Compilations: Lacking Independence in the Current or Prior Period

CPAs must disclose independence impairments in compilation reports

Do you lack independence in a compilation engagement? If yes, then here’s how to disclose the impairment in the compilation report.

An accountant can issue a compilation report even though independence is lacking. When independence is impaired, SSARS 21 requires that the CPA modify the compilation report. The cause of the impairment (e.g., you own a portion of the business) can be disclosed in the compilation report but is not required. You can–if you prefer–simply say you are not independent; this is what most CPAs do.

Lacking Independence

Lacking Independence in Current Year

The accountant’s compilation report can disclose a lack of independence as follows:

We are not independent with respect to ABC Company.

Just add this sentence separately at the bottom of the compilation report.

Lacking Independence in the Prior Year

If you were not independent in 2016 but you are independent in 2017 (and comparative statements are presented), the accountant’s report can read:

As of and for the year ended December 31, 2016, we were not independent with respect to ABC Company.

Alternatively, the report can read:

As of and for the year ended December 31, 2016, we were not independent with respect to ABC Company. We are currently independent with respect to ABC Company.

Independence in Review Engagements and Audits

CPAs must be independent to perform review engagements or audits. There are no exceptions. See the AICPA Code of Professional Conduct for guidance on independence issues. Independence rules are found in section 1.200.

Independence in Preparation of Financial Statement Engagements

CPAs can perform a Preparation of Financial Statement engagement without being independent. No independence disclosure is required since this service is a nonattest engagement. 

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SSARS 23: Parts are Effective Immediately

SSARS 23 affects compilation and review reports

SSARS 23, Omnibus Statement on Standards for Accounting and Review Services–2016, was issued in late October 2016, but parts of the standard are applicable immediately.

SSARS 23 Changes Effective Now

The two key changes effective immediately are:

  1. An update of compilation and review report language regarding supplementary information
  2. You must now report departures from the applicable financial reporting framework in the compilation report
SSARS 23

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1. Update of Compilation and Review Report Language for Supplementary Information

The compilation and review report language regarding supplementary information changed with the issuance of SSARS 23.

Compilation Report Supplementary Information Language

The compilation report language regarding supplementary language is as follows:

Compilation Report Language for Supplementary Information Subject to Compilation Procedures

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. The supplementary information was subject to our compilation engagement. We have not audited or reviewed the supplementary information and do not express an opinion, a conclusion, nor provide any assurance on such information.

Compilation Report Language for Supplementary Information Not Subject to Compilation Procedures

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. The supplementary information was not subject to our compilation engagement. We do not express an opinion, a conclusion, nor provide any assurance on such information.

Review Report Supplementary Information Language

The review report language regarding supplementary language is as follows:

Review Report Language for Supplementary Information Subject to Review Procedures

Other Matter

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management and was derived from, and relates directly to, the underlying accounting and other records used to prepare the financial statements. The supplementary information has been subjected to the review procedures applied in our review of the basic financial statements. We are not aware of any material modifications that should be made to the supplementary information. We have not audited the supplementary information and do not express an opinion on such information.

Review Report Language for Supplementary Information Not Subject to Review Procedures

Other Matter

The accompanying [identify the supplementary information] is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information is the responsibility of management. We have not audited or reviewed such information and we do not express an opinion, a conclusion, nor provide any assurance on it.

2. Disclose Departures in the Compilation Report

SSARS 21 allowed CPAs to report departures from the applicable financial reporting framework either in the notes or in the compilation report. SSARS 23 requires that such departures be reported “in a separate paragraph” in the compilation report. In other words, you can no longer just disclose the departure in the notes to the financial statements.

Impact on Peer Reviews

So, what happens if a firm fails to make the revisions to the supplementary information paragraphs as discussed in 1. above?

The February 2017 AICPA Reviewer Alert (the newsletter that peer reviewers receive) says the following:

If a firm failed to update the language in the additional paragraph for review and compilation reports, it would generally not result in a deficiency or significant deficiency. The changes made by SSARS No. 23 in relation to supplementary information are considered further clarifications to existing requirements. Therefore, the following guidance is applicable; PRP Section 6200 Appendix E Areas of Common Noncompliance With Applicable Professional Standards;

List of Matters and Findings That Generally Would Not Result in a Deficiency
Reports
• Omission of phrases or use of phrases not in conformity with the appropriate standards for the report issued

Failing to make the revisions will not result in a deficiency or a significant deficiency in a peer review.

