SSARS 21: Bringing Standards into the 21st Century

Transcription

1 ADP Lunch & Learn Course Materials SSARS 21: Bringing Standards into the 21st Century NASBA INFORMATION SmartPros Ltd. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website: ADP has partnered with SmartPros (a Kaplan Company) to provide this program and SmartPros has prepared the material within A

2 segment one segment one segment one 1. SSARS 21: Bringing Standards into the 21st Century Learning Objectives: Segment Overview: Field of Study: Expiration Date: Course Level: Course Prerequisites: Advance Preparation: Recommended Accreditation: Required Reading (Self-Study): Video Transcript: Running Time: 1 1 Upon successful completion of this segment, you should be able to: Identify the contents of SSARS 21; Determine where to put the legend and what it should say when performing non-reporting preparation services; Identify the situations where Sec. 70 of SSARS 21 does not apply; Recognize the presentation approach when financial statements are prepared in accordance with a special purpose framework, substantial disclosure is omitted, or there is a departure from the framework. It s not unusual for a company s management to collaborate contemporaneously with their accounting advisers. As a result, many accountants appreciate the ARSC s new guidance that differentiates when you actually prepare financial statements, from when you merely assist management in preparing their financial statements. Michael Glynn, senior technical manager at the AICPA, explains how SSARS 21 is bringing the accounting and review standards into the 21st century. Auditing August 31, 2017 Update Work experience in financial reporting or auditing, or an introductory course in accounting None 1 hour group live 2 hours self-study By Michael L. Brand, CPA; Michael P. Glynn, CPA; and Charles J. McElroy Reprinted with permission of the Journal of Accountancy For additional info, go to: See page See page minutes CPAR/ DEC. 15

3 outline outline outline outline outline Outline I. Results of the New SSARS 21 Release A. Background on SSARS 21: 4 Sections 1. SSARS 21 biggest change to SSARS standards since they were first issued more than 35 years ago 2. Will help financial statement users differentiate between when an accountant a. Performs a compilation engagement b. Prepares the financial statements c. Merely assists management in preparing financial statements 3. SSARS 21 is composed of four different sections: a. Section 60 on the general principles for engagements performed in accordance with SSARS b. Section 70 on the preparation of financial statements c. Section 80 on compilation engagements d. Section 90 on the review of financial statements II. The Management Report A. No Written Report Required 1. Under section 70 a management report does NOT require a written report a. Even when financial statements are expected to be provided to a 3rd party b. Just like all other non-attest internal control functions 2. ARSC did away with the prohibition on distribution a. Clients can do what they want with their financial statements b. Equate it with the old managementuse only compilation B. SSARS 21 Scorecard 1. True clarification of the existing literature 2. Just old management-use only compilation a. Don t have to worry about who the client gives it to 3. Response to SSARS 21 has been overwhelmingly positive B. Legend Required 1. No assurance provided on these financial statements. 2. No requirement as to where you put the legend 3. Can say, No assurance provided in the watermark a. Can put firm name on it if you want 1 2

4 Outline (continued) 1 3 outline outline outline outline outline III. Section 70 A. Need an Engagement Letter 1. For all engagements performed according to SSARS a. All reviews, compilations, preparation services b. Need engagement letter signed by both the firm and the client 2. SSARS does not apply when all the client wants is for us to do some accounting work or bookkeeping services 3. When client needs us to prepare financial statements a. That's when we jump into section 70 B. When Section 70 Does Not Apply 1. When preparation of financial statements is a byproduct of something else 2. Example: preparing financial statements for use in developing client s tax return a. Same thing with litigation services or business valuation services IV. Compilation Engagements A. Compilation vs. Audit Clarified 1. New standard eliminates the submission requirement 2. Compilation literature applies only when the client needs us to do a compilation a. Whole notion of whether or not we submitted financial statements is gone 3. Did they hire yoau to prepare financial statements? a. If not, it s just a bookkeeping service b. You're not in SSARS B. Streamlined Report 1. ARSC wanted to make the nonassurance report look as different as possible from the review and the audit report 2. Basically one paragraph a. Says these financial statements look like they're in the right format i. But we didn't test any of the numbers ii. No assurance provided C. Bells and Whistles 1. If financial statements are prepared in accordance with a special purpose framework a. Still have to make users aware that these are not GAAP financial statements i. Could put it in a selected note ii. Could put it in the legend 2. If management has elected to omit substantial disclosures a. Users have to be made aware of that 3. If we're aware of a departure from the framework a. For instance they use the tax basis of accounting b. Probably put it in a selected note With clients where I'm aware of a departure from the framework I would probably look to steer those guys to a compilation so I have a report that explains the departure in it. - Michael Glynn C. Disclosures for Special Situations 1. If you're aware of a known departure from the framework a. Disclose that in a separate paragraph of the report 2. Required to make clear if the financial statements are prepared in accordance with a special purpose framework a. OCBOA (other comprehensive bases of accounting) frameworks 3. If management elects to omit substantial disclosures need to disclose CPAR/ DEC. 15

