The attest engagement and the practice of accounting.

No word in the accountant's lexicon generates more confusion than the word "attest." Accounting literature is sprinkled with words and terms like "attest" and its variants "attesting" and "attestation," "attest engagement" and "attestation standards." Just what do these terms mean and how are they defined in accounting doctrine and by state accountancy boards?

Historically, attest services were limited to the certified audit report. The audit expressed a positive opinion on historical financial statements based on an examination made pursuant to generally accepted auditing standards (GAAS). Thus, in a dictionary sense, attest means to affirm, to authenticate, to certify.

There is no problem in associating attest with the certified audit function. The problem area is the expansion of the term "attest" with its family of variants beyond the certified audit of historical financial statements and the resulting application of attestation standards to historical financial statements other than the certified audit, namely to the compilation or review of financial statements.

Many states define the "attest function" in terms that include compilation or review of financial statements by a licensee. This is in clear conflict with prevailing accounting doctrine. If the attest function is defined at all, it should be defined in terms of auditing standards and definitely not in terms of compilation or review. Further reference and example are made in a subsequent paragraph of this comment.

Those states that don't include a definition of "attest" and its variants in their accountancy laws make reference nevertheless to attest or attesting without benefit of a definition when the law or regulation defines what constitutes the "practice of public accountancy." For example, state laws may hold that an individual is practicing public accountancy (and therefore must possess a license or permit) when the individual fixes his or her name to an accounting statement "attesting" to the reliability of any representation embracing financial information or transactions. In this context, if a review of financial statements provides the accountant with a reasonable basis for expressing limited assurances, then the expression of such limited assurances is viewed as an attest function and the individual who does so is "practicing public accountancy."

Thus, the accountant who puts his or her name to an attested (by state definition) financial statement is practicing public accountancy and therefore must be a licensee of the board of accountancy. In those states whose accountancy laws define the practice of public accountancy in terms of the attest function, accountants who are not licensed by the board are advised to proceed cautiously. While a compilation or a review of a financial statement does not come within the orbit of an audit or the attest service, many state laws provide that a compilation or review is an attest service if the accompanying report or transmittal contains words that express a conclusion about the reliability of a written assertion that is the responsibility of another party.

The American Institute of Certified Public Accountants (AICPA) defines an attest engagement in its Statement on Standards for Attestation Engagements (originally issued in March 1986 and hereinafter referred to as Attestation Standards) as an engagement in which a practitioner is engaged to issue or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. An assertion is further defined as any declaration or set of related declarations taken as a whole by a party responsible for it.

An important footnote appearing in Attestation Standards admits that the term "attest" and its family of variants are used in state accountancy laws and regulations for different purposes and with different meanings from those intended by the Attestation Standards' statement. Accordingly, the text of Attestation Standards cautions the reader that the definitions in the text and the meaning of "attest" and "attestation" as used in the text should not be understood as defining those terms as they are used in any state's accountancy laws or regulations. This caveat implies that AICPA defines attest in its Attestation Standards one way and state accountancy boards define it in another context and meaning.

Further, the text of Attestation Standards clearly states that engagements in which the practitioner compiles financial statements are not attest engagements, because the practitioner is not required to examine or review any evidence supporting the information furnished by the client and does not express any conclusions on its reliability--that is, does not express any assurances on the information provided. State accountancy laws and regulations that provide that the compilation of a financial statement is an attest engagement are contrary to the Attestation Standards' text because the compilation by definition does not convey assurances.

The AICPA/NASBA Uniform Accountancy Act (UAA) states there is no prohibition on the performance by unlicensed persons of either reviews or compilations, in the sense contemplated by AICPA's Statement on Standards for Accounting and Review Services No. 1 (SSARS 1). The prohibition is on the issuance of reports asserting or implying that the accountant has complied with SSARS 1 standards for such compilations and reviews and has the demonstrated capabilities to so comply. (Refer to the comment following the definition of "Report" in Section 3(i) of the UAA).

Accounting doctrine on attest services may be summarized as follows:

* A compilation of a financial statement is not intended to convey assurances.

* A review of a financial statement at the most conveys only a limited assurance.

* An attest service expresses a positive opinion on historical financial statements.

* An attest engagement expresses a definite conclusion about the reliability of a written assertion.

* An engagement in which the accountant compiles a financial statement, because an examination or review of evidence supporting the information furnished by the client is not required, does not express any conclusions on the reliability of the statement.

One way unlicensed accountants can avoid the dilemma of conflicting definitions is to use authorized "safe harbor" language in their transmittals. Safe harbor transmittal language is language that aims to protect the unlicensed accountant against violation of the statute or regulation that reserves the financial statement reporting function to licensees of the board. In the 34 states where safe harbor language does not exist, unlicensed accountants are advised to proceed cautiously and avoid any language that might be construed as conveying assurances and thus coming within the purview of an attest statement. This is so despite the fact that compilations, by definitions, don't convey assurances.

The problem is that accountancy laws and state board rules just don't make a distinction. As stated previously, the term "attest" and its variants are used in state accountancy laws for different purposes and with different meanings from those intended by AICPA's Attestation Standards statement. The inconsistency of state laws with the Attestation Standards can be further illustrated by the state of North Carolina, whose regulations define the attest service to mean any compilation when the licensee expects, or reasonably might expect, that a third party will use the compilation and the licensee does not disclose a lack of independence.

The attest engagement or function was the subject of a 1991 court decision in Florida (Department of Professional Regulation, Board of Accountancy v. Rampell, District Court of Appeal, Fourth District, No. 89-2668) decided October 16, 1991. In that case, the Florida court, by dictum, referred to the attest function. Dictum is a statement or comment in an opinion concerning some rule of law or legal proposition not necessarily involved nor essential to the determination of the case before the court for a decision. Although a court is not bound to follow dictum from prior opinions, it may certainly do so. Well reasoned dictum relevant to the issue may be persuasive to the court.

In the Rampell decision, this is what the Florida court said about attest:

"...While others may provide tax services or bookkeeping services, |licensees of the board of accountancy~ alone perform the 'attest' function, which refers to the process by which |licensees~ audit financial statements and express opinions as to those financial statements. Those audits are relied on not only by the clients on whose financial matters audits are performed but upon a host of other individuals and entities who may rely on the information in making their own economic decisions. Audited statements are relied upon by banks, other creditors, and investors ... In short, the use of financial statements attested by |licensees~ is so frequently used in our economic system as to be indispensable..."

Note the judicial definition of the "attest" function--namely, a function that refers to the process by which licensees of the board of accountancy audit financial statements and express opinions as to those financial statements.

In conclusion, it is wrong for state accountancy laws or regulations to include compilation and review of financial statements within the orbit of the attest engagement. Insofar as compilations of financial statements are concerned, the Attestation Standards are adequately clear that compilations provide no assurances and therefore are not attest engagements. State laws and regulations that provide otