Proposed changes in compilations redefined review standards and accompanying proposed changes in AICPA ethics rules will more effectively define the CPA’s responsibilities regarding client financial statements.
In a set of proposed Statements on Standards for Accounting and Review Services (SSARS) issued June 29, compilations redefined previously presumed to incorporate the preparation of financial statements, is redefined as an attestation and reporting engagement.
Objectives in a compilations redefined engagement are to:
Read the financial statements and consider whether the financial statements are free from obvious material misstatements and whether they appear to be appropriate in form, without undertaking to obtain or provide any assurance that there are no material modifications necessary for the statements to be in conformity with the applicable financial reporting framework.
Report in accordance with the requirements of the proposed SSARS.
Compilations redefined standards would only apply when the accountant is engaged to perform a compilation service.
An exposure draft of proposed revisions to ethics Interpretation 101-3 issued concurrently with the SSARS exposure draft defines the preparation of financial statements as a nonattest service. The draft clarifies that CPAs preparing financial statements who are not engaged to perform a compilation will be subject to 101-3 rather than SSARS. CPAs performing a compilation, review or audit are also subject to 101-3 when they are performing a nonattest and attest service for the same client.
“Preparing financial statements has always been management’s responsibility, and part of the system of internal control over financial reporting,” said Gustavo A. Viera CPA. “Therefore, it makes sense that preparation be a nonattest service. With compilations redefined a CPA will not be compelled to follow the compilation standards (an attest standard) when they prepare or submit financial statements (a nonattest service). A CPA will follow the compilation standards when he or she has been engaged to perform a compilation or voluntarily does so.”
Changes from existing standards
An accountant is required to comply with compilation standards when he or she is engaged to perform a compilation, or if he or she prepares and “submits” financial statements to the client or third parties. The proposed amendments to SSARS would remove the concept of “submission,” so the CPA would no longer need to be concerned about questions in determining whether a compilation has been conducted such as who prepared the financial statements, or the current “Who pushed the print button?” dilemma.
When a CPA is involved in preparation of financial statements but is not engaged to perform a compilation service, the proposed standards would require the accountant to either attach a disclaimer, or request that management include a legend on the financial statements that they were not compiled, reviewed or audited.
Under the proposals, preparation of financial statements would be considered a nonattest service, whether or not the CPA is also engaged to compile, review or audit the financial statements, and the CPA will be required to comply with 101-3 for that portion of the engagement. Additional services that help with financial statement preparation, such as cash-to- accrual conversions, cash flows, specialized footnotes or significant reconciliations will also fall under the requirements of 101-3.
In addition to simplifying the consideration of whether a compilation has been performed for practitioners, the changes benefit the public interest by addressing an area where there has been inconsistency in practice and application. In an era of cloud computing, the concept of “submission” has become irrelevant and difficult to ascertain.
With the removal of the concept of submission, accountants no longer have to be concerned whether the extent of their involvement in the preparation of the financial statements will inadvertently place their engagement under standards for a service they never intended to perform.
“By making the compilation engagement-driven, nobody accidentally trips into an attest standard when there was no intent to provide an attest service,” Viera said.
“Practitioners have been looking for years for that ‘right answer’ as to when a compilation has been performed. These changes will provide a consistent answer in an area where practice has been all over the board.”
The OSCPA Accounting and Auditing and Professional Ethics Committees support the changes.
“This approach meets the public interest test in making the CPA’s and management’s responsibilities clear to the user of the financial statements,” said committee member Viera, CPA. “The proposed standards provide clarifying guidance in an area in which there has been ambiguity and diversity in interpretation.”
When asked about the most significant area of concern raised in letters of comment, Viera said, “We’ve heard from some practitioners that we are ‘removing the preparation standard’ with this change. In addition to clarifying responsibilities in 101-3, the CPA’s responsibility for preparation has always been addressed in Ethics Rule 102, Integrity and Objectivity. Whether in public practice or business and industry, a CPA may not be associated with information he or she knows to be misleading.
“Responsibility for financial statement preparation has never been in the attest literature,” Viera added. “The previous compilation trigger about preparation and submission led to practitioners equating compiling to preparation. These changes clarify that preparation has always been management’s responsibility, and assisting the client with preparation is a nonattest service.”
The comment period for both exposure drafts has been extended to Nov. 30. The effective date for the proposed standards is expected to be for periods ending on or after Dec. 15, 2014.