A new approach to compilations.Proposed revisions to SSARS SSARS Statements on Standards for Accounting and Review Services no. 1 make some bold changes. After years of attempts to alter the requirements or exempt certain services, the AICPA AICPA See American Institute of Certified Public Accountants (AICPA). accounting and review services committee (ARSC ARSC Arctic Region Supercomputing Center ARSC Association for Recorded Sound Collections ARSC Accounting and Review Services Committee ARSC Aircraft Repair and Supply Center (USCG) ARSC Arizona Remote Sensing Center ) has issued an exposure draft that seeks to make fundamental changes in compilation Compiling a program. See compiler. engagements. The December December: see month. 31, 1999, ED would revise Statement on Standards for Accounting and Review Services (SSARS) no. 1, Compilation and Review of Financial Statements, which established performance and reporting standards for compilation and review engagements. Previous auditing standards required accountants to add a disclaimer (networking) disclaimer - Statement ritually appended to many Usenet postings (sometimes automatically, by the posting software) reiterating the fact (which should be obvious, but is easily forgotten) that the article reflects its author's opinions and not necessarily those of the to the unaudited financial statements they were associated with. Exhibit 1, page 39, provides an overview of the changes the new ED proposes. [Exhibit 1 ILLUSTRATION OMITTED] WHY FIX IT? SSARS no. 1 was supposed to establish a minimum level of service for unaudited financial statements of nonpublic Adj. 1. nonpublic - not invested with or related to prominent position or status etc. private - confined to particular persons or groups or providing privacy; "a private place"; "private discussions"; "private lessons"; "a private club"; "a private secretary"; entities. To accomplish this, there is a trigger in paragraph 7 that says that, "The accountant should hot submit unaudited financial statements of a nonpublic entity to his or her client or others unless, as a minimum, he or she complies with the provisions of this statement applicable to a compilation engagement. Submission of financial statements is defined as presenting to a client or others financial statements that the accountant has (a) generated, either manually or through the use of computer software, or (b) modifies by materially changing account classification, amounts, or disclosures directly on client-prepared financial statements." (Italics have been added for emphasis.) This means that if the accountant generates a financial statement or modifies a client-generated financial statement, he or she has "submitted" a financial statement, triggering the need to comply with the performance and reporting standards in SSARS no. 1. Although this trigger effectively established a minimum level of service, in the years since SSARS no. 1 was issued, the accounting profession, the competitive environment and technology have all change. These progressive changes have led to problems for practitioners, including deciding whether or not SSARS applies (see case study 1, at right). Many times an accountant is forced either to compile To translate a program written in a high-level programming language into machine language. See compiler. financial statements or violate the SSARS professional standards. Case Study 1 To Apply SSARS or Not, That Is the Question A client asks for help finding a problem in an income statement that he or she has just printed--net income just doesn't does·n't Contraction of does not. "look right." You sit down and begin to review the prior month's entries in the client's computerized computerized adapted for analysis, storage and retrieval on a computer. computerized axial tomography see computed tomography. accounting database and notice that four checks totaling $15,000--a material amount--were coded incorrectly as "repairs and maintenance." Based on your close association with the client and your knowledge of the prior month's activities, you know the checks should have been coded as "leasehold improvements Leasehold Improvement Improvements on a leased asset that increase the value of the asset. Notes: A leasehold improvement is classified as an asset that must be depreciated over time. ." To solve the problem you simply change the account classifications and log out of the software. Did you just "submit" financial statements? In our opinion, you did, because you materially modified the client's financial statement by changing account classifications (paragraph 7 of SSARS no. 1). Did you intend to compile the financial statements? Probably not. Must you now compile the client's financial statements? According to according to prep. 1. As stated or indicated by; on the authority of: according to historians. 2. In keeping with: according to instructions. 