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.

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11 thoughts on “The New Preparation of Financial Statements Standard

  1. Armando, I know our firm will be discussing whether we will use this option–not sure at this point. But I know many CPAs have desire such a provision for many years.

  2. Charles, as usual great information. However, at the present I do not perform this type of service as I concentrate in audit and agreed-upon-procedures

  3. Excellent job as usual! I enjoy reading your blog. Just an update, the Peer Review Board issued an exposure draft on 11/18/14 regarding the implications of the preparation standard and peer review. It now looks to be likely be scoped in. They plan on issuing their final decision at their meeting on 1/27/15.

    Thanks again Charles!

  4. Charles – Curious why you think there is increased probability that you or your firm will be sued and lose when applying Section 70 of SSARS 21. Assuming you met the standard by obtaining an engagement letter, prepared the financials and applied the required wording to each page of the financials and included a disclaimer with the financials… where is the increased probability of exposure from third parties?

    PS Great blog… spent most of the early morning reading many of your prior posts.

    • Michael,

      Thanks for you questions and comment.

      My main concern is when I use the option of just placing on each page “no assurance is provided” (and don’t issue the paragraph disclaimer on firm letterhead). So let’s say I am your client and you prepare financials for me, including “no assurance is provided” on each page and you get me to properly sign the engagement letter. I take the financials to my local bank and I tell them “Michael Davis, CPA” prepared these and the lender makes a note in the file (that you prepared the statements). A loan of, let’s say $200,000, is made. I later default. Now the bank is looking for someone with money — you. They sue and take you to court. You say “I followed standards.” But the jury hears the banker say Michael prepared the financials and did not adequately communicate the limits of the engagement (something I think the paragraph disclaimer does).

      I may be completely off base Michael. I am definitely not an attorney, but it just seems to me if you, in the scenario above, had the paragraph disclaimer on letterhead, you could wave it around in court and say “I told everyone exactly what I did not do.”

      Again, I could be wrong about all of this. Hope this more clearly communicates my thoughts.

      • Makes sense. I may have misunderstood your original statement.

        I totally agree that the footnote alone may not be enough and the separate disclaimer should accompany the statements. In fact I believe I would make reference to the disclaimer from the footnote… perhaps “no assurance is provided – see accountant’s disclaimer (or report)”

        Thanks Charles – good information!

  5. Excellent Charles, thank you. I did not see a requirement obtain a management representation letter for financial statements prepared under section 70 of SSARS 21. I would get one.

    • Armando, while there is no requirement to obtain a rep letter for a preparation engagement, it certainly would be a good step nonetheless.