The American Institute of Certified Public Accountants (AICPA) has issued Statement on Standards for Accounting and Review Services (SSARS) No. 21. Some analysts say this update is the biggest change to the accounting and review standards since they were issued more than 35 years ago.
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. This distinction is critical in a cloud-computing environment where internal management and external advisors often collaborate contemporaneously on financial recordkeeping.
Accounting and review standards clarified
SSARS 21 uses the reference “AR-C” to distinguish the clarified accounting and review standards from the old (“AR”) ones. For instance, AR-C 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, provides an overview to clarify accountants’ professional responsibilities when performing preparation, compilation and review engagements.
As CPA firms implement SSARS 21 during the next year, they’ll follow three other clarified standards, listed in ascending order of assurance each service level provides:
- AR-C 70, Preparation of Financial Statements
- AR-C 80, Compilation Engagements and
- AR-C 90, Review of Financial Statements
The clarified standards supersede all existing guidance, except AR Section 120, Compilation of Pro Forma Financial Information, which the AICPA plans to review in 2015.
A significant portion of the changes brought forth under SSARS 21 will happen behind the scenes as accountants work on preparation, compilation and review engagements. However, business owners will notice the following noteworthy changes:
“Management use only” compilation agreements eliminated. If a CPA has been providing this service for your business, you’ll need to decide whether to upgrade to a full-fledged compilation (or review) engagement or to simply receive prepared financial statements (below) when the new guidance goes into effect.
“Preparation of financial statements” added. The revised guidance specifically carves out preparation of financial statements as a separate type of nonattest service that may be used by a third party, not just management. For many years, accountants have performed this service for clients when they prepared their tax returns or compiled, reviewed or audited their financial statements. Now the clarified guidance tells accountants when and how to conduct preparation engagements.
For instance, a preparation service may be appropriate if the financial statements will be used by another CPA to perform the client’s year end review or audit. To ensure that financial statement users won’t be misled, the guidance requires that every page of prepared financial statements include a legend stating that no assurance is being provided. Alternatively, the accountant may issue a disclaimer report that indicates that no assurance is provided — or upgrade the client to a compilation (or review) engagement.
If applicable, the face of prepared statements (or the footnotes) must describe any special purpose framework, such as the cash or income tax basis of accounting, used to prepare the financial statements. In addition, the report must disclose any significant deficiencies in prepared financial statements, such as departures from special purpose frameworks or inadequate disclosures.
Reports may look different. Under existing guidance, standard compilation reports generally are three paragraphs long. SSARS 21 shortens the standard compilation report to just one paragraph. Another paragraph must be added, however, if the statements are prepared under a special purpose framework.
In addition to identifying any special purpose framework used, review reports may be required to add emphasis of matter (EOM) and other matter (OM) paragraphs, if the accountant believes there’s a significant matter that must be brought to the attention of stakeholders to help them better understand the financial statements. EOMs elaborate on concerns already disclosed in the footnotes. OM paragraphs relate to matters that aren’t covered in the footnotes.
Engagement letters must be signed. For prepared, compiled and reviewed financial statements, accountants will be required to obtain an engagement letter that’s signed by both the CPA and management. After adopting SSARS 21, accountants will issue compiled financial statements only when they’re specifically engaged to do so via a signed engagement letter.
SSARS 21 doesn’t go into effect until periods ending on (or after) Dec. 15, 2015. Early implementation is permitted, but it’ll take time for CPAs to fully integrate the changes into their practice aids and systems. So your 2014 year end results will likely be reported under the existing guidance.
We can help you determine which service will best suit your needs. In light of the clarified guidance, you may decide to switch to a different level of service to report next year’s financial results.