3. SSARS no. 1, you must. What if, instead of going to the client's office, you made the same modifications on a disk in your office or by modem? In our opinion, the answer would be the same; you submitted financial statements and now you must compile those statements. The other problem accountants face derives from market influences. As client relationships change, many practitioners feel constrained con·strain tr.v. con·strained, con·strain·ing, con·strains 1. To compel by physical, moral, or circumstantial force; oblige: felt constrained to object. See Synonyms at force. 2. by the requirements of SSARS no. 1. There are instances when a client needs financial statements solely for management purposes. Yet SSARS no. 1 requires accountants to perform a compilation engagement and issue a report on the financial statements even if neither the client nor the accountant believes it is necessary. A NEW APPROACH Most of the ideas proposed during the past 22 years involved an exemption from SSARS no. 1, including exemptions for management-use-only financial statements, interim financial statements and computer-generated computer-generated computer adj → de synthèse financial statements. Each of these ideas met opposition from most of the accounting profession. In the new ED, ARSC has taken a different approach: Rather than create an exemption from SSARS no. 1, the committee rewrote the statement to recognize the realities of the accounting profession today. SSARS no. 1 has always contained performance and reporting standards for compilation engagements. The ED does not change the performance standards. The accountant must still * Have or obtain a general understanding of the accounting principles and practices of the industry in which the client operates. * Have or obtain a general understanding of the client's business. * Obtain more information if the data the client supplies appear to be incorrect, incomplete or otherwise unsatisfactory to compile the financial statements. * Read the compiled financial statements and consider whether they are appropriate in form and free of obvious material error. The reporting standards also have not changed. They provide rules for * The form of a standard compilation report. * Reporting on financial statements that omit o·mit tr.v. o·mit·ted, o·mit·ting, o·mits 1. To fail to include or mention; leave out: omit a word. 2. a. To pass over; neglect. b. substantially all disclosures. * Reporting when the accountant is not independent. * Reporting when there are departures from GAAP GAAP See: Generally Accepted Accounting Principles GAAP See generally accepted accounting principles (GAAP). or an other comprehensive basis of accounting °Other Comprehensive Basis of Accounting (OCBOA) in the United States accounting, refers to a system of accounting other than GAAP. As explained in The Journal of Accountancy in an online issue:[1] Under SAS no. (OCBOA OCBOA Other Comprehensive Basis of Accounting ). The ED does make two modifications that * Change the definition of "submission of financial statements." * Add communication options in certain circumstances CIRCUMSTANCES, evidence. The particulars which accompany a fact. 2. The facts proved are either possible or impossible, ordinary and probable, or extraordinary and improbable, recent or ancient; they may have happened near us, or afar off; they are public or . ARSC decided that although the trigger could be confusing con·fuse v. con·fused, con·fus·ing, con·fus·es v.tr. 1. a. To cause to be unable to think with clarity or act with intelligence or understanding; throw off. b. , it still served the valuable purpose of ensuring a minimum level of service on financial statements the accountant generated and presented to the client and should remain. However, the committee thought modifying the definition of submission would solve most applicability problems. It now defines submission of financial statements as "presenting to a client or third parties financial statements that the accountant has generated either manually or through the use of computer software." Although the revised definition may create a loophole An omission or Ambiguity in a legal document that allows the intent of the document to be evaded. Loopholes come into being through the passage of statutes, the enactment of regulations, the drafting of contracts or the decisions of courts. for accountants who want to avoid doing a compilation, ARSC decided the change was the best way to address today's technological environment and still retain the trigger. The second change involves communication options. The compilation report has long been the vehicle an accountant uses to express his or her degree of responsibility for the financial statements to the statement user. ARSC thought there should be other ways of communicating the same information under limited circumstances--for example, an engagement in which the client and accountant do not expect third parties to use the financial statements. In such an engagement, the accountant could compile the financial statements and have three different ways to explain the accountant's role in the engagement: * The standard compilation report. * An engagement letter signed by management. * A letter addressed directly to management. The two new options--the two letters--would contain much the same information as a standard compilation report but would simply be in a different format (see the sample engagement letter in exhibit 2, page 40). To learn how accountants might use these options in practice, see case study 2, page 41. Exhibit 2: Compilation of Financial Statements Not Intended for Third-Party Use Illustrative il·lus·tra·tive adj. Acting or serving as an illustration. il·lus  tra·tive·ly adv.Adj. 1. Engagement Letter or Letter to Management [Appropriate Salutation] This letter is to confirm our understanding of the terms and objectives of our engagement and the nature and limitations of the services we will provide. 