SSARS 21 is Coming! SSARS 21 is Coming!
Part 2: Major Changes to the Compilation - New Engagement Letter and the New Accountant’s Report
By: Joseph L. Santoro MBA/CPA/CVA/MAFF/ABA
This is the second in a series of articles intended to provide readers with information about the AICPA’s proposed Statement on Standards for Accounting and Review Services [SSARS] No. 21. The first installment described a new engagement level - The Preparation – which falls below the level of a Compilation as presented by the Accounting and Review Services Committee of the AICPA. This article, the second installment, describes the major changes to the Compilation and identifies distinctions between the Preparation and Compilation services. Part III will focus on the changes to the Review.
The prior article provided an introduction to the most significant change to Statements on Standards for Accounting and Review Services [SSARS] in 35 years: the release of SSARS No. 21. That standard will add a fifth level of service to traditional financial reporting which will become:
- The Audit
- The Review
- The Compilation with full disclosure
- The Compilation without disclosure
- The Preparation
The Preparation is a non-attest service which can be released by an accountant when financial statements are issued that have not been audited, reviewed or compiled. For the Preparation level of service an accompanying accountant’s report to the financial statements is strictly prohibited. However, the Preparation service does require that the accountant place a legend on each financial statement page indicating that “no assurance is provided”, even though the visual appearance of the Preparation’s statements can be identical to the first four, higher levels of service, listed above. The Preparation can even come with notes to the financial statements. For more detail, please refer to the first article in the “SSARS No. 21 is Coming” series or consult the AICPA web site at AICPA.org.
The Compilation Engagement
SSARS No. 21, at 172 pages, is a massive rewrite and codification of virtually every preceding SSARS [the one surviving SSARS is No. 14 with respect to pro forma financial statements], and is effective for engagements performed in accordance with SSARS for periods ending on or after December 15, 2015, with early implementation permitted. In addition to adding The Preparation Level of Service, it changes several things with respect to Compilation and Review Services.
One of the more significant aspects of the revised Compilation is the restatement of its objective, which now becomes:
“The accountant’s objective in a compilation engagement is to apply accounting and financial reporting expertise to assist management in the presentation of financial statements and report in accordance with this standard without undertaking to obtain or provide any assurance that there are no material modifications that should be made to the financial statements in order for them to be in accordance with the applicable financial reporting framework.”
Note that special phrase: “to apply accounting and financial reporting expertise.” For the first time—and in a contractual arrangement—an accountant who issues a Compilation Report avers to his or her proficiency as one who is an expert. While the phrase imparts greater credibility to a compiled set of financial statements than to those that are “merely” Prepared, some accountants might be uncomfortable making such a declaration, especially if there is the specter of litigation. Perhaps using the Preparation level of service would be the better choice
The Compilation continues to deal with the need to maintain independence. That is, in a Compilation engagement, independence is expected. However, as with SSARS No. 19, the accountant could choose to disclose that: (1) there is a lack of independence, without indicating its cause; or, (2) state that there is a lack of independence but list the major issues that resulted in that lack of independence. With the Preparation, the independence issue is not a concern, nor is it addressed in the accountant’s report because, bluntly, there is no accountant’s report.
Primary differences between a Preparation and a Compilation are summarized below.
Exhibit 1: Comparison between Compilation and Preparation Engagement Services
| |
Compilation |
Preparation |
| Engagement Letter Required? |
Yes |
Yes |
| Independence Required? |
Yes, but can issue a modified report |
No |
| Is a report required? |
Yes |
No |
| May the financial statements be released to users outside of management? |
Yes |
Yes |
| May the financial statements omit additional disclosures (notes)? |
Yes |
Yes |
SSARS No. 21 also introduces a fifth financial reporting accounting framework alternative to GAAP: it is called the Contractual Basis of accounting. Prior SSARS allowed for the OCBOA [an Other Comprehensive Basis Of Accounting] option to GAAP with four possibilities: (1) cash basis (both pure and modified); (2) tax basis (to include cash, accrual, or hybrid); (3) regulatory basis (such as reporting that may be required to comply with state insurance commission requirements); and, (4) “other”, which encompasses a definite set of logical, reasonable criteria that is applied to all material items that appear within a set of financial statements and for that purpose is generally accepted.
Under SSARS No. 21, the “contractual basis” of accounting is one the entity may use to comply with an agreement between that entity and one or more third parties. Also, the former OCBOA alternative to GAAP becomes known as a “special purpose financial reporting framework”
Most of the management and accountant responsibility provisions of SSARS No. 19 remain intact, but the accountant is encouraged to read thoroughly AR-C Section 80 [Compilation Engagements] to learn about the subtle differences between the older and newer versions of compilation services. For example, SSARS no longer addresses independence issues directly; rather, independence issues are covered within the Code of Professional Conduct.
The Compilation Engagement Letter
The SSARS No. 21 release comes with a sample engagement letter. While the Accounting and Review Services Committee [ARSC] represents that the sample is not authoritative, it is intended to serve as an illustration of what the wording should include. In fact, the ARSC cautions that the accountant may seek legal advice – presumably the advice provide by an Errors & Omissions Insurance carrier – before using the new engagement letter format and wording.