5 Outline (continued) 1 4 outline outline outline outline outline V. Section 90 A. Clarifying Review 1. For the most part SSARS left review untouched 2. New requirement to put headings a. Management s Responsibility b. Accountant s Responsibility 3. In SSARS 19 really hammered out what a review is a. Separated the requirements and the application guidance VI. Take-Aways on SSARS 21 A. Focus Solely on What Client Asked For 1. SSARS 21 focuses the standards on our providing the service that the client hired us to do 2. Additional resources on AICPA website a. To help folks through the process of implementing SSARS 21 B. I.S.R.E. Convergence 1. Auditing Standards Board was concerned with harmonization and converged international literatures on auditing 2. Compilation and review literature is not strictly harmonized with the corresponding international literature a. ARSC harmonized it with the review standards for auditors 3. Literature is harmonized with the international literature for interim reviews a. Not on the international literature for non-interim reviews i. When you are not the auditor B. ARSC Guidance: Relation to SSARS ARSC streamlined the standards as part of SSARS 21 a. To make it as easy to understand the literature as possible 2. Concepts from old AR sections that were not clarified yet were still superseded by SSARS 21 a. Mostly went to the authoritative guide 3. ARSC is looking to make sure nothing fell through the cracks

6 1 5 outline outline outline outline outline Outline (continued) VII. FRF for SMEs A. Less Complex Financial Statements 1. For many banks and other thirdparty users of financial statements for smaller firms and main street USA businesses a. Cash or basis of accounting doesn't get them what they need b. They needed an established set of standards such as GAAP 2. Problem is U.S. GAAP is very complex a. A lot of smaller firms don't need complex financial statements 3. AICPA developed framework for small and medium sized entities a. Elevates it above all other special purpose frameworks b. Fits the specific needs for their users, banks etc. 4. It is a globally recognized set of accounting principles CPAR/ DEC. 15

7 discussion questions discussion questions Group Live Option Instructions for Segment For additional information concerning CPE requirements, see page vi of this guide. As the Discussion Leader, you should introduce this video segment with words similar to the following: In this segment. Michael Glynn explains how SSARS 21 is bringing the accounting and review standards into the 21st century. Show Segment 1. The transcript of this video starts on page 1 20 of this guide. Discussion Questions After playing the video, use the questions provided or ones you have developed to generate discussion. The answers to our discussion questions are on pages 1 7 and 1 8. Additional objective questions are on pages 1 9 and After the discussion, complete the evaluation form on page A SSARS 21: Bringing Standards into the 21st Century You may want to assign these discussion questions to individual participants before viewing the video segment. 1. What are the contents of SSARS 21? 2. Under SSARS 21, where should the accountant put the legend when performing non-reporting preparation services? What should the legend say? 3. What is Mr. Glynn s observation regarding engagement letters? What is our firm s policy? 4. In what situations does Sec. 70 of SSARS 21 not apply? 5. What is Mr. Glynn s recommendation for presentation when financial statements are prepared in accordance with a special purpose framework? When a substantial disclosure is omitted? When there is a departure from the framework? 6. What is the notion of submission? Does it still apply? 7. What are the SSARS 21 requirements related to compilation engagements? Review engagements? 1 6

8 suggested answers to discussion questions Suggested Answers to Discussion Questions 1. SSARS 21: Bringing Standards into the 21st Century 1. What are the contents of SSARS 21? Contents of SSARS 21 Sec. 60: General principles for SSARS engagements Sec. 70: When accountant is engaged to prepare financial statements Sec. 80: When accountant is engaged to perform a compilation Sec. 90: When accountant is engaged to perform a review 2. Under SSARS 21, where should the accountant put the legend when performing non-reporting preparation services? What should the legend say? Non-reporting preparation service: Where to put the legend? AICPA perspective: Put on bottom of each page Similar to what accountants have historically done No stipulation as to where it should go What should the legend say? It should state: No assurance provided on these financial statements Glynn s recommendation: The message is clear so use only no assurance provided Additional language is permitted at direction of CPA 3. What is Mr. Glynn s observation regarding engagement letters? What is our firm s policy? Glynn s observation An engagement letter for all engagements performed according to SSARS is required It should be signed by the firm and the client Response is based your firm s policy 4. In what situations does Sec. 70 of SSARS 21 not apply? Sec. 70 of SSARS 21 does not apply when Developing the tax return Performing litigation services Performing valuation services Glynn s recommendation: Include no assurance provided even though not required 5. What is Mr. Glynn s recommendation for presentation when financial statements are prepared in accordance with a special purpose framework? When a substantial disclosure is omitted? When there is a departure from the framework? Glynn s recommendation for presentation when financial statements prepared in accordance with special purpose framework ABC Company Balance Sheet, Tax Basis as of December 31, 2015 Putting it in a note or legend is OK Glynn s recommendation for presentation when a substantial disclosure is omitted ABC Company Balance Sheet Line 3 Substantial Disclosures Omitted December 31, 2015 Putting it in the legend is OK Glynn s recommendation for presentation when there is a departure from the framework Put it in a selected note Putting it on the face may also be OK 1 7 CPAR/ DEC. 15

