ARSC Meeting May 20-22, 2014 Agenda Item 1 Proposed SSARSs Preparation of Financial Statements; Compilation Engagements; and Association With Financial Statements Objective of Agenda Item To discuss issues raised in the comment letters received on the proposed SSARSs Preparation of Financial Statements; Compilation Engagements; and Association With Financial Statements and to consider proposed revisions to the draft SSARSs as a result of the comments received. Background On October 23, 2013 the ARSC issued an exposure draft which contained three proposed SSARSs Preparation of Financial Statements; Compilation Engagements and Association With Financial Statements. Comments on the proposed SSARSs were due by May 2, 2014. Fifty four comment letters were received. Issues For Discussion With the ARSC The vast majority of the comment letters received on the proposed SSARSs were supportive of the draft standards. The following represent issues raised in certain comment letters. The Nature of the Preparation and the Compilation SSARSs ARSC proposes to issue two separate SSARSs as follows: The proposed SSARS Preparation of Financial Statements would provide requirements and guidance when an accountant is engaged to prepare financial statements for an entity but has not been engaged to perform a compilation, review, or audit with respect to those financial statements. The proposed SSARS Compilation Engagements would provide requirements and guidance that would apply only when an accountant is engaged to perform a compilation of historical financial statements. The proposed revised compilation standard would modify the applicability of the compilation literature. Currently, AR section 80, Compilation of Financial Statements, applies when an accountant is engaged to report on compiled financial statements or Prepared by: M. Glynn (May 2014) Page 1 of 7
submits financial statements to the client or to third parties. Submission is defined as prepares and presents. Cloud computing and other applications have made it difficult to determine who (or what) has prepared the financial statements. Since the accountant would follow the compilation standard when engaged, the accountant would always be required to issue a compilation report. However, to differentiate the non-assurance compilation report from assurance (review and audit) reports, the ARSC has proposed to streamline the report so that the standard report is just one paragraph with no headings. The proposed standard would retain the existing requirement that the accountant modify the accountant s compilation report whenever the accountant s independence is impaired. The accountant would be required to obtain an engagement letter signed by both the accountant and the client s management. The proposed standard can be applied to financial statements with or without disclosures. The proposed preparation standard would apply when the accountant is engaged to prepare financial statements but is not engaged to perform an audit, review or a compilation on those financial statements. A report would not be required even when financial statements are expected to be used by or presented to a third party. Instead, the accountant would be required to include a legend on each page of the financial statements stating that no assurance is being provided. The proposed SSARS would require that the accountant obtain an engagement letter signed by both the accountant and the client s management. Like all other nonattest bookkeeping/accounting services engagements, the accountant would not be required to consider whether he or she is independent. The proposed standard can be applied to financial statements with or without disclosures. Certain of the advantages of the proposed clarified and revised compilation and preparation SSARSs are: Would result in a bright line between accounting (preparation) and reporting (compilation) services. The accountant would not have to be concerned about whether the financial statements would be used internally or would be used by third parties (including Boards of Directors). The following table illustrates the similarities and differences between the two proposed services:the following table compares and contrasts attributes of the proposed SSARSs Preparation of Financial Statements and Compilation of Financial Statements: When does the standard apply? Is an engagement letter required? Is the accountant required to determine if he or she is independent of the client? Compilation When an accountant is engaged to perform a compilation Preparation When an accountant is engaged to prepare financial statements No Agenda Item 1 Page 2 of 7
If the accountant is not N/A independent, is that fact required to be disclosed? Does the engagement require No 1 a report? May the financial statements go to users outside of management? May the financial statements omit notes? 1 When an accountant is engaged to prepare financial statements, the accountant is required to include an adequate statement on each page of the financial statements indicating that no CPA provides any assurance on the financial statements. If the accountant is unable to include an adequate statement on each page of the financial statements, the accountant is required to issue a disclaimer on the financial statements. Several commenters expressed confusion over the differences between the two services. The ARSC is asked to consider the following questions: 1. Is the applicability of each proposed SSARS sufficiently clear? The proposed SSARS Preparation of Financial Statements would apply when the accountant is engaged to prepare financial statements and is not engaged to perform a compilation, review or audit. It would not apply when the accountant assists in the preparation of financial statements or performs other internal control services with respect to the entity s system of internal control over financial reporting. The proposed SSARS Compilation Engagements would apply when the accountant is engaged to perform a compilation engagement. The advantages of the proposed applicability of the respective standards are: accountants would no longer have to make difficult judgments as to whether they have submitted financial statements disparity in practice that results from the application of professional judgment would be eliminated entities would not be required to accept a service or report that they did not need or want The disadvantages of the proposed standards are: may be difficult to understand whether the member is assisting in preparing or preparing. overcoming years of practice for some members who view preparation and compilation as synonymous. whether users will be confused by the legend 2. Are the independence requirements sufficiently clear? Agenda Item 1 Page 3 of 7