Of note is the following extract from SSARS No. 21: The ‘Nonattest Services’ interpretation in the ‘Activities Related to Attest Services’ section of the AICPA Code of Conduct reads:
“Activities such as financial statement preparation, cash-to-accrual conversions, and reconciliations are considered outside the scope of the attest engagement and, therefore, constitute a nonattest service. Such activities would not impair independence provided the requirements of this interpretation are met.”
Said another way: the preparation of financial statements is a book-keeping function. Financial statements do not rise to the level of an accounting service until the accountant chooses to label the product a compilation, a review, or an audit and also signs and issues a report.
The requirements of the standard include emphasizing management’s role and responsibilities. It is the client that assumes all management responsibilities; it is the client who bears the burden of properly overseeing the accountant’s compilation service. Client oversight includes direct and complete evaluation of the accountant’s work product, for which the client is expected to assume full responsibility. The illustrative engagement letter below assumes that the accountant:
- First prepared financial statements as a part of a non-attest service function.
- Then, agreed to subject those financial statements to SSARS compilation level procedures.
Exhibit 2: Compilation Engagement Letter with Respect to Financial Statements Prepared in Accordance with the Tax Basis of Accounting under SSARS No. 21
|
To: Appropriate Representative
ABC Company
You have requested that we prepare the financial statements of ABC Company, which comprise the statement of assets, liabilities, and equity – tax basis as of December 31, 20XX, and the related statements of operations and retained earnings – tax basis, and cash flows – tax basis for the year then ended and the related notes to the financial statements and perform a compilation engagement with respect to those financial statements. We are pleased to confirm our acceptance and our understanding of this engagement to prepare the financial statements of ABC Company by means of this letter.
Our Responsibilities
The objective of our engagement is to
a. prepare financial statements in accordance with the tax basis of accounting based on information
provided by you and
b. apply accounting and financial reporting expertise to assist you in the presentation 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 in order for them to be in
accordance with the tax basis of accounting.
We will conduct our compilation engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS) promulgated by the Accounting and Review Services Committee of the AICPA and comply with the AICPA’s Code of Professional Conduct, including the ethical principles of integrity, objectivity, professional competence, and due care.
We are not required to, and will not, verify the accuracy or completeness of the information you will provide to us for the engagement or otherwise gather evidence for the purpose of expressing an opinion or a conclusion. Accordingly, we will not express an opinion or a conclusion or provide any assurance on the financial statements.
Our engagement cannot be relied upon to identify or disclose any financial statement misstatements, including those caused by fraud or error, or to identify or disclose any wrongdoing within the entity or noncompliance with laws and regulations.
Your Responsibilities
The engagement to be performed is conducted on the basis that you acknowledge and understand that our role is the preparation of the financial statements in accordance with the tax basis of accounting. You have the following overall responsibilities that are fundamental to our undertaking this engagement in accordance with SSARS:
a. The preparation and fair presentation of financial statements in accordance with the tax basis of accounting.
b. The inclusion of all informative disclosures that is appropriate for the tax basis of
accounting. This includes:
1. A description of the tax basis of accounting, including a summary of significant accounting policies, and how the tax basis of accounting differs from accounting principles generally accepted in the United States of America, the effects of which need not be quantified, and
2. Informative disclosures similar to those required by accounting principles generally accepted in the United States of America.
c. The design, implementation, and maintenance of internal control relevant to the
preparation and fair presentation of the financial statements
d. The prevention and detection of fraud.
e. To ensure that the entity complies with the laws and regulations applicable to its activities.
f. To make all financial records and related information available to us.
g. The accuracy and completeness of the records, documents, explanations, and other
information, including significant judgments, you provide to us for the engagement to
prepare financial statements.
You are also responsible for all management decisions and functions, and for designating an individual, with suitable skill, knowledge, and expertise 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.
Our Report
As part of our engagement, we will issue a report that will state that we did not audit or review the financial statements and that, accordingly, we do not express an opinion, a conclusion, nor provide any assurance on them.
Other Relevant Information
Our fees for these services ...
[The accountant may include the following language: You agree to hold us harmless and to release, indemnify, and defend is from any liability or costs, including attorney’s fees, resulting from management’s knowing misrepresentations to us.]
Please sign and return the attached copy of this letter to indicate your acknowledgment of, and agreement with, the arrangements for our engagement to prepare the financial statements described herein, and to perform a compilation engagement with respect to those same financial statements and our respective responsibilities.
Sincerely yours,
____________________________________
Signature of accountant or accountant’s firm
Acknowledged and agreed on behalf of ABC Company by:
_____________________________________________
Name, Title, and Date
|
SSARS requires that an accountant obtain a current engagement letter when something significant with regard to professional standards has occurred. SSARS No. 21 is a significant change: an accountant must obtain a new engagement letter in 2015, or earlier, if SSARS No. 21 is implemented prior to its mandatory effective date for periods ending on or after December 15, 2015.
