entity
6. Perform Analytics
7. Make inquiries
8. Reconcile financial statements to underlying information
Subject to Peer ReviewNot known at this timeYesYes
When does the standard apply?
Accountant engaged to prepare financial statements
Accountant engaged to compile financial statements
Accountant engaged to review financial statements

SSARS 21 Compilations: What Changed?

Much of the recent conversation surrounding SSARS 21 has been about Section 70 — Preparation of Financial Statements. In this post, we’ll take a look at Section 80 — Compilation Reports.

What changed? What’s the same?

First, here’s a short video to give you an overview (and the secret to the most expeditious way to issue compilation reports).

What’s the Same?

So what is the same (when comparing SSARS 21 compilation guidance with SSARS 19)?

  • Compilations are still a nonassurance service (the CPA is not verifying anything)
  • Compilations are an attest service
  • The accountant must prepare an engagement letter
  • The accountant must read the financial statements
  • The accountant must report any material departures from the reporting framework
  • The accountant must report the omission of notes (if they are omitted)
  • Selected disclosure is permissible
  • The accountant’s lack of independence should be noted in the compilation report

What’s Different?

What’s different (when comparing SSARS 21 compilation guidance with SSARS 19)?

  • Compilation report language and formatting (see example below)
  • The engagement letter must be signed by the accountant and the client
  • The preparation of financial statements is a separate nonattest service (and the compilation engagement letter should refer to the preparation service as such)

Here is the relevant sample 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.

Compilation Report

The standard 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]

Notice the sample report has no report title.  It also is not addressed to anyone. For a comparison of the new compilation report with the SSARS 19 (old) report, click here.

 

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.

Comparison of Compilations and Financial Statement Preparation — SSARS 21

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.

The New Preparation of Financial Statements Standard

The art of life is a constant readjustment to our surroundings. –Kakuzo Okakaura

Significant change has occurred in the compilation world.

  • The Accounting and Review Services Committee recently added a new twist to the standards that govern the preparation of financial statements. Now CPAs can issue financial statements without a compilation report. To do so, you need to follow the guidance in Section 70 (Preparation of Financial Statements) of SSARS 21. So let’s unwrap this package and see what’s inside.

First, when is the Preparation standard applicable?

Section 70 states it is not applicable when the accountant prepares financial statements:

  • and is engaged to perform an audit, review, or compilation of financial statements
  • solely for submission to taxing authorities
  • for inclusion in written personal financial plans
  • in conjunction with litigation services that involve pending or potential legal or regulatory proceedings, or
  • in conjunction with business valuation services

In other words, the standard applies when you create financial statements that are not for any of the above purposes.

If you create financial statements that will, for example, be used for litigation purposes, then Section 70 does not apply. If you create a balance sheet that is a part of a tax return, Section 70 is not applicable. If you are engaged to create financial statements as a part of a compilation, then, again, Section 70 doesn’t apply. (You will only issue a compilation report when you are engaged to do so. Under Section 70, no compilation report is issued. See my prior SSARS 21 post for more information.)

Difference in Preparation and Merely Assisting

The Preparation standard also makes a distinction between preparing financial statements and merely assisting in the preparation of financial statements.

Preparing refers to the creation of financial statements.

Merely assisting refers to bookkeeping services. Here are examples of accounting services that are not covered by Section 70:

  • Preparing or proposing certain adjustments, such as those applicable to deferred income taxes, depreciation, or leases
  • Drafting financial statement notes
  • Entering general ledger transactions or processing payments in accounting software

Independence Not Required

Bear in mind that the preparation of financial statements and related bookkeeping services (e.g., entering transactions into a general ledger) are both considered nonattest services. So you can do either without considering whether you are independent.

What does this mean? Well, I can process payments for a client (even sign checks or have custody of a client’s assets) and prepare financial statements. Am I independent? No. Does it matter? No, not if I am just preparing financial statements under the guidance of Section 70 (and not issuing a compilation report). Do I need to disclose my lack of independence? No. (If you do issue a compilation report, you need to disclose your lack of independence–as you have in the past.)

Must the accountant verify the accuracy or completeness of the information? No. Remember, however, that AICPA ethics rules prohibit a CPA from issuing financial statements that are intentionally misleading.

Required Wording or Disclaimer?

Each page of the financial statements should include, at a minimum, the words “no assurance is provided” or issue a disclaimer that makes clear that no assurance is provided.

The example disclaimer provided in .A12 of Section 70 reads as 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]

Can the financial statements omit disclosures?

Yes.

The disclosure of the omission of substantially all disclosures may be made on the face of the financial statements or in a selected note to the financial statements. (Selected disclosure is permissible under Section 70.)

If disclosures are omitted and a special purpose framework is used, then the accountant should include a description of the financial reporting framework on the face of the financial statements.

Engagement Letter Required

An engagement letter is required by Section 70. Both the accountant and the client must sign the letter.

Documentation Requirements

The accountant should retain:

  • A copy of the financial statements
  • The signed engagement letter

That’s it: Nothing else is required.

The documentation may also include any significant consultations or professional judgments.

Subject to Peer Review?

My February 2015 AICPA Peer Review Update (newsletter) states the following:

On November 18, 2014, the Peer Review Board (PRB) issued an exposure draft, which proposed that firms that only perform preparation engagements under AR-C Section 70 – Preparation of Financial Statements (issued as part of Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statement on Standards for Accounting and Review Services: Clarification and Recodification) would not be required to enroll in the AICPA peer review program (Program). However, it also proposed that a firm’s preparation engagements would be included in the scope of a peer review when the firm either elects to enroll in the program (e.g. to comply with licensing or other requirements) or is already enrolled due to other engagements it performs. This proposal was issued in order to address the effect of these engagements on the scope of the Program.

The PRB considered comments raised by the peer review community about the proposal and elected to adopt the proposed guidance changes. The changes are effective for peer reviews commencing on or after February 1, 2015.

The key points of this communication are:

  • Firms that only perform the Preparation of Financial Statement service under section 70 of SSARS 21 are not required to enroll in the AICPA peer review program.
  • Firms that are enrolled in the peer review program will have the Preparation of Financial Statements service included in the scope of their peer reviews.

Note that these are the AICPA rules. Peer review requirements may be more stringent in your state, possibly requiring a peer review–even if you only perform Preparation of Financial Statement engagements. Check with your state board of accountancy.

When can I apply Section 70 of SSARS 21?

Now, if early implemented.

When am I required to apply SSARS 21?

For periods ending on or after December 15, 2015.

Coming SSARS 21 Book

My SSARS 21 book will be available on Amazon in late April. It will be available in Kindle and paperback formats. The book will provide concise overviews of the Preparation and Compilation sections of the standard.

Compilation Report Sample – SSARS 21

Are you looking for a compilation report sample? Here it is.

compilation report sample

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 in order to differentiate compilation reports from assurance service reports (e.g., audits, reviews) that do include headers. Though not required, you can add a title such as “Accountant’s Compilation Report.”

Compilation Report Sample

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 add additional paragraphs to the compilation report when the following exists:

  • When financial statements are prepared in accordance with a Special Purpose Framework/OCBOA
  • When disclosures are omitted
  • When the accountant is not independent
  • When there are known departures from the applicable financial reporting framework
  • When supplementary information accompanies the financial statements 

Supplementary Information

SSARS 23 amended SSARS 21 and has changed the language regarding supplementary information. Click here to see the new supplementary language.

SSARS 21 Book

For information about my SSARS 21 book, click here.

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.