ARSC Meeting May 10-12, 2011

ARSC Meeting May 10-12, 2011 Agenda Item 3A Summary of Comment Letters on Draft of the SSARS, The Use of the Accountant s Name in a Document or Communication Containing Unaudited Financial Statements That Have Not Been Compiled or Reviewed Comment Letter No. Commenter 1 Legislative Audit Division 2 California Society of Certified Public Accountants 3 Deloitte & Touche LLP 4 Audit and Assurance Committee of the IL CPA Society 5 Accounting, Auditing and Review Standards Committee of the WA Society of CPAs 6 AICPA Technical Issues Committee Prepared by: M. Glynn (May 2011) Page 1 of 16

Summary of Comment Letters on Draft of the SSARS, The Use of the Accountant s Name in a Document or Communication Containing Unaudited Financial Statements That Have Not Been Compiled or Reviewed 1 General Legislative Audit Division Members of our staff have read the proposed standard and believe that it contains appropriate guidance. 2 General Deloitte We are supportive of the development of the proposed SSARS and believe that the inclusion SSARS of requirements related to the use of the accountant s name in a document or communication containing unaudited financial statements that have not been compiled or reviewed is appropriate. 3 General Washington The Committee has no objectives to the proposed statement. However we feel that it would be useful to provide additional clarification and/or examples of where it would apply. 4 General TIC TIC believes the ED is a step wrong direction and has a number of concerns with its scope, performance requirements and reporting options. TIC recommends that the ED be carefully reexamined to determine the extent to which accountants are receiving requests to have their names used in documents that contain unaudited financial statements that have not been compiled or reviewed. TIC believes a compilation engagement should be a minimal requirement whenever the accountant s name is used in a document that contains financial statements. None None The ARSC to consider adding examples, as appropriate. The ARSC to consider. NO NO Agenda Item 3A Page 2 of 16

TIC had difficulty understanding when this proposal would apply. None of the TIC members has encountered client situations that seem to fit the fact pattern described, which leads us to believe that this ED may have very limited applicability in practice. In TIC s experience, clients are not asking accountants for permission to use the firm s name when the accountant is not associated with the statements. For example, most lenders accept internally prepared interim financial statements without requiring a CPA firm to compile them. The entity does not need or want the accountant s name to be included document, and management will simply submit the statements directly to the bank on its own. In addition, clients are no longer placing unaudited statements that have not been compiled or reviewed same document as financial statements that have been compiled or reviewed, as described in extant AR 200.03. Generally, financial statement users want at least a compilation of all annual financial statements presented. Compilation engagements are not timeconsuming to perform and are understood by users. If accountants are being asked to consent to the use of their names in a document that contains client-prepared condensed or summarized financial statements or financial information that the client has extracted from annual compiled, reviewed or audited Agenda Item 3A Page 3 of 16

financial statements that are not included document, TIC believes the SSARS should address this issue apart from this ED. In TIC s experience, this practice occurs much more frequently (e.g., in bond offerings, private placements or glossy annual reports of governmental entities and not-for-profit organizations) than circumstances that are described in this ED. TIC also believes a SSARS that addresses an accountant s association with supplementary financial information would have wider applicability within TIC s constituency and should take priority over this ED. 5 51 Deloitte The second sentence of paragraph.51 states, However, the accountant does have certain considerations when the accountant permits the use of his or her name in a document or communication, whether written or electronic, containing such financial statements. As written, this sentence refers only to the accountant s considerations although paragraphs.52-.55 include specific requirements of the accountant beyond considerations. To be consistent with subsequent paragraphs, we recommend revising paragraph.51 as follows: An accountant has no responsibility for unaudited financial statements that have not been compiled or reviewed. However, the accountant does have certain considerations when the accountant permits the use of becomes aware that his or her name is or will be used in a document or Agree with the change regarding the use of the term considerations. However, the ARSC previously concluded that the requirements should run to those situations where the accountant permits the use of his or her name in a document or communication containing unaudited financial statements that have not been compiled or reviewed so, the edit regarding the accountant becoming aware that his or her name is or will be used in such a document has not been made. YES Agenda Item 3A Page 4 of 16