The Compilation Report
The ARSC has redesigned the accompanying accountant’s compilation report in such a way as to make it look unlike any higher level of service; that is, the mere formatting of the report should appear so different from that of an audit or review service that the reader could not confuse the Compilation level of reporting with anything akin to one that provides any form of assurance.
SSARS No. 1, issued in 1978, used a minimum two paragraph format for the compilation:
1. I (We) have compiled ....
2. A compilation is limited to ....
SSARS No. 19, issued in 2010, established a minimum three paragraph format:
1. I (We) have compiled ....
2. Management’s Responsibilities ...
3. The Accountant’s Responsibilities ..
SSARS No. 21 converts the report from a three paragraph minimum to a single basic paragraph when a GAAP report is issued. And, the opening comments no longer refer to what the accountant has done [no more I(We) have ...]. Instead, the opening words focus upon management: its responsibilities and its choices. The illustrative accountant’s report below has more than one paragraph because the basis of accounting is not GAAP; non-GAAP reports will have at least two paragraphs, followed by more if something needs to be brought to the reader’s attention, such as the absence of complete disclosures.
Exhibit 3. An Accountant’s Compilation Report of Comparative Financial Statements Prepared in Accordance with the Tax Basis of Accounting, and Management Has Elected to Omit Substantially All Disclosures Ordinarily Included in Financial Statements Prepared in Accordance with the Tax Basis of Accounting
Management is responsible for the accompanying financial statements of XYZ Company, which comprise the statements of assets, liabilities, and equity—tax basis as of and for the years ended December 31, 2015 and 2014, and the related statements of revenues and expenses—tax basis, for the years then ended in accordance with the tax basis of accounting. 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 provide an opinion, a conclusion, nor provide any form of assurance on these financial statements.
The financial statements are prepared in accordance with the tax basis of accounting, which is a basis of accounting other than accounting principles generally accepted in the United States of America.
Management has elected to omit substantially all the disclosures ordinarily included in financial statements prepared in accordance with the tax basis of accounting. If the omitted disclosures were included in th financial statements, they might influence the user’s conclusions about the company’s assets, liabilities, equity, revenue, and expenses. Accordingly, the financial statements are not designed for those who are not informed about such matters.
[Signature of accounting firm or accountant as appropriate]
[Accountant’s city and state]
[Date of the Accountant’s Report]
***
Of additional note with respect to formatting, for the first time the accountant is required to include reference to the city and state the accountant was in when the report was signed. So far, the presentation standards do not demand the use of letterhead; however, the requirement for the accountant’s geographical information can be satisfied if letterhead is used.
The Next Article
The previous article in this publication on SSARS No. 21 introduced the new level of service: the Preparation, which is below that of the Compilation in terms of impact and accountant responsibility. This article focused on the Compilation with respect to the new engagement letter and the new accountant’s report. In the next and last in the three-part series on SSARS No. 21, the subject matter will be the changes to the Review level of service and the new Review report.
The Next Article, SSARS Part 3
The previous article in this publication on SSARS No. 21 introduced the new level of service: the Preparation, which is below that of the Compilation in terms of impact and accountant responsibility. This article focused on the Compilation with respect to the new engagement letter and the new accountant’s report. In the next article on SSARS No. 21, the subject matter will be the changes to the Review level of service and the new Review report.
SSARS 21: Part 1: Major Changes to the Compilation - The Preparation
SSARS 21: Part 3: Major Changes to the Compilation - The Review Engagement
About the author
Joseph L. Santoro is a certified public accountant, an AICPA member, and, since 1981, a member of the National Society of Accountants. In addition to an MBA, Mr. Santoro holds certificates as a Certified Valuation Analyst, Accredited Business Advisor, and Master Analyst in Financial Statement Forensics. A former two-term NSA District 1 Governor, he has chaired numerous NSA committees, including Budget, Education, National Affairs, and Peer Review. Currently he is chair of NSA Accounting Standards Committee and serves also as a member of the Board of Directors for the Accreditation Council for Accounting and Taxation (ACAT), for whom he has for many years worked as a subject matter expert for its credentialing examinations. Although retired from the CPA practice he founded more than 30 years ago, Mr. Santoro, who is known nationwide as an author and lecturer for Gear Up with which he has been associated for more than 20 years, continues to provide lectures on Accounting and Taxation at more than 80 seminars a year.
Mr. Santoro is also the recipient of the National Society of Accountants (NSA) 2015 Accountant of the Year award and the NSA Golden Quill award for his work on this important series of articles. He is a featured speaker at NSA's 71st Annual Meeting where he will be presenting on SSARS No. 21.
Editor's Note: These articles were written September 14, 2014 based upon the revised proposed SSARS No. 21 as of August 21, 2014. Subsequently, the ARSC Committee met twice more to make additional revisions that culminated in the release of SSARS No. 21 in December 2014. Readers are advised to check for themselves the final approved text of SSARS No. 21 for any differences between the proposal and the final standard. NSA will update these articles for those differences in the near future.
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