9 suggested answers to discussion questions Suggested Answers to Discussion Questions (continued 6. What is the notion of submission? Does it still apply? The notion of submission In 1978 ARSC stipulated compilation standard applied when we submit financial statements to client/third party SSARS 21: Compilation literature only applies when client engages us to perform a compilation Notion of submission goes away 7. What are the SSARS 21 requirements related to compilation engagements? Review engagements? SSARS 21: Compilation engagement Includes a paragraph in Plain English that states no assurance provided Including a heading is optional Additional paragraph disclosures when We know of a departure from the framework Our independence is impaired Financial statements prepared in accordance with special purpose framework Management elects to omit substantial disclosures SSARS 21: Clarified review statements Includes heading for Management s and Accountant s Responsibility Added guidance around communications between accountant and management 1 8

10 Objective Questions 1 9 objective questions objective questions 1. SSARS 21: Bringing Standards into the 21st Century You may want to use these objective questions to test knowledge and/or to generate further discussion; these questions are only for group live purposes. Most of these questions are based on the video segment; a few may be based on the required reading for self-study that starts on page Which of the following engagements is incorporated into SSARS 21? a) financial statement preparation b) bookkeeping services c) payroll services d) management-use only compilations 2. What does Michael Glynn emphasize about the required legend under section 70 of SSARS 21? a) It must include the name and business address of the accountant. b) It must be included in the title of the financial statements. c) It must state that no assurance is provided. d) It must be included in the financials as well as the accompanying report. 3. When would section 70 of SSARS 21 not apply? a) when financials are prepared for use in developing the tax return for the client b) when financials are created solely in connection with business valuation services c) whenever financial statements are prepared as a byproduct of another service the accountant was hired to perform d) all of the above 4. According to section 70 of SSARS 21, how should departures from GAAP be disclosed in the financials? a) Any departures should be indicated in the accountant s report. b) They must be incorporated into the legend. c) They must be incorporated into the financial statement titles. d) While the disclosure is mandatory, the method of disclosure is not prescribed. 5. With respect to section 80 of SSARS 21, Michael Glynn notes that: a) a compilation should be performed when an accountant prepares and submits financial statements. b) management-use only compilations will now require a report. c) engagement letters are considered a best practice but not a requirement. d) the compilation report has been streamlined so as not to be confused with a review or audit report. 6. Which of the following engagements have been harmonized with international standards? a) non-interim reviews, where the accountant is not the auditor b) management use only compilations c) financial statement preparation d) none of the above 7. What does Michael Glynn note regarding steps the AICPA has taken to support smaller accounting firms? a) He does not think that accountants are interested in learning FRF for SMEs. b) He doesn t believe that the CPEA offers enough of an advantage over the AICPA technical hotline. c) He believes the CPEA provides a national office service for smaller firms. d) He notes that third parties like banks have not been accepting of FRF for SMEs. 8. Which of the following is incorporated into section 60 of SSARS 21? a) general principles for SSARS engagements b) financial statement preparation guidance c) compilation guidance d) review guidance CPAR/ DEC. 15

11 1 10 objective questions objective questions Objective Questions (continued) 9. Which of the following is required with respect to section 70 of SSARS 21? a) a determination of whether or not the accountant is independent b) disclosure on the financial statements if there is a departure from GAAP c) the inclusion of the accountant s name in the financial statements d) a legend included at the bottom of each page of the financials 10. What was one of the primary reasons for the need for SSARS 21? a) Changes needed to be made to the financial statement preparation services guidance. b) Compilations needed to be updated since an independence determination no longer exists. c) A revamping of the review report was necessary. d) The existing compilation literature was problematic in the current technological environment.