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Dating Review Representation Letters

According to SSARS 19, representation letters must be dated on the same date as the review report. Also, the review report should be dated on the date the review engagement is complete–the date all work and technical reviews are complete.

So how do I make the stars align? How do I get the client to sign the representation letter on the same date that I complete the review engagement? Or is there another way to solve this problem? Let’s see.

Typical Scenario

It’s February 3rd and you expect to complete your review engagement on the 7th–the date the partner will review the file and the report. So you have the representation letter typed (with a February 7, 2014 date) and sent to the client, but the client leaves town unexpectedly. It’s the 12th before the owner can actually sign the representation letter. Argh!

So how can we solve this dating problem?

Use an “as of” date.

Include in your representation letter language such as the following:

We confirm, to the best of our knowledge and belief, as of February 7, 2014, the following representations made to you during your review.

As long as the signature date (the date at the top of the letter) does not precede the “as of” date (e.g., February 7, 2014, in our example), you are okay. Using our example scenario, the “as of” date and the date of the review report is February 7, 2014; the date of the letter and date the client signs the letter is February 12, 2014.

Must I be in physical receipt of the representation letter before I date the review report?

No.

SSARS 19 (AR 90.24) states:

The accountant need not be in physical receipt of the management representation letter as of the date of the accountant’s review report, provided that management has acknowledged that they will sign the representation letter without modification.

Must I be in physical receipt of the representation letter prior to the issuance of the review report?

Yes.

SSARS 19 (AR 90.24) states that the representation letter must be “received prior to the release of the report.” This issue is often solved with an exchange–the CPA hands the report to the client and the client hands the representation letter to the CPA, or the representation letter is emailed to the CPA and the CPA emails the report to the client.

Dating CPA Reports

One issue that CPAs often deal with is the dating of reports. What date should you use on your compilation, review, audit, and agreed-upon procedures reports?

Here’s a summary.

Compilations 

The date of completion of the compilation should be used as the date of the accountant’s report.

Source of information: AR 80.17.

Reviews

The accountant’s review report should not be dated earlier than the date on which the accountant has accumulated review evidence sufficient to provide a reasonable basis for concluding that the accountant has obtained limited assurance that there are no material modifications that should be made to the financial statements in order for the statements to be in conformity with the applicable financial reporting framework.

Source of information: AR 90.28.

Audits

The auditor’s report should be dated no earlier than the date on which the auditor has obtained sufficient appropriate audit evidence on which to base the auditor’s opinion on the financial statements, including evidence that:

a. the audit documentation has been reviewed;

b. all the statements that the financial statements comprise, including the related notes, have been prepared; and

c. management has asserted that they have taken responsibility for those financial statements.

Source of information: AU-C 700.41.

Agreed-Upon Procedures

The date of completion of the agreed-upon procedures should be used as the date of the practitioner’s report.

Source of information: AT 201.34.

Summary

When I’m asked about dating reports, my response is usually, “don’t date the report until all reviews (engagement partner, quality control and client) have been performed.” A peer reviewer may find fault with engagement files reflecting report issuance dates prior to review dates. The lack of review (prior to issuance of the financial statements) may be construed as a lack of evidence (especially for audits).

You will need to get a representation letter from clients for all audits and reviews (and usually for agreed-upon procedures), and the representation letter date should be the same as the report date.

Coordinating the completion of reviews and the signing of the representation letter is tricky and can feel like herding cats. It is best to get all reviews (including the engagement partner and quality control) performed prior to getting the representation letter signed.

Safest rule: Have all reviews of work paper files (including the financial statements) performed prior to the signing of the representation letter and make sure the report date agrees with the representation letter date.

Why?

The CPA firm may find a material error in the financial statements upon its final review. If this happens after you’ve given your client a draft of the financial statements and they’ve signed the representation letter, you will have egg on your face – and more work to do.