1. We will perform the following services: We will compile, from information you provide, the [monthly, quarterly or other frequency] financial statements of XYZ XYZ interj. Informal Used to indicate to someone that the zipper of his or her pants is open. [ex(amine) y(our) z(ipper).] Company for the year 20XX. A compilation is limited to presenting in the form of financial statements information that is the representation of management. We will not review or audit the financial statements and, accordingly, will not express an opinion or any other form of assurance on them. The financial statements will not include a report. Based upon our discussions with you, these financial statements have been designed to meet your needs in managing your business. Accordingly, these statements are for management's use only and are not intended for third-party use. Material departures from generally accepted accounting principles The standard accounting rules, regulations, and procedures used by companies in maintaining their financial records. Generally accepted accounting principles (GAAP) provide companies and accountants with a consistent set of guidelines that cover both broad accounting (or an other comprehensive basis of accounting) may exist and the effects of those departures, if any, on the financial statements may not be disclosed. In addition substantially all disclosures required by generally accepted accounting principles (or an other comprehensive basis of accounting) may be omitted. [The accountant may wish to identify known departures.] Notwithstanding these limitations, you represent that you have knowledge of the business that allows you to place the financial information in the proper context. Further, you represent and agree that the use of the financial statements will be limited to members of management with similar knowledge. [The financial statements are intended solely for the information and use of (include list of specified parties) and are not intended to be and should not be used by anyone other than these specified parties.] Optional 2. We will also [include discussion of other services.] Optional Our engagement cannot be relied upon to disclose errors, fraud or illegal acts that may exist. However, we will inform the appropriate level of management of any material errors that come to our attention and any fraud or illegal acts that come to our attention, unless clearly inconsequential in·con·se·quen·tial adj. 1. Lacking importance. 2. Not following from premises or evidence; illogical. n. A triviality. . [We are hot independent with respect to (name of entity)] If applicable [In view of the limitations described above, you agree hot to take, or assist in, any action seeking to hold us liable for damages due to any deficiency in the financial statements we prepare and you agree to hold us harmless The term harmless may be taken in several ways:
[Our fees for these services ...] Optional If the foregoing is in accordance Accordance is Bible Study Software for Macintosh developed by OakTree Software, Inc.[] As well as a standalone program, it is the base software packaged by Zondervan in their Bible Study suites for Macintosh. with your understanding, please sign the copy of this letter in the space provided and return it to us. [If the letter to management form of documentation is elected and a signed agreement is not to be returned, delete To remove an item of data from a file or to remove a file from the disk. See file wipe, trash and undelete. 1. (operating system) delete - (Or "erase") To make a file inaccessible. this sentence and substitute the following: If the foregoing is not in accordance with your understanding, please notify us.] Sincerely yours Adv. 1. sincerely yours - written formula for ending a letter sincerely , [Signature of accountant] [If applicable:] Accepted and agreed to: XYZ Company Title Date Case Study 2 There Is No Longer a Question Assume the same scenario as in case study 1 on page 37, except you are now practicing under the new SSARS no. 1 and have a signed engagement letter with the client. Each month you go to the client's office and make certain "corrections and adjustments" similar to those in case study I to produce financial statements for management's use only. (Per your understanding with the client, the client will not make these financial statements available to third parties.) Since