Monthly Archives: January 2015

Preparation of financial statements and independence
Jan 14

Independence and Preparation of Financial Statements

By Charles Hall | Accounting and Auditing , SSARS

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

Preparation of financial statements and independence

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.

Jan 11

New AICPA Code of Professional Conduct Effective December 15, 2014

By Charles Hall | Accounting and Auditing

The AICPA’s new Code of Professional Conduct is now effective.

On January 28, 2014, the AICPA Professional Ethics Executive Committee (PEEC) approved the new Code of Ethics Codification. The prior code of ethics evolved over many years without a great deal of structure, making it difficult to find answers to CPA’s ethical and independence questions. The purpose of the new codification is to enhance the clarity and organization of the Code.

You will find the new codification delivers as promised: easy-to-follow and well designed. The AICPA did a fine job with this project.

AICPA Code of Professional Conduct Table of Contents

AICPA Code of Professional Conduct Table of Contents

Table of Contents

The Code is organized into three parts:

  1. Public practice
  2. Members in Business
  3. All other members (including those who are in between jobs or retired)

Effective Dates

The revised Code is effective as of December 15, 2014. The new conceptual frameworks, however, are not effective until December 15, 2015. 

The Code includes a threats and safeguards framework (not effective until December 15, 2015–this delay is provided to give CPAs time to consider and understand the new framework). CPAs will identify threats and then consider safeguards to mitigate those threats. The CPA will be able to proceed with the engagement if threats–after considering safeguards–are at an acceptable level. The conceptual frameworks (there are two–one for members in practice and one for members in business) are to be used only in situations for which the revised code does not contain a specific rule or requirement.

Access to New Code of Conduct

Access to the revised code is free (you may be thinking, finally something free), and users will be able to save searches and bookmark content.

Access the electronic version of the code here.

Download a free PDF version of the code here.

Independence Standards

For CPAs in public practice, the independence standards are located at 1.200.

Merging of AICPA and Yellow Book Independence Rules

If the threats and safeguards framework sounds familiar, it should. You will recall the GAO issued the revised 2011 version of the Yellow Book which includes similar independence language and approaches.

For many years the AICPA and the GAO went in different directions. The result was independence standards that were quite different. Now, thankfully, they are similar.

Sample compilation and review reports
Jan 08

SSARS 21 Reports – Preparation, Compilation and Review

By Charles Hall | SSARS

In this post, I provide comparisons of SSARS 19 (old standard) and SSARS 21 (new standard) compilation and review reports.

But first I provide the new SSARS 21 preparation (of financial statements) disclaimer–SSARS 19 had no such disclaimer. (If the accountant chooses not to use the disclaimer, he can put “no assurance is provided” on each page of the financial statements.) For more information about preparation of financial statements, as provided in SSARS 21, click here.

SSARS 21 is effective for all periods ending on or after December 15, 2015 and can be early implemented.

Courtesy of DollarPhoto.com

Courtesy of DollarPhoto.com

Preparation Disclaimer

Using SSARS 21, a disclaimer can be provided by an accountant that prepares financial statements and is not engaged to perform a compilation.

The preparation 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]

Compilation Reports

The SSARS 19 compilation report follows:

Accountant’s Compilation Report

[Appropriate Salutation]

I (we) have compiled the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. I (we) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or provide any assurance about whether the financial statements are in accordance with accounting principles generally accepted in the United States of America.

Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the compilation in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. The objective of a compilation is to assist management in presenting financial information in the form of financial statements without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements.

[Signature of accounting firm or accountant, as appropriate]

[Date]

The 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]

For more information about compilation engagements, based on SSARS 21, click here.

Review Reports

The SSARS 19 review report follows:

Independent Accountant’s Review Report

[Appropriate Salutation]

I (We) have reviewed the accompanying balance sheet of XYZ Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.

Management (owners) is (are) responsible for the preparation and fair presentation of the financial statements in accordance with accounting principles generally accepted in the United States of America and for designing, implementing, and maintaining internal control relevant to the preparation and fair presentation of the financial statements.

My (our) responsibility is to conduct the review in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. Those standards require me (us) to perform procedures to obtain limited assurance that there are no material modifications that should be made to the financial statements. I (We) believe that the results of my (our) procedures provide a reasonable basis for our report.

Based on my (our) review, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

[Signature of accounting firm or accountant, as appropriate]

[Date]

The SSARS 21 review report follows:

Independent Accountant’s Review Report

[Appropriate Addressee]

I (We) have reviewed 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 stockholders’ equity, and cash flows for the years then ended, and the related notes to the financial statements. A review includes primarily applying analytical procedures to management’s (owners’) financial data and making inquiries of company management (owners). A review is substantially less in scope than an audit, the objective of which is the expression of an opinion regarding the financial statements as a whole. Accordingly, I (we) do not express such an opinion.

Management’s Responsibility for the Financial Statements 

Management (Owners) is (are) responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement whether due to fraud or error.

Accountant’s Responsibility 

My (Our) responsibility is to conduct the review engagements in accordance with Statements on Standards for Accounting and Review Services promulgated by the Accounting and Review Services Committee of the AICPA. Those standards require me (us) to perform procedures to obtain limited assurance as a basis for reporting whether I am (we are) aware of any material modifications that should be made to the financial statements for them to be in accordance with accounting principles generally accepted in the United States of America. I (We) believe that the results of my (our) procedures provide a reasonable basis for our conclusion.

Accountant’s Conclusion 

Based on my (our) reviews, I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with accounting principles generally accepted in the United States of America.

[Signature of accounting firm or accountant, as appropriate]

[Accountant’s city and state]

[Date of the accountant’s review report]

Observations

The Accounting and Review Services Committee (ARSC) intentionally reformatted the compilation report in SSARS 21 to distinguish it from assurance service reports (a compilation is a nonassurance service). Compare the SSARS 21 compilation report above to the SSARS 21 review report (a review is an assurance service).

Notice the sample SSARS 21 compilation report has no:

  1. Report title (e.g., Independent Accountant’s Compilation Report) or
  2. Addressee/salutation
  3. Paragraph headers (and even no separate paragraphs)

I checked with the AICPA, and they advised that a compilation report title and salutation, while not required, is permissible.

Notice the SSARS 21 review report has section headers, as audit reports do. Both reviews and audits are, of course, assurance services–so the reports are formatted similarly.

Other Blog Posts

Here’s some additional SSARS 21 information:

SSARS 21 Book Available on Amazon.com

Are you looking for more information about SSARS 21? My new SSARS 21 book (ranked #1) is now available on Amazon.com. The book focuses on Section 70 of SSARS 21, Preparation of Financial Statements, and Section 80, Compilation Engagements. Click here to see the book on Amazon.com, and use the “Look Inside” feature to see excerpts (including the table of contents).

Jan 04

Comparison of Compilations and Financial Statement Preparation

By Charles Hall | Accounting and Auditing

This post provides a comparison of compilations and financial statement preparation services.

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.

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