Assembly of financial statements for internal use only: the solution to the plain paper/compilation report dilemma?The latest skirmish in the battle over accountants' association with and reporting on financial statements of nonpublic entities involves the AICPA AICPA
See American Institute of Certified Public Accountants (AICPA). Accounting and Review Services Committees' (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 ) exposure draft. This proposal provides for an exemption from Statement on Standards for Accounting and Review Services (SSARS SSARS Statements on Standards for Accounting and Review Services ) No. 1 for financial statements assembled for internal use only. This exposure draft proposes a new type of allowed non-association with financial statements, known as an assembly. This new level of service would allow accountants to assist clients in preparing internal-use-only financial statements without the need to report on them.
Currently, plain paper statements are appropriate only when the service provided to the client consists of typing or reproducing client-prepared financial statements without modification (SSARS 1, AR 100.07). Otherwise, a compilation report is the minimum required. This proposal is between the hands-off of a plain paper client accommodation and the formality formality, in chemistry: see chemical equilibrium; concentration. of a compilation. It more likely reflects the realities of practice in dealing with small clients.
In the exposure draft, an assembly is defined as follows:
"...providing various manual or automated bookkeeping bookkeeping, maintenance of systematic and convenient records of money transactions in order to show the condition of a business enterprise. The essential purpose of bookkeeping is to reveal the amounts and sources of the losses and profits for any given period. or data processing data processing or information processing, operations (e.g., handling, merging, sorting, and computing) performed upon data in accordance with strictly defined procedures, such as recording and summarizing the financial transactions of a services the output of which is in the form of financial statements intended for internal use only. The function of assembling financial statements may include preparing a working trial balance, assisting in adjusting the books of an account, and consulting on accounting matters. Assembly does not refer to the mere typing or reproduction of client-prepared financial statements."
Nature and Intended Use of Financial Statements
The assembled internal-use-only financial statements need not comply in all material respects with 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 (GAAP GAAP
See: Generally Accepted Accounting Principles
See generally accepted accounting principles (GAAP). ) or any 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: Under SAS no. (OCBOA OCBOA Other Comprehensive Basis of Accounting ). Instead, the financial statements may be constructed to meet the needs of internal management for decision-making purposes. Since the financial statements need not be GAAP or OCBOA, reporting on them under SSARS 1 would require describing any such departures.
Under the exemption to SSARS 1, the accountant would not be required to report on the financial statements in any form. Thus issues such as accountant's independence, GAAP departures and related issues only need to be considered as they relate to the decision usefulness of the financial statements being assembled.
However, given the possible non-GAAP nature of these financial statements, the exposure draft requires that the accountant gain written assurance that the statements are for internal use only. This would include the client agreeing not to distributed copies of the financial statements to third parties for any purpose or at any time.
Written Understanding with Client
The provisions of the exposure draft include requiring a written understanding with the nonpublic entity regarding the services to be performed. This would include the nature and limitations of the services to be performed and a confirmation of management's representation and agreement that the financial statements are for internal use only. In addition, the understanding should state that the engagement cannot be relied upon to disclose errors, irregularities or illegal acts. This provision would most likely be met through the use of an engagement letter similar to Exhibit 1, adapted from the exposure draft.
Since the accountant will not be reporting on the financial statements, the engagement letter becomes much more important than in a compilation engagement. Since the letter may be the sole communication from the accountant regarding the services performed in the assembly process, it is crucial that the accountant be thorough and to the point. The exposure draft does provide for an optional transmittal letter Transmittal letter
A letter describing the contents and purpose of a transaction delivered with a security that is changing ownership. which would be limited to (a) identification of the financial statements enclosed en·close also in·close
tr.v. en·closed, en·clos·ing, en·clos·es
1. To surround on all sides; close in.
2. To fence in so as to prevent common use: enclosed the pasture. , (b) reference to the fact that they are for internal use only with reference to the engagement letter and (c) comments of a business advisory nature. See Exhibit 2 for an example transmittal letter.
The exposure draft also provides for an optional legend for each page of the financial statements indicating that they are "Restricted for Internal Use Only - See Engagement Letter Dated November 10, 199x." This is similar to the SSARS 1 requirement of referring to the Compilation or Review Report. With the assembly, however, the provision is optional.
Procedures if Statements Are Distributed to Third Parties
With the limitations of the financial statements to internal use only comes the possibility that the statements will nonetheless end up in the hands of third parties. If this occurs and becomes known, the accountant is advised to notify the client, consider notifying the third parties and take other appropriate actions, possibly after consulting with an attorney.
This proposal appears to be a step in the right direction in relieving the small practitioner from one area of standards overload See information overload and overloading. . The proposed statement seems to make life easier for the accountant by assisting the client in generating internal management information on a timely basis. Only time will tell what the liability and client acceptance issues will be if the statement is adopted.