you are complying with the performance standards (understanding the client's industry, understanding the client's business, taking certain actions if the information appears to be incorrect and reading the compiled financial statements) and you have already communicated with the client via an engagement letter, you are in full conformity with professional standards and are providing exactly what the client has requested in an effective and efficient manner. You are no longer required to attach a compilation report to the financial statements, although that option is still available. You have instead communicated much of the same information in the engagement letter. Had you attached a compilation report, you would have had to identify all known departures--measurement and disclosure--from GAAP or OCBOA. Through the engagement letter you have indicated that material departures may exist without having to specifically identify them. Because the financial statements are intended for use only by those who can put the information in the proper context (nonthird parties) specific identification is not necessary. NOT NEW, BUT DIFFERENT The ED does not create a new type of engagement. According to SSARS no. 1, compilation of financial statements is defined as "presenting in the form of financial statements information that is the representation of management (owners) without undertaking to express any assurance on the statements." ARSC did not change this definition--the financial statements are compiled in accordance with the performance standards whether they are accompanied by the standard report or by one of the new alternatives described above. The ED defines third parties as "all parties except for members of management who are knowledgeable about the nature of the procedures applied and the basis of accounting or assumptions used in the presentation of the financial statements." Note that this is a definition by exception--it starts by assuming that third parties includes everyone, except certain members of management. Under this definition, some members of management could be considered third parties (those who are not knowledgeable about the entity's accounting matters). Some who read this proposal will say that all such financial statements will end up in the hands of third parties. While this could happen, ARSC thought this was an issue between the practitioner and his or her client. If the client represents to the accountant that he or she will not make the financial statements available to third parties yet does just that, the practitioner has a larger problem to deal with than complying with SSARS. ARSC recommends that accountants exercise some caution in selecting and retaining clients and recognize that restricted-use compilation engagements may not be appropriate for all clients. PROVIDING QUALITY SERVICE There have been several attempts to bring SSARS into conformity with today's accounting profession. Exhibit 3, page 41, compares the current ED to one ARSC issued in 1995 to address the problem. Although the 1999 proposal makes changes in SSARS no. 1, it retains the best of what has always existed. SSARS no. 1 still embodies the traditional compilation, but ARSC believes that the proposed changes align align (  līn),v to move the teeth into their proper positions to conform to the line of occlusion. the standard with the CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. Vision and equip e·quip tr.v. e·quipped, e·quip·ping, e·quips 1. a. To supply with necessities such as tools or provisions. b. practitioners to serve their clients well into the twenty-first century. An accountant now will be able to use his or her professional judgment about how to communicate with the client and provide quality service accordingly. Exhibit 3: Exposure Draft vs. Assembly Service In 1995 ARSC issued an exposure draft, Assembly of Financial Statements for Internal Use Only. This chart compares that proposal with the new ED.
Concept 1999 Proposal
Relationship to Replaces SSARS no. 1 by
SSARS no. 1 providing for two types of
compilations: a compilation
with a report and a compilation
with another form of
communication in certain
situations.
Performance Provides that all compilations
standards are still subject to the
performance standards in SSARS
no. 1.
Communication Contains both reporting
standards and communication
standards.
Level of service Provides only three levels of
service: audit, review and
compilation.
Restricted Uses a "definition by
parties exception"--third parties are
all parties except for certain
members of management.
Nonindependence Requires disclosure in the
chosen communication.
Concept 1995 Proposal
Relationship to Created an exemption from
SSARS no. 1 SSARS no. 1.
Performance Provided no performance
standards standards.
Communication Required an engagement
letter; transmittal letter
was optional.
Level of service Created a fourth level of
service: audit, review,
compilation and assembly.
Restricted Used the term "internal-use,"
parties which was considered unclear.
Nonindependence Required no disclosure.