communication, whether written or electronic, containing such financial statements, the accountant should perform the procedures in paragraphs.52 -.55, as applicable. Electronic sites are a means of distributing information and are not documents or communications for the purposes of the SSARSs. 6 51 Illinois paragraph.51 seems to create a new scenario that requires addressing under professional standards. SAS 118 addresses the auditor s response to other information in documents that contain audited financial statements. Exhibit B to that SAS compared the language in SAS 118 to the language in International Standard on Auditing 720, titled, The Auditor s Responsibility in Relation to Other Information in Documents Containing Audited Financial Statements. AU 504.01 addresses cases where an auditor s name is associated with financial statements, requiring the auditor to clearly indicate the character of the auditor s work, if any, and the degree of responsibility the auditor is taking. The conforming SAS, Forming an Opinion and Reporting on Financial Statements (adopted but not yet effective), addresses information contained in documents that include financial statements. 2.53 of SSARS No. 19 addresses the response to basic financial statements that have been compiled and are accompanied by information presented for supplementary analysis purposes. 3.60 of SSARS No. 19 addresses the response to basic financial statements that have AU section 504, Association With Financial Statements addresses situations where the accountant is associated with unaudited financial statements. The Auditing Standards Board determined to withdraw the requirements and guidance with respect to unaudited financial statements contained within AU section 504 as it determined that such information should reside SSARSs. The subject proposed SSARSs results incorporation of those requirements and guidance SSARSs. NO Agenda Item 3A Page 5 of 16

been reviewed and that are accompanied by information presented for supplementary analysis purposes. In all standards described above, the auditor or accountant that is addressing other information is doing so in conjunction with reporting on financial statements that have been audited, reviewed or compiled. The proposed standard, however, appears to address documents that may not contain any financial statements upon which the accountant has reported. If a document contains unaudited financial statements only (i.e., there are no financial statements on which the accountant has reported), it is not apparent why the accountant should permit the use of his/her name at all. The inclusion of a standard that obligates the accountant to perform any level of review or reading of the document would appear to be expanding the scope of the accountant s responsibility to an undefined degree and for an undefined purpose. 6 of SAS 118 provides a reason for requiring an auditor to read the other information, to identify material inconsistencies, if any, with the audited financial statements. This makes sense, since such inconsistencies could discredit information on which the auditor is rendering an audit opinion. When an accountant has not reported on any financial statements included document, he or she has not taken any responsibility for the validity or appropriateness of other.03 of AU section 504 states an accountant is associated with financial statements when he has consented to the use of his name in a report, document, or written communication containing the financial statements..05 of AU section 504 provides a form of disclaimer of opinion that the accountant is required to issue when associated with financial statements. That paragraph further states When an accountant issues this form of disclaimer of opinion, he has no responsibility to apply any procedures beyond reading the financial statements for obvious material misstatements. The proposed SSARS does not add any additional Agenda Item 3A Page 6 of 16

information contained document. We do not feel that it is reasonable for the standard to suggest that the accountant provided any level of assurance or negative assurance on financial statements that he or she was not engaged to audit, review or compile. This standard would create an expectation (and perhaps new level of service) that the accountant has performed some sort of procedures included in communications that contain his/her name when in fact no attest procedures were performed. requirements on accountants beyond that which they are already required by AU section 504 nor does it create a new level of service. There will be times when an accountant s name is used in documents or communications without his/her knowledge and it could provide a reader with an inappropriate belief that some level of procedures were performed on the financial statements. It would not be feasible that an accountant would be notified every time his or her name was used in some sort of document or communication. Even if the accountant was made aware of all situations in which his/her name was used, since the accountant was not engaged to provide any services the accountant may not have the power or ability to require the entity to correct the financial statements or provide the required disclaimer. It would seem more appropriate to address situations where the accountant s name is specifically being associated with information document, in such a manner as to seem to be The proposed SSARS only applies to those situations where the accountant permits the use of his or her name in a document or communication containing unaudited financial statements that the accountant has not compiled or reviewed. Therefore, it would not apply to those situations where the accountant s name is used in documents or communications without his or her knowledge. Nevertheless, paragraph 55 addresses those situations where the accountant becomes aware that his or her name has been used improperly. The proposed SSARS is public interest Agenda Item 3A Page 7 of 16