12 1 11 required reading required reading Self-Study Option Instructions for Segment When taking a CPA Report segment on a self-study basis, an individual earns CPE credit by doing the following: 1. Viewing the video (approximately minutes). The transcript of this video starts on page 1 20 of this guide. 2. Completing the Required Reading (approximately minutes). The Required Reading for this segment starts below. Required Reading (Self-Study) A BRIGHT LINE IN SSARS By Michael L. Brand, CPA; Michael P. Glynn, CPA; and Charles J. McElroy Reprinted with permission of the Journal of Accountancy For additional info, go to: Accountants in public practice who prepare financial statements for clients will find significant changes in new standards for accounting and review services that were issued in October. Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, is the result of efforts by the AICPA Accounting and Review Services Committee (ARSC) to clarify and revise the standards for reviews, compilations, and engagements to prepare financial statements. The basic standard for accountants who prepare and present financial statements to their clients or to third parties was issued as SSARS No. 1, Compilation and Review 3. Completing the online steps (approximately minutes). Please see pages iii to v at the beginning of this guide for instructions on completing these steps. of Financial Statements, in December Paragraph 7 of SSARS No. 1 stated that the accountant should not submit unaudited financial statements of a nonpublic entity to his client or others unless, as a minimum, he complies with the provisions of this statement applicable to a compilation engagement. The SSARS defined submission as presenting to management financial statements that the accountant has prepared. The bottom line is that accountants in public practice who prepared financial statements were required to, at a minimum, perform a compilation engagement with respect to those financial statements. Submission worked well as a trigger for the compilation service when SSARS No. 1 was issued. At that time, paper financial statements were prepared, bound, and presented to clients by the CPA. However, in today s electronic environment, financial data are typically recorded and organized across multiple computer platforms, including some in the cloud. The use of computer software by the client and by the CPA makes it difficult to determine who CPAR/ DEC. 15

13 1 12 required reading required reading (or what) has prepared the financial statements and thus whether the accountant is required to perform a compilation engagement. For example, take a situation where an accountant performs bookkeeping services for a client. Perhaps the accountant has access to the client s cloud-computing system and makes a number of journal entries to record payroll tax payments, sales tax payments, depreciation expense, and revenue adjustments for a given period. The company s internal bookkeeper records amounts billed and certain recurring expenses such as utilities and office expenses. At the end of each month, the bookkeeper prints, from the cloud accounting software, a copy of the financial statements for presentation to the owner. Has the accountant prepared those financial statements? The bookkeeper? The application itself? The answer is difficult to determine, and often accountants will come to different conclusions given the same set of circumstances. This diversity in practice is not in the public interest. SSARS No. 21 eliminates the need for the accountant to determine an answer to that question by eliminating the submission requirement and making the compilation literature apply when the accountant is engaged to perform a compilation service. Prior Standards Are Superseded SSARS No. 21 supersedes all existing AR sections with the exception of AR Section 120, Compilation of Pro Forma Financial Information. Proposed standards regarding compilation of pro forma information and compilation of prospective financial information are expected to be exposed for public comment in Format of SSARS No. 21 SSARS No. 21 is formatted into four sections: Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services. Section 70, Preparation of Financial Statements. Section 80, Compilation Engagements. Section 90, Review of Financial Statements. These sections will be codified with the prefix AR-C to distinguish them from the extant AR sections. Section 60 Section 60 of SSARS No. 21 replaces AR Section 60, Framework for Performing and Reporting on Compilation and Review Engagements, and provides general principles for engagements performed in accordance with SSARSs. Section 60 is intended to help accountants better understand their professional responsibilities when performing an engagement in accordance with SSARSs. An accountant engaged to perform a review, a compilation, or an engagement to prepare financial statements is required to adhere to the requirements in Section 60 as well as the requirements in the appropriate engagement section. Section 60 includes requirements and guidance with respect to: Ethical requirements. Professional judgment. Conduct of the engagement in accordance with SSARSs. Engagement-level quality control. Acceptance and continuance of client relationships and engagements. Requirement to obtain a signed engagement letter: The accountant is required to agree upon the terms of the engagement for all SSARSs engagements with management or those charged with governance, as appropriate. The agreed-upon terms of the engagement are required to be documented in an engagement letter or other suitable form of written agreement. The engagement letter or other suitable form of