The effect of these types of engagements on quality review provisions is unclear. The transmittal letter accompanying the exposure draft refers to the burden of quality control procedures for compilation reports intended for third parties. The inference (logic) inference - The logical process by which new facts are derived from known facts by the application of inference rules.
See also symbolic inference, type inference. is that assembly engagements would be treated differently than compilation engagements with regard to quality control expectations and therefore quality review scrutiny. While this seems to be ARSC's intent, the implementation of that intent is uncertain.
The impact of an assembly engagement on accountant independence for review or audit engagements is also unclear. The degree of accountant involvement in the client's accounting process will have to be carefully considered if an assembly client is also an annual review or audit client.
It is doubtful that this proposal will be the final skirmish in the ongoing battle over accountants' association with financial statements but, if adopted, it can be counted as a victory for the small firm and its clients.
Exhibit 3 provides a checklist that could be used in connection with assembly engagements. The checklist contains necessary steps for the accountant to comply with the provisions of the statement as given in the exposure draft. While these engagements may be exempt from quality control standards for compilation engagements, accountants will still be concerned about providing quality service with due professional care. Given the possibility of legal exposure to third parties for statements that come into their possession, accountants will want to have proper documentation supporting the nature of the engagement and the work performed.
Exhibit 1: Illustrative il·lus·tra·tive
Acting or serving as an illustration.
Adj. 1. Engagement Letter - Assembly of Financial Statements for Internal Use Only (adapted from Exposure Draft, Appendix A)
Jones & Johnson, Public Accountants 1500 Parkside Anycity, USA November 10, 199x
John Smith, President XYZ XYZ
Used to indicate to someone that the zipper of his or her pants is open.
[ex(amine) y(our) z(ipper).] Client 1000 Parkway Anycity, USA
Dear Mr. Smith,
This letter is to confirm our understanding of the terms and objectives of our engagement to provide accounting services during 199x, the output of which will be in the form of unaudited financial statements assembled for internal use only (emphasis added).
We will perform the following services: [Describe as necessary]
We do not undertake to and will not provide any opinion or form of assurance on the financial statement we assemble in connection with these services and, accordingly, we do not undertake to make inquiries or perform other procedures to verify, corroborate To support or enhance the believability of a fact or assertion by the presentation of additional information that confirms the truthfulness of the item.
The testimony of a witness is corroborated if subsequent evidence, such as a coroner's report or the testimony of other or review information supplied by you. In addition, those statements may contain departures from generally accepted accounting principles or any other comprehensive basis of accounting.
Notwithstanding these limitations, you represent that the financial statements we will assemble will provide you with information that you can use in managing the entity's business. This is because you have the knowledge of the business' day-to-day affairs that will allow you to place that information in the proper context and that will help you to identify questions about material matters when appropriate. Further, you represent and agree that their distribution will be limited to those persons inside your organization who have similar knowledge.
Our engagement to provide accounting services cannot be relied upon to disclose errors, irregularities or illegal acts, including fraud or defalcations, that may exist.
In view of the limitations described above, you agree not to take or assist in any action seeking to hold us liable for damages on account of any deficiency in the financial statements we assemble and you agree to indemnify To compensate for loss or damage; to provide security for financial reimbursement to an individual in case of a specified loss incurred by the person.
Insurance companies indemnify their policyholders against damage caused by such things as fire, theft, and flooding, which and hold us harmless The term harmless may be taken in several ways:
Our fees for these services will be ________.
We would be pleased to discuss this letter with you at any time.
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 a copy of this letter in the space provided and return it to us.
Sincerely yours Adv. 1. sincerely yours - written formula for ending a letter
Davey Jones, PA
Accepted and agreed: XYZ Client
Exhibit 2: Illustrative Transmittal Letter - Assembly of Financial Statements for Internal Use Only (adapted from Exposure Draft, Appendix B)
Jones & Johnson, Public Accountants 1500 Parkside Anycity, USA January 20, 199y
John Smith, President XYZ Client 1000 Parkway Anycity, USA
Dear Mr. Smith,
Enclosed are financial statements for XYZ Client as of December 31, 199x. These statements have been assembled for internal use only, pursuant to the terms of our engagement letter dated November 10, 199x, to provide accounting services.
[Comments of a business advisory nature may be included in separate paragraphs]
Please call us at any time to discuss any questions or comments you might have.
Davey Jones, PA
1. Having a plane surface; flat.
2. Organized as a table or list.
3. Calculated by means of a table.
resembling a table. DATA FOR EXHIBIT 3 OMITTED]
Michael R. Ruble, 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. , Ph.D. is an assistant professor of accounting at Western Washington University Western Washington UniversityWWU or Western) is one of six state-funded, four-year universities of higher education in the U.S. state of Washington. It is located in Bellingham and offers bachelor's and master's degrees. in Bellingham.