using the accountant s name in a way that adds credibility to the information. For example, a document might contain unaudited financial statements and also identify that the accountant is associated with the entity (e.g., an offering memorandum describing the entity and its associated professionals). The lack of any disclaimer opinion or other level of reporting is clear enough that no work has been performed. Why should someone assume the accountant has, absence of any other information, performed a review or compilation of those statements? has the required communication (either by the client or through the accountant s disclaimer ) makes clear to users that the accountant has not audited, reviewed, or compiled the financial statements. We do not believe that the benefit of clarifying the responsibility the accountant is taking on pertaining to the financial information outweighs the ambiguity surrounding the accountant s knowledge and responsibilities se situations. However, if issuance is considered necessary, the Committee believes that there should be no requirement to perform any level of reading or review of the information, but allow the CPA to follow either of the options included in paragraph 53 of the exposure draft. 7 52-53 CalCPA On the whole, the Committee agrees with the proposed standard; however, in our opinion, the term material inconsistencies needs clarification and guidance. The Committee had several specific questions with regard to material inconsistencies. As previously mentioned, the requirement to read the unaudited financial statements is included in AU section 504 and will not result in any incremental requirement being placed on the accountant. See issue #1 in Discussion Memorandum (Agenda item 3) YES Agenda Item 3A Page 8 of 16

1. Does material inconsistencies refer to differences between what we know about the client and what is presented, for instance events that have happened that are not yet reflected on the financial statements? 2. Does it refer to inconsistencies between the client s presentation and GAAP? The proposed term conflicts runs to other knowledge or information of which the accountant may be aware. a. Interim financial statements routinely omit items such as depreciation changes, allowance for uncollectibles, and inventory changes. Do these omissions constitute a material inconsistency? b. Does a departure from the usual reporting framework constitute a material inconsistency (e.g., the omission of the statement of cash flows or disclosures)? 3. Does this statement apply when only partial information or financial representations are presented in a form other than form of a financial statement? For example: No the accountant would be reading to determine if the interim financial statements (that the accountant has not been engaged to compile, review, or audit) does not conflict with the other knowledge or information of which the accountant may be aware. No. Yes. a. list of major accounts b. list of open contracts c. list of general and administrative expenses Agenda Item 3A Page 9 of 16

d. a single program profit and loss statement e. sales, costs, or net worth changes 4. Does this statement apply when a tax return, prepared by the CPA, is presented to a third party (e.g., in a loan package for a bank)? 5. We suggest that the SSARS committee consider including language stating that the CPA may want to consider adding to his engagement letter that for any professional service, including attest services, any use if the CPA s name on any document requires prior permission from the CPA. 8 52 Deloitte.52 contains a requirement for the accountant to read the financial statements and other information to identify document or communication and consider such financial statements and other information appears free from material inconsistencies with other knowledge or information of which the accountant may be aware. We are concerned that the use of the phrase may be aware could result accountant being held to responsibility, in hindsight, for a wider body of knowledge than what the accountant possesses (i.e., what the accountant may have or should have been aware as opposed to what the accountant is aware). In addition, certain language paragraph appears to be based on the presumption that permission No tax returns are specifically excluded from SSARS (see Interpretation 2 to AR section 80). The proposal is too proscriptive for inclusion in SSARSs. However, nothing would preclude the accountant from adding such language to the engagement letter if he or she determined such addition to be appropriate. Agree with the change regarding is from may be aware. However, the deletion of prior to granting such permission is considered an important aspect to the proposed SSARS as it establishes that the reading of the financial statements and other information is a precondition to granting permission for the use of the accountant s name in a document containing unaudited financial statements that have not been compiled or reviewed. YES Agenda Item 3A Page 10 of 16

to use the accountant s name will be granted, rather than establishing a need to read the information prior to making such a decision. To be clearer, we recommend revising paragraph.52 as follows: If the accountant is requested to permit the use of his or her name in a document or communication containing unaudited financial statements that have not been compiled or reviewed, prior to granting such permission, the accountant he or she should read the financial statements and other information in the document or communication and consider whether such financial statements and other information appears free from material inconsistencies with other knowledge or information of which the accountant may be is aware. 9 52 TIC If the ARSC decides to move forward with this ED, TIC strongly encourages the Committee to clarify the scope of the document by providing specific examples from practice that would explain why the stated reporting options are needed. As to the proposed performance requirement, TIC is concerned that the accountant in many such scenarios may not have adequate knowledge of the client, nor an understanding of its business or accounting principles common to the industry, or any other reasonable basis to determine whether an inconsistency exists between the unaudited financial statements and the other information document. In many respects, the procedures described in The proposed requirement runs to a consideration as to whether the financial statements and other information appear free from material inconsistencies with other knowledge or information of which the accountant may be aware. There is no requirement to determine whether an inconsistency exists between the unaudited financial statements and the other information document. NO Agenda Item 3A Page 11 of 16