14 1 13 required reading required reading written agreement is required to be signed by the accountant or the accountant s firm and management or those charged with governance. The requirement that management sign the engagement letter is to better ensure that management has read the letter and understands the terms of the engagement. Section 70 Section 70 of SSARS No. 21 is intended to be short (only 22 requirement paragraphs and 19 application paragraphs) and easy to apply for accountants who are engaged to prepare financial statements for their clients without reporting on those statements. The section is particularly helpful for accountants who prepare interim financial statements and perform accounting services using a cloud-computing application. Also, accountants who currently prepare financial statements that are not expected to be used by a third party (commonly referred to as management-use-only financial statements or SSARS 8 financial statements) should find that an engagement to prepare financial statements in accordance with Section 70 now is better suited to their clients needs. Section 70 applies when an accountant in public practice is engaged to prepare financial statements. It does not apply when the accountant is engaged to perform an audit, review, or compilation of those financial statements that the accountant prepared. Even when Section 70 does not apply to the preparation of financial statements because the accountant is engaged to perform an audit, review, or compilation, Ethics Interpretation No , Performance of Nonattest Services, would still apply since the preparation of or assisting in the preparation of financial statements is a nonattest service. The section also does not apply when the accountant has been engaged to merely assist in preparing financial statements or when the accountant prepares financial statements as a byproduct of another engagement, such as when the accountant prepares financial statements: Solely for submission to taxing authorities; For inclusion in written personal financial plans prepared by the accountant; In conjunction with litigation services that involve pending or threatened legal or regulatory proceedings; or In conjunction with business valuation services. The accountant is required to apply professional judgment in determining whether he or she is engaged to prepare financial statements. The accountant will need to have a discussion with the client to determine the client s specific needs, including whether the client expects the accountant to prepare financial statements as part of the engagement either for internal or external use. Because the engagement to prepare financial statements is a nonattest service, the accountant is not required to make a determination as to whether he or she is independent of the entity. The accountant may prepare financial statements that omit substantially all disclosures required by the applicable financial reporting framework. In such instances, the accountant is required to disclose such an omission in the financial statements. The disclosure of the omission of substantially all disclosures required by the applicable financial reporting framework may be made on the financial statements or in a selected note to the financial statements (see Exhibit 1). The accountant may prepare financial statements that include disclosures about only a few matters in the notes to the financial statements. Such disclosures may be labeled Selected Information Substantially All Disclosures Required by [the applicable financial reporting framework] Are Not Included. The accountant is precluded from preparing financial statements that omit substantially all disclosures if the omission was undertaken with the intent of misleading users of such financial statements (see Exhibit 1). CPAR/ DEC. 15

15 1 14 required reading required reading If the accountant becomes aware that the financial statements include a departure or departures from the applicable financial reporting framework, he or she is required to either correct the departure or, after discussions with management, disclose the material misstatement or misstatements in the financial statements. The disclosure of the material misstatement or misstatements may be made on the face of the financial statements or in a note to the financial statements. When SSARS No. 1 was issued, the requirement that the accountant report on financial statements that the accountant submitted to a client or to third parties was included because users should be able to readily identify the degree of responsibility the accountant is taking with respect to such financial statements. To ensure that users can readily identify that the accountant is not providing any assurance on the financial statements, the accountant is required to include a statement on each page of the financial statements indicating, at a minimum, that no assurance is provided on the financial statements. The accountant s name is not required to be included in the statement (see Exhibit 2). Vendors are already working to include the legend in their accounting software. If the accountant is unable to include a statement on each page of the financial

16 1 15 required reading required reading statements, he or she is required to do one of two things: Issue a disclaimer that makes clear that no assurance is provided on the financial statements; or Perform a compilation engagement in accordance with Section 80 of SSARS No. 21. See Exhibit 3 for an example of a disclaimer that an accountant may issue. When preparing financial statements in accordance with a special-purpose framework (also commonly referred to as an other comprehensive basis of accounting, or OCBOA), the accountant is required to include a description of the financial reporting framework on the face of the financial statements or in a note to the financial statements. A description of the special-purpose framework is usually placed next to or under the title of the financial statements. For example, Statement of Assets and Liabilities Modified Cash Basis. It is not expected that accountants will find the implementation of Section 70 to be a significant challenge. However, since the section can be implemented early, accountants need to make sure that they understand the full text of the new section and have a thorough discussion with their clients to ensure that both the accountant and the client understand what the client needs and what service the accountant will provide including whether the accountant s service will result in the issuance of a report. Section 80 Like Section 70, Section 80 of SSARS No. 21 is intended to be short (38 requirement paragraphs and 43 application paragraphs) and easy to apply for accountants. Section 80 applies when the accountant is engaged to perform a compilation engagement. This contrasts with prior compilation standards, which applied when the accountant submitted (defined as prepared and presented ) financial statements to a client or to third parties. Other than the applicability of the literature, the compilation standard is largely unchanged from previous standards. 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 Section 80 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. Section 80 retains the requirement that the accountant determine whether he or she is CPAR/ DEC. 15