A copy of the ED is available on the AICPA Web site (www.aicpa.org See .org. (networking) org - The top-level domain for organisations or individuals that don't fit any other top-level domain (national, com, edu, or gov). Though many have .org domains, it was never intended to be limited to non-profit organisations. RFC 1591. ). Comments on any aspect of the ED are encouraged and can be sent to Sherry sherry [from Jérez], naturally dry fortified wine, pale amber to brown in tint. The term sherry originally referred to wines made from grapes grown in the region of Jérez de la Frontera, Andalusia, Spain; today it may refer to any of the Boothe, Audit and Attest To solemnly declare verbally or in writing that a particular document or testimony about an event is a true and accurate representation of the facts; to bear witness to. To formally certify by a signature that the signer has been present at the execution of a particular writing so as Standards, File 2000, AICPA, 1211 Avenue of the Americas A·mer·i·cas , the See America. , New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , New York 10036-8775 or e-mailed to Sboothe@aicpa. org. The deadline for comments is June June: see month. 9, 2000. The proposed effective date of the revision is for financial statements submitted on or after September September: see month. 30, 2000. EXECUTIVE SUMMARY * THE AICPA ACCOUNTING AND REVIEW SERVICES committee issued a proposed revision of SSARS no. 1, Compilation and Review of Financial Statements, in December 1999. It gives accountants new communications alternatives they can use when compiled financial statements will be restricted to management use only. * THE PROPOSAL DOES NOT PROVIDE AN EXEMPTION from SSARS no. 1 or create another level of service. An accountant would still have to compile the financial statements restricted to management's use under existing SSARS no. 1 performance standards. * A NEW DEFINITION OF "SUBMISSION OF FINANCIAL statements" would exclude the modification concept and instead focus only on the generation of financial statements. The new communication options the revision provides would be appropriate only when the accountant does not expect third parties to use the financial statements. * ACCOUNTANTS WOULD HAVE TWO NEW COMMUNICATION options available to them: an engagement letter agreed to and signed by management or a letter addressed directly to management. These letters would include much of the same information currently contained in the standard compilation report. * THE ED DEFINES THIRD PARTIES AS ALL PARTIES except members of management who are knowledgeable about the nature of the procedures applied and the basis of accounting or assumptions used in presenting the financial statements. This means some members of management--those not knowledgeable about the entity's accounting matters--could be considered third parties. RELATED ARTICLE: Plain Paper Revisited For more than two decades the accounting profession has debated whether to allow CPAs to prepare so-called so-called adj. 1. Commonly called: "new buildings ... in so-called modern style" Graham Greene. 2. plain-paper financial statements for management-only use. The term "plain paper" meant CPAs would not have to put their name on bare-bones bare bones pl.n. Informal The basic elements or essentials: outlined the bare bones of the proposal. bare statements that were intended only for internal use. To allow CPAs to issue plain-paper financial statements would have required major revisions to SSARS no. 1, Compilation and Review of Financial Statements. The AICPA issued SSARS no. 1 in 1978 at a time when the profession was concerned about shielding members from legal action. The statement set compilation as the lowest level of service for financial statements in the belief that there was no way CPAs could be certain their clients would hot show internal-use-only financial statements to third parties. In September 1995 the plain-paper debate led to the exposure draft Assembly of Financial Statements for Internal Use Only. It provided an exemption from SSARS no. 1 for internal-use-only financial statements and would have created a fourth level of service--assembly--in addition to audit, review and compilation. In issuing the ED, the AICPA accounting and review services committee (ARSC) acknowledged that SSARS no. 1 made it difficult for CPAs to provide nonpublic clients with needed services in a timely, cost-effective cost-effective, n the minimal expenditure of dollars, time, and other elements necessary to achieve the health care result deemed necessary and appropriate. manner. ARSC said many such clients do not need financial statements that comply in all material respects with GAAP--or an other comprehensive basis of accounting--to manage their businesses. In August 1997 the profession was still holding public hearings to debate whether SSARS no. 1 should be revised to exempt CPAs from having to compile financial statements in certain situations and instead permit them to issue plain-paper financial statements. Plain-paper supporters argued that requiring a compilation ignored client needs at a time of rapid