paragraph.52 seem indistinguishable from compilation procedures and may create confusion among practitioners. TIC encourages the ARSC to require compilations as a minimum requirement. TIC believes this would avoid the complexity of new special reporting options and would better serve the public interest. 10 53 Deloitte We believe that the language proposed in paragraph.53 regarding the accountant s responsibility for unaudited financial statements that have not been compiled or reviewed in a document or communication that includes the accountant s name may be unclear. AR 200, Reporting on Comparative Financial Statements, paragraph.03 states, in part: There are clearly additional requirements in a compilation engagement. Agree with proposed edits YES Client-prepared financial statements of some periods that have not been audited, reviewed, or compiled may be presented on separate pages of a document that also contains financial statements of other periods on which the accountant has reported if they are accompanied by an indication by the client that the accountant has not audited, reviewed, or compiled those financial statements and that the accountant assumes no responsibility for them. [Emphasis Added] To clarify the language regarding the accountant s responsibility for unaudited financial statements that have not been compiled or Agenda Item 3A Page 12 of 16

reviewed in a document or communication that includes the accountant s name and to be consistent with AR 200, paragraph.03, we recommend revising paragraph.53 as follows: If the accountant, pursuant to paragraph.52, concludes that the financial statements and other information appear free from material inconsistencies with other knowledge or information of which the accountant is may be aware and determines that permission will be granted for the use of the accountant s name, the accountant should either: a. request that the client clearly indicate that the unaudited financial statements were not audited, compiled or reviewed, or compiled by the accountant and that the accountant assumes no responsibility for them, which can be accomplished by an indication on each page of the financial statements or with a clear statement document or communication containing the unaudited financial statements, or b. issue a report that would be included document or communication containing the unaudited financial statements that have not been compiled or reviewed that states that the accountant has not audited, compiled or reviewed, or compiled the unaudited financial statements Agenda Item 3A Page 13 of 16

and accordingly the accountant does not express an opinion or provide any assurance on them. An example of report wording that the accountant may use would be The unaudited financial statements of XYZ Company as of and for the year ended December 31, 20XX, as contained in [describe document or communication] were not audited, compiled or reviewed, or compiled by me (us) and, accordingly, we do not express an opinion or provide any assurance on them. 11 53 TIC Even if practice situations can be identified that involve the use of an accountant s name in connection with unaudited financial statements, the suggested reporting options serve no useful purpose and could be misleading to financial statement users. Under this proposal, the accountant is named document, but the user is told that the accountant has not compiled or reviewed the financial statements and that no assurance is being expressed. From the user s standpoint, the presence of the accountant s name document could be viewed as meaningless. The reporting options serve the public interest in that they put the user on alert that the accountant who was named document or communication did not audit, review, or compile the financial statements. NO TIC is also concerned that, despite the cautionary language contained reporting options described ED, the user is likely to inappropriately infer an unintended level of assurance whenever an accountant s name appears in a document containing unaudited financial statements. In TIC s view, the The reporting language would address any potential unintended level of assurance since the user would be put on notice that the accountant did not audit, review, or compile the financial statements. Agenda Item 3A Page 14 of 16

accountant would be unwise to permit the association of his/her name with unaudited financial statements that had not been at least compiled. If the client is not willing to engage the accountant to perform a compilation engagement, then the client should be asked to remove the accountant s name from the document. 12 54 Deloitte To be consistent with our proposed changes to paragraph.52, we recommend revising paragraph.54 as follows: Agreed with proposed edit. YES If, upon reading the financial statements and other information document or communication, the accountant becomes aware that the unaudited financial statements or other information document or communication are materially inconsistent with other knowledge or information of which the accountant may be is aware, the accountant should request that management revise the financial statements or other information document or written communication. If management refuses to make the revision, the accountant should advise the client that the use of his or her name is not permitted. 13 55 Deloitte We believe that it may be unclear that paragraph.55 is applicable to all circumstances in which the accountant becomes aware that his or her name has been used improperly. We recommend revising paragraph.55 as follows: Agreed with proposed edit. YES Agenda Item 3A Page 15 of 16

If an accountant becomes aware that his or her name has been used improperly, including having been used without the accountant s permission, in any document or communication containing unaudited financial statements that have not been compiled or reviewed, the accountant should advise the client that the use of his or her name is inappropriate and should consider what other actions might be appropriate, including consultation with his or her legal counsel. Agenda Item 3A Page 16 of 16