17 1 16 required reading required reading independent of the entity. The accountant can still perform a compilation engagement on financial statements that omit substantially all disclosures. The primary change in the literature relates to reporting on financial statements that have been subjected to a compilation engagement. First of all, a report is now required for all compilation engagements. The nonreporting exception that previously applied when financial statements that were prepared and presented by an accountant to management were not intended for thirdparty use is no longer necessary because such engagements would be covered by Section 70. Also, to differentiate a report in which the accountant provides no assurance from assurance reports (i.e., review and audit reports), the report is streamlined. The standard report is just one paragraph with no headings. Additional paragraphs would be added when the financial statements are prepared in accordance with an OCBOA; when management elects to omit substantially all disclosures required by the applicable financial reporting framework; when the accountant s independence is impaired; when there is a known departure from the applicable financial reporting framework; and when supplementary information accompanies the financial statements and the accountant s compilation report. See Exhibit 4 for a comparison of the standard compilation report in accordance with Section 80 to the previous standard compilation report. See Exhibit 5 for differences between a compilation engagement and an engagement to prepare financial statements in accordance with SSARS No. 21. The bottom line is that SSARS No. 21 provides a bright line between accounting services (preparation) and reporting services (compilation or review). The accountant no longer has to be concerned about whether the financial statements will be used only by management or by third parties. Section 90 Section 90 of SSARS No. 21 is primarily a clarity redraft of the extant review literature with very few changes. SSARS No. 21 does make clear that Section 90 may be applied to historical financial information other than historical financial statements, such as specified elements, accounts, or items of a financial statement; supplementary information; required supplementary information; and financial information included in a tax return. The accountant s review report will look different as SSARS No. 21 requires the use of headings in the accountant s review report. The accountant is also required to name the city and state of the issuing office. The requirement will be met if the accountant s review report is presented on the accountant s letterhead and the letterhead contains the city and state of the issuing office. Effective Date of SSARS No. 21 ARSC is allowing early implementation for SSARS No. 21, with a required effective date a year out to allow for education and training for those in practice who need more time. SSARS No. 21 is effective for reviews, compilations, and engagements to prepare financial statements for periods ending on or after Dec. 15, Accountants should be aware that early implementation has drawbacks as well as benefits. Accountants should ensure that staff is appropriately trained and that firm methodologies are updated before the implementation of any new standard. Other SSARS No. 21 Guidance ARSC discussed many issues in the deliberations of SSARS No. 21. It was concerned about the length of the standard for a straightforward, no-assurance compilation or engagement to prepare financial statements. ARSC decided to try to keep the standards and application paragraphs short and put much of the application guidance in an authoritative interpretive guide.

18 1 17 The applicability of the compilation standard was based on a trigger of submission that was no longer practical in today s electronic environment. Therefore, ARSC sought to create an engagementrequired reading required reading That interpretive guidance is expected to be available during the second quarter of Why SSARS 21 Was Necessary ARSC is the senior committee of the AICPA that is designated by AICPA Council to issue standards with respect to unaudited financial statements or other unaudited financial information of a nonpublic entity. The Compliance with Standards Rule of the AICPA s Code of Professional Conduct requires members who perform professional services to comply with standards promulgated by bodies designated by Council. The project was undertaken because: CPAR/ DEC. 15

19 1 18 required reading required reading driven standard that would be applicable in the same way as the review and auditing standards. In other words, it would apply when a CPA was engaged to perform a compilation service. The AICPA Auditing Standards Board (ASB), as part of its project to clarify the literature for audit engagements, had deleted the association section from the auditing literature and had asked ARSC to consider including it in SSARSs since it dealt with unaudited financial statements. ARSC was committed to take a look at whether the review standard should be amended in light of a new international review standard. ARSC was committed to clarifying the SSARSs literature in a manner similar to that used by the ASB in clarifying the auditing standards. Based on comments from stakeholders, ARSC in January 2013 withdrew its initial exposure drafts from June Commenters had told ARSC that the compilation service should be positioned as a nonattest service consistent with the positioning of preparation of financial statements. They also said the standards needed to be combined and simplified. ARSC later paved the way forward for SSARS No. 21 with a proposal that the accountant would be required to comply with the compilation SSARS when the accountant is engaged to perform a compilation engagement as opposed to when the accountant submits (defined as prepares and presents ) financial statements to a client or to third parties. The standard was created with the help of substantial comments from a wide range of parties. Ninety-two respondents submitted comments on the initial exposure draft, and 62 comment letters the overwhelming majority of which were supportive were received on the reproposed standards. Statement on Standards for Accounting and Review Services (SSARS) No. 21 was issued by the AICPA Accounting and Review Services Committee (ARSC) in October, but it took years to develop with the consideration of extensive comments from stakeholders in the accounting profession. ARSC consists of seven volunteer members, all of whom are in public practice, are with smaller or regional firms, and perform SSARSs engagements regularly. Convergence Whereas the AICPA s Auditing Standards Board used, where applicable, the corresponding International Standard on Auditing (ISA) as a base when drafting each clarified auditing standard, ARSC has used AU-C section 930, Interim Financial Information (AICPA, Professional Standards), as a base to clarify the existing review literature. AU-C section 930 was clarified using International Standard on Review Engagements (ISRE) 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity, as a base, and there are no substantive differences between AU-C section 930 and ISRE ARSC determined that it was more appropriate to converge with the corresponding limited assurance engagement guidance in the American auditing literature than with ISRE 2400 (Revised), Engagements to Review Historical Financial Statements. Although ARSC has considered International Standard on Related Services (ISRS) 4410, Engagements to Compile Financial Statements, and has adopted certain of the requirements, section 80 has not been fully harmonized with ISRS 4410 because some of the underlying premises (for example, the requirement to determine independence) are different in the United States of America. SSARSs Clarity Project With the release of Statement on Auditing Standards (SAS) Nos in October 2011, the Auditing Standards Board (ASB) reached a major milestone in its project to redraft all of the auditing sections in AICPA Professional Standards. The clarified auditing standards are designed to make the standards easier to read, understand, and apply.