The preparation of financial statements, like all other nonattest services, would not require the accountant to consider whether the accountant is independent. However, the performance of the preparation service may result in an impairment of the accountant s independence which may preclude the accountant from performing a review or an audit engagement. The proposed SSARS Compilation Engagements would retain the independence requirements from SSARS 19 namely that the accountant could perform the compilation engagement if the accountant s independence is impaired but would have to disclose that the accountant is not independent in the compilation report. The accountant would not be precluded from disclosing the reasons that the accountant s independence is impaired. The ARSC is asked to consider the aforementioned questions and whether additional guidance is necessary. Language in the Statement/Legend on Each Page of the Financial Statements Prepared by the Accountant Paragraph 12 of the proposed Preparation SSARS reads as follows: 12. The accountant should include an adequate statement on each page of the financial statements indicating that no CPA provides any assurance on the financial statements. If the accountant is unable to include an adequate statement on each page of the financial statements, the accountant should issue a disclaimer on the financial statements (Ref: par. A13A14) The proposed Preparation SSARS would not require a report when an accountant is engaged to prepare financial statementseven if the financial statements are expected to be used by, or provided to, a third party. The appropriate statement or legend communicates substantially the same lack of assurance as a compilation report in accordance with extant AR section 80. Examples of an adequate statement or legend on each page of the financial statements include the following: No CPA provides any assurance on these financial statements. These financial statements have not been audited or reviewed, and no CPA provides any assurance on them. In a rare situation in which the accountant is not able to include an appropriate statement or legend on each page of the financial statements, the accountant would be required to issue a disclaimer report. The accountant s name is not required to be included in the financial statements that the accountant has prepared or any document that contains the financial statements. Agenda Item 1 Page 4 of 7
Certain respondents expressed concern with the proposed legend/statement. A concern was raised that the legend/statement would imply that the accountant performed a compilation engagement. Additionally, in a cloud computing environment, it may be difficult to ensure that the legend is included on each page of the financial statements. If the legend is omitted from the financial statements, a user may infer an inappropriate level of assurance. Additionally, another concern was raised about instances where the accountant is aware that the financial statements contain a departure or departures from the applicable financial reporting framework and suggest that additional application guidance is needed. Further, concern has been expressed that the illustrative examples are negative. Suggested legend/statement language is as follows: CPAs can perform reviews or audits in which the accountant obtains assurance that the financial statements are free of material misstatement. While these financial statements were prepared by an accountant, an accountant did not review or audit them. These financial statements were prepared by a CPA in accordance with Statements on Standards for Accounting and Review Services. The entity outsourced the preparation of these financial statements to an outside CPA. 1. Does the ARSC continue to support the non-reporting aspect of proposed Preparation SSARS when the accountant is engaged to prepare financial statements but not to perform a compilation, review, or audit of those financial statements? 2. If the ARSC continues to support the non-reporting option, does the ARSC continue to believe that a legend or statement should be required on each page of the financial statements prepared by the accountant so that a user does not infer an inappropriate level of assurance? 3. Are additional requirements or guidance necessary with respect to the preparation of financial statements when the accountant is aware that the financial statements contain a departure or departures from the applicable financial reporting framework? The ARSC is asked to consider whether additional guidance is needed with respect to the required legend/statement on each page of the financial statements prepared by the accountant. Ability to Issue a Compilation Report Even if Not So Engaged Agenda Item 1 Page 5 of 7
Paragraph A16 of the proposed Compilation SSARS reads as follows: A16. The accountant may issue a compilation report on financial statements that the accountant prepared even if not so engaged. The accountant may determine, for example, that a report would reduce the likelihood that a user of the financial statements may inappropriately infer an unintended level of reliance on the financial information. Certain respondents expressed concern with the ability to issue a compilation report when not engaged to perform a compilation engagement. It was suggested that perhaps the option could be moved to the preparation standard. 1. Should the proposed Compilation standard be silent as to the option to issue a compilation report even if not engaged to perform a compilation engagement? The proposed standard would not contain a prohibition. 2. Should the proposed Preparation standard (or the revised Compilation and Review Guide) include (application) guidance with respect to reputational risk and suggest that the accountant may want to issue a compilation report? The ARSC is asked to consider the aforementioned questions and whether the proposed Compilation SSARS should include guidance stating that an accountant can issue a compilation report even if not so engaged. Proposed SSARS, Association With Financial Statements In addition to the proposed Preparation and Compilation SSARSs, the exposure draft also contained a proposed SSARS that would provide requirements and guidance when an accountant agrees to permit the use of the accountant s name in a report, document, or written communication that includes financial statements with respect to which the accountant did not issue a compilation, review, or audit report. The Task Force has considered the comments received on the proposed Association SSARS and feels that the standard may potentially distract from the Preparation and Compilation SSARS. Certain commenters are confused and think that the Association SSARS results in a separate service or ask how the standard differs from the proposed Preparation SSARS. The Task Force suggests that the Association SSARS not be issued as a separate SSARS and instead, that guidance be included in the Preparation, Compilation, and Review SSARSs that address the risks of accountant association with financial statements when the accountant has not issued a report on such financial statements. Agenda Item 1 Page 6 of 7
The ARSC is asked whether it agrees with the Task Force that the Association SSARS should not be issued and instead, guidance should be included in the proposed Preparation, Compilation, and Review SSARSs that deals with accountant association with financial statements when the accountant has not reported on such financial statements. Early Implementation of the Proposed SSARSs The ARSC has proposed to permit early implementation of the proposed SSARSs. Certain commenters have expressed concern that allowing early implementation will confuse users of financial statements prepared by accountants. Other commenters have expressed enthusiastic support for early implementation. The ARSC is asked to consider whether it continues to support early implementation of the proposed clarified and revised SSARSs. Agenda Items Presented: Agenda item 1A Exposure draft of the proposed SSARSs Preparation of Financial Statements; Compilation Engagements; and Association With Financial Statements Agenda item 1B Summary of comment letters received on the exposure draft of the proposed SSARSs Preparation of Financial Statements; Compilation Engagements; and Association With Financial Statements All comment letters received on the exposure draft of the proposed SSARSs Preparation of Financial Statements; Compilation Engagements; and Association With Financial Statements are available at http://www.aicpa.org/research/exposuredrafts/compilationreview/pages/commentletters-ssarss-ed-prep-comp-assoc.aspx Agenda Item 1 Page 7 of 7