SSARS 21: What Have We Learned?

SSARS 21 offers interesting alternatives for compilations and preparation of financial statements

SSARS 21 has been in existence since October 2014. What have we learned about this standard? 

(SSARS 22 and SSARS 23 were subsequently added, but most of the SSARS 21 guidance remains as originally issued.)

SSARS 21: What Have We Learned

Preparation of Financial Statements or Compilation Reports

Before SSARS 21, if an accountant created financial statements and submitted them to a client, he had to issue a compilation report. Now, using the Preparation of Financial Statements part of SSARS 21 (AR-C 70), an accountant can create and provide financial statements without a compilation report. Such financial statements can be provided to third parties such as banks–again with no compilation report. So, how have accountants responded to the option to provide financial statements to clients without a compilation report?

It has been my observation that many accountants continue to perform compilation engagements (rather than use the preparation option). Why? I think we are creatures of habit. We have issued compilation reports for so long that we’re comfortable doing so–and we continue to do the same. Also, as we’ll see in a minute, performing a compilation doesn’t take much additional time.

Some accountants, however, are using AR-C 70. They are issuing financial statements without a compilation report and stating that “no assurance is provided” on each page–or, as the standard allows, placing a disclaimer page in front of the financial statements.

Who Should Use the Preparation Standard?

So, who uses AR-C 70? Accountants with limited time. 

Suppose, for example, that a client wants a balance sheet and nothing else. You can create the balance sheet in Excel and put “no assurance is provided” at the bottom of the page. And you’re done–with the exception of obtaining a signed engagement letter. (Accountants should document any significant consultations or professional judgments, but usually, there are none.)

Can I Avoid the Engagement Letter?

You may be thinking, “Charles, I’m not sure I’m saving much time if I have to create an engagement letter.  Getting a signed engagement letter might even take more time than preparing the balance sheet.” Yes, that is true. So, is there a situation where the engagement letter is not required? Yes, sometimes.

Financial Statements as a Byproduct

You can provide the balance sheet to a client without obtaining an engagement letter if the statement preparation is a byproduct of another service (as long as you have not been engaged to prepare the financial statement). For example, if you’re preparing a tax return and create the balance sheet as a byproduct of the tax service, you are not required to obtain a SSARS engagement letter? Why? Because you have not been engaged to prepare the financial statement. The trigger for AR-C 70 is whether you have been engaged to prepare financial statements. 

QuickBooks Bookkeeping

The same is true if you provide bookkeeping services using QuickBooks in the Cloud. If you have not been engaged to prepare financial statements and the online software allows you to print the financial statements, you are not in the soup. That is, you are not following AR-C 70–because you have not been engaged to prepare financial statements. If your client asks you to perform bookkeeping service in a cloud-based accounting package (such as QuickBooks) and to prepare financial statements, you are engaged. Then you must follow AR-C 70 and obtain an engagement letter–and follow the other requirements of the standard.

Regardless, we need to be clear about the intended service.

Compilation Engagements

In most compilations, the accountant prepares the financial statements and performs the compilation engagement. Notice these are two different services: (1) preparing the financial statements and (2) performing the compilation. It is possible for your client to create the financial statement and for you (the accountant) to perform the compilation, though this is rare. If you do both, the preparation of financial statements is not performed using AR-C 70. So what standard should you follow for the preparation of the financial statements. There is none. You are just performing a nonattest service. Then you’ll perform the compilation engagement using AR-C 80.

So, the question at this point is whether you should prepare financial statements using AR-C 70 or create the financial statements and perform a compilation using AR-C 80. (Technically, the choice is the clients, but you are explaining the differences to them.)

Additional Time for Compilations

How much extra time does it take to perform a compilation engagement after the financial statements are created? Not much. You are only placing a compilation report on your letterhead (rather than stating that “no assurance is provided” on each page or providing a disclaimer that precedes the financial statements). 

What other procedures are required for a compilation (versus providing the financial statements under AR-C 70)? You are reading the financial statements to see if they are appropriate. And since you just created the statements, that shouldn’t take much time. 

Regardless, both AR-C 70 and AR-C 80 require signed engagement letters. So if you’ve been engaged to prepare financial statements or perform a compilation, there is no getting around the requirement for an engagement letter.

Is a Preparation or a Compilation Service Best?

So which is better? Using AR-C 70 (Preparation of Financial Statements) or AR-C 80 (Compilation Engagements)? It depends. 

Some banks desire a compilation report, so in that case, of course, you are going to–at the request of the client–perform a compilation engagement.

Also, some CPAs feel safer issuing a compilation report that spells out (in greater detail than a preparation disclaimer) what is done and what is not done. We don’t know yet whether a preparation service creates greater legal exposure than a compilation. But we will with time. After a few years of using SSARS 21, I think our insurance companies will tell us whether one service creates more exposure than another. So far, I have not seen any such studies. Why? SSARS 21 has been in use only a couple of years.

Another factor to consider is peer review. The AICPA standards do not require a peer review if you only provide financial statements using AR-C 70. But check with your state board of accountancy; some states require peer review, regardless.

For the most efficient way to issue financial statements, click here.

SSARS 21 Book

You can purchase my five-star rated SSARS 21 book on Amazon. Click here. The book provides sample financial statements using AR-C 70 and AR-C 80.

(Note: SSARS 23 has changed the supplementary information language; see it here. The book focuses on preparation of financial statements and compilation engagements. It does not cover review engagements.)

SSARS 21 and Printing Financial Statements from Quickbooks

Is AR-C 70, Preparation of Financial Statements, triggered by printing financial statements from Quickbooks?

Many CPAs are still asking if printing financial statements from Quickbooks triggers a requirement to follow SSARS 21. Previously, if a CPA created and submitted financial statements to a client, he had to issue a compilation report. Hear the answer in this video. 

Also, we’ll take a look at whether you as a CPA can issue monthly financial statements in accordance with SSARS 21 and then perform an audit for the same client at the end of the year. 

Note: This video was created in 2015, but the information is still current. SSARS 23 does not alter the answers.

Check out my SSARS 21 book on Amazon.com by clicking here

How to Present Supplementary Information in Compilation and Preparation Engagements

Supplementary information can be added to basic financial statements

Are you wondering how to present supplementary information in compilation and preparation engagements? What supplementary information (SI) should be included? How does the accountant define his or her responsibility for SI?

Often accountants, at the request of their clients, add supplementary information to the financial statements. Such information is never required (to be in compliance with a reporting framework) but may be useful.

supplementary information: compilation and preparation engagements

Picture is courtesy of Dollar Photo

You can think of financials with supplementary information in this manner:

Financial statements – Required – The jeep in the picture above

Supplementary Information – Not required – The camper

You’re not going anywhere without a vehicle (it’s required). And your camper (not required) is no good without an automobile to pull it. Kind of a silly analogy, I know, but maybe it will help you remember.

I normally add a divider page between the financial statements and supplementary information (though such as page is not required); the divider page simply says “Supplementary Information” and nothing else.

SSARS 21 defines supplementary information as follows:

Information presented outside the basic financial statements, excluding required supplementary information, that is not considered necessary for the financial statements to be fairly presented in accordance with the applicable financial reporting framework.

The Most Efficient Way to Issue Financial Statements

SSARS 21 Tax Basis Financial Statements

What is the most efficient way to issue financial statements?

Tax basis financial statements without disclosure, using the Preparation of Financial Statements option (Section 70 of SSARS 21).

efficient way to issue financial statements

This answer assumes you are preparing financial statements in conjunction with a tax return and that those financial statements are issued separately—apart from the tax return—to your client.

Episode 6 – SSARS 21 Compilation Engagement Questions & Answers

Digging deeper into how compilations have changed

Today we take a look at compilation engagement issues such as:

  • What does the new compilation report look like?
  • Should a compilation report have a title and a salutation?
  • Should the financial statement pages refer to the compilation report?
  • How should a departure from the applicable reporting framework be communicated?
  • How should a going concern issue be communicated?
  • How does the use of the tax basis of accounting alter the compilation report?
  • What are the minimum work paper requirements?
  • Are you required to make inquiries in a compilation engagement?

Episode 5 – Compilation Engagements Using SSARS 21

Here are the basics to using the new compilation standard

This week we look at how compilation engagements have changed from SSARS 19 to SSARS 21. We also discuss what compilation engagement elements have not changed. We conclude by providing an overview of the objectives and requirements of the new compilation standard.

An overview of the podcast is as follows:

  • What are the key changes in compilation engagements?
  • What has not changed?
  • What are the objectives of a compilation?
  • What procedures must be performed?

Episode 4 – Questions and Answers for the New SSARS 21 Preparation of Financial Statements Standard

Here are answers to your most pressing AR-C 70 questions

CPAs have had many questions about the use of AR-70, Preparation of Financial Statements. Those questions include:

When is the standard applicable?

What work papers must I retain?

Is an engagement letter required?

What should the preparation report look like?

Should I include a disclaimer page?

How do I communicate departures from the applicable basis of accounting?

Can I add supplementary information?

Can AR-C 70 be used in reference to prescribed forms?

Today we answer your most pressing questions about using the SSARS 21 preparation standard.