20 1 19 required reading required reading The ARSC concluded that undertaking a similar clarity project for the SSARSs would serve the public interest and ensure that all professional literature for audits, reviews, and compilations are drafted using the same conventions. In addition, the resulting clarified compilation and review standards would be easier to read, understand, and apply. In May 2010, the ARSC approved a project to revise all its existing compilation and review standards in the AR sections of AICPA Professional Standards, substantially using the drafting conventions adopted by the ASB in clarifying the auditing literature. The ARSC determined, however, that there would be certain differences between its clarity drafting conventions and those adopted by the ASB. Specifically, the ARSC determined not to include specific application guidance with respect to governmental entities and smaller, less complex entities. Accordingly, the ARSC s clarity drafting conventions include the following: Establish objectives for each clarified AR section. Include a definitions section, if relevant, in each clarified AR section. Separate requirements from application and other explanatory material. Number application and other explanatory material paragraphs with the prefix A- and present them in a separate section that follows the requirements section. Use formatting techniques, such as bulleted lists, to enhance readability. CPAR/ DEC. 15

21 video transcript video transcript Video Transcript 1. SSARS 21: Bringing Standards into the 21st Century SURRAN: One year ago, the American Institute of Certified Public Accountants released a new SSARS standard. And according to most observers, Statement on Standards for Accounting and Review Services No. 21 is the biggest change to the SSARS standards since they were first issued more than 35 years ago. Specifically, the clarified guidance will help financial statement users differentiate between when an accountant performs a compilation engagement, prepares the financial statements, or merely assists management in preparing financial statements. As you might expect, this distinction is especially critical in a cloudcomputing environment where internal management often collaborates contemporaneously with their external advisers on financial recordkeeping. The good news is that practitioner awareness of the new standard has increased significantly since last year. The not-so-good news is that many practitioners are still not aware of the significant changes that SSARS 21 makes to compilation and review engagements or the specific requirements necessary to provide financial statement preparation services. And as a reminder, SSARS 21 is composed of four different sections: Section 60, on the general principles for engagements performed in accordance with SSARS; Section 70, on the preparation of financial statements, when the accountant is just engaged to prepare financial statements, but not a compilation of those financial statements; Section 80, on compilation engagements, when the accountant is engaged to perform a compilation engagement; and Section 90, on the review of financial statements, when the accountant is engaged to perform a review of financial statements. Returning to our program is regular expert commentator Michael Glynn, senior technical manager at the AICPA. And since SSARS 21 was released about a year ago, let me say, Happy anniversary to you, Mike. Well, thank you very much, Mike. It s been an eventful year with folks looking at how SSARS 21 fits in their practice and whether or not to early implement but it has been an exciting one-year anniversary and going forward it will be just as exciting. Well, you told us last year, Mike, that the Accounting and Review Services Committee wanted to revise and clarify the standards relating to compilation and review services. One year later, I suppose it s time to issue a report card on SSARS 21. From your perspective, what grade do you deserve for the effort? Well, Mike, I and other folks using their judgment and their viewpoint may differ on the scorecard but I think that the committee hit a homerun here. I would give the committee ARSC an A plus because the standards, now SSARS 21, once we cut away all of the bells and whistles and everything else around it, really is a true clarification of the existing literature. 1 20

22 1 21 video transcript video transcript Even this new preparation service that folks are all excited about and everything else, at the end of the day it really is just the old management use only compilation with our having to worry about who the heck the client gave it to stripped away. So, it really is a true clarification. Now the services we can provide. That is a non-reporting preparation. The compilation and the review are all really clear. The standards are really streamlined with a lot of the side stuff moved to a guide where you can go. So, I am thrilled with where it is and the response to SSARS 21 has been overwhelmingly positive. Since you mentioned the management report, let s start with that aspect of SSARS 21. Is it really true that, under section 70, a management report does NOT require a written report, even when the financial statements are expected to be used or provided to a third party? Well, Mike, that is true. The idea is this. Think about it this way. There are certain services that we can provide for our client where we re clearly jumping into their system of internal control over financial reporting. We come in; tax work is clearly in there, bookkeeping. Those kinds of things are clearly in there. Financial statement preparation is also clearly an internal control function of our client. So, just like all those other non-attest internal control functions, we no longer require a report. Now, that s not so revolutionary because we always had a mechanism where you didn t have to report and that was as long as the client didn t use it outside of the management circle. Well, why do we care who they give their financial statements to? As a matter of fact, we can t control it anyway. They end up going to third parties and big and loan files and stuff like that anyway. At the end of the day the client paid us for a service. That was to prepare their financial statements. So, what the ARSC said is, Hey, let s do away with this prohibition on the distribution. They are their financial statements. Let them do what they want. And that is a non-reporting preparation service. To make it easy in folks mind, I would just equate it with the old management use only compilation. Some of the words changed; instead of management use only on the bottom of the statements we would now way say, No assurance is provided, but it is that management use only set of financial statements with the limitation of distribution removed. On one hand, you say that no report is required. But on the other hand, you say that a legend is required. So, where do you put that legend, especially when there s no report? Well, Mike, it s a great question and there is actually no requirement as to where you put it. The way we have envisioned it and the way any of the illustrations that I ve drawn up for folks is to put it on the bottom of each page because, again, that s something that we ve always done as accountants. If we have prepared financial statements for management use only, we put For management use only. Not intended for third party use on the bottom traditionally of each page of those financial statements. For argument s sake in the past if we had been engaged to review or perform a compilation on the financial statements, we put a legend on it that said, See accountant s compilation report. CPAR/ DEC. 15

23 1 22 video transcript video transcript So, using that same construct we ve always had, now the way we ve envisioned it is you d put a legend on there that says, No assurance provided on these financial statements. Now, having said that, we know that accountants and CPAs for the most part are fairly smart people. So, I have been going around speaking at conferences and getting s and phone calls from folks and I ve heard a lot of different things that folks said they would do and they re all fine. One that I hear a lot of is folks saying they re going to develop a watermark similar to the way we ve always watermarked drafts and say, No assurance provided in the watermark. They ve asked me, Is that fine? Absolutely. As a matter of fact, I think that it s insanely clear. Perfect. If you want to do that, there s nothing at all wrong with that. Now, again, having said that, if we and all our viewers, we re all in the same firm talking about what we would do, I would still say I d put it at the bottom in the legend because, again, that s a convention we ve always had and probably what I would do going forward. But if you want to be creative and come up with a different way, put it in the headings, some other way, there s nothing wrong with that as long as it s clear that no assurance is provided. Okay, so now our viewers know WHERE to put the legend, Mike. But you ve got to tell our viewers: is there any specific requirement about WHAT that legend should say? I m sorry that I didn t do that but, Mike, the requirement is just that the legend state that no assurance is provided on these financial statements. That is the required language. Now, a lot of folks have asked me, Hey, can I put some other stuff in there? Now, having said that again, I have said a few times during the course of our discussion today that if we are all partners in the same firm my view is that no assurance provided is so darn clear, I wouldn t mess with it. I want the user to see clearly that no assurance is provided on these financial statements. But if in your professional judgment you want to do something else like some folks have said to me, Hey, Mike, we like people to know that we prepared these financial statements. Can we put down Jones & Jones CPA s prepared these financial statements. No assurance provided? And the answer is sure, if you want to. Or, Jones & Jones CPAs has provided no assurance on these financial statements. There is nothing that prohibits you from doing that. I would caution, though, that one of the real benefits of just saying no assurance provided is that we re not name associated with those financial statements. Therefore how the heck can a user put more comfort in them because we were involved. Well, now we ve jumped over that fence a little bit, if we put our name on there or printed it out on our letterhead or any other number of things, I d be careful. Again, if we were all in the same firm, my risk management strategy would be to shy away from that but if you feel that that s what you want to do, get your name out there and everything else, there s nothing wrong with doing that. The only required language is no assurance provided. Anything else is at your discretion.