technological advancement. Many clients did not want to pay for a compilation when management-only financial statements could do the job. In addition, many practitioners were already violating the spirit, if not the letter, of SSARS no. 1 by putting together computer-generated financial statements and having the clients push the buttons that printed them. Others argued that changes were hot necessary because CPAs already had--but did not understand--the options under existing standards that would allow them to provide clients with timely and cost-effective compilation services. The 1995 ED never reached final form. In issuing its latest ED in December 1999 to amend SSARS no. 1, ARSC acknowledged the last rive rive v. rived, riv·en also rived, riv·ing, rives v.tr. 1. To rend or tear apart. 2. To break into pieces, as by a blow; cleave or split asunder. 3. years have brought changes to the services clients ask CPAs to perform. Low-cost software means even the smallest entity can prepare its own financial statements. Despite this, many nonpublic companies ask their CPAs to prepare management-only financial statements. The 1999 ED adds communication options to SSARS no. 1 to enable CPAs to use their professional judgment in responding to client needs. --Peter D. Fleming Flem·ing , Sir Alexander 1881-1955. British bacteriologist who discovered penicillin in 1928. He shared a 1945 Nobel Prize for this achievement. RELATED ARTICLE: Exposure Draft on Business Valuations ARSC also issued another exposure draft on December 31, 1999, Financial Statements Included in Written Business Valuations. Financial statements an accountant includes in written business valuations frequently contain departures from GAAP or an other comprehensive basis of accounting (OCBOA) because the purpose of such financial statements is solely to help develop and present the value of an entity. ARSC issued this ED to exempt financial statements included in written business valuations from SSARS no. 1 because users of these statements do not require the statements to conform with GAAP or an OCBOA. The proposed statement * Exempts from SSARS no. 1 historical financial statements and "normalized" financial statements included in a written business valuation. * Defines normalized financial statements as historical financial statements that have been adjusted to make the financial information meaningful so an accountant can present and compare the financial results of one entity with those of a comparable entity as part of a business valuation engagement. The proposal was modeled after SSARS no. 6, Reporting on Personal Financial Statements Included in Written Personal Financial Plans, which exempts personal financial statements from SSARS no. 1 if the client or accountant does not use the statements to obtain credit or for any purpose other than preparing a written personal financial plan. A copy of the ED is available on the AICPA Web site (www.aicpa.org). Comments on any aspect of the ED are encouraged and can be sent to Sherry Boothe, Audit and Attest Standards, File 2000, AICPA, 1211 Avenue Of the Americas, New York, New York 10036-8775 or e-mailed to Sboothe@aicpa.org. The deadline for comments is June 9, 2000. The statement would be effective upon issuance. DIANE S. CONANT Co·nant , James Bryant 1893-1978. American educator who was president of Harvard University (1933-1953) and served as ambassador to West Germany (1955-1957). , CPA, is a partner of Conant, Nelson & Conant, Ltd., in Las Vegas Las Vegas (läs vā`gəs), city (1990 pop. 258,295), seat of Clark co., S Nev.; inc. 1911. It is the largest city in Nevada and the center of one of the fastest-growing urban areas in the United States. and chairwoman of the AICPA accounting and review services committee. Her e-mail address See Internet address. e-mail address - electronic mail address is diane@cncltd.com. J. RUSSELL Russell, English noble family. It first appeared prominently in the reign of Henry VIII when John Russell, 1st earl of Bedford, 1486?–1555, rose to military and diplomatic importance. MADRAY, CPA, is a lecturer lecturer A person who is primarily–if not entirely—involved in the teaching activities of an academic center, who is not expected to perform research or Pt management; in general, lectureships are non-tenured positions at Clemson University Clemson University, at Clemson, S.C.; coeducational; land-grant; state supported; opened in 1893 as a college, gained university status in 1964. The university includes programs in textile and computer research, wildlife biology, and aquaculture and maintains School of Accountancy and Legal Studies, in Clemson, South Carolina South Carolina, state of the SE United States. It is bordered by North Carolina (N), the Atlantic Ocean (SE), and Georgia (SW). Facts and Figures Area, 31,055 sq mi (80,432 sq km). Pop. (2000) 4,012,012, a 15. . He is a member of the ARSC. His e-mail address is mj@clemson.edu See .edu. (networking) edu - ("education") The top-level domain for educational establishments in the USA (and some other countries). E.g. "mit.edu". The UK equivalent is "ac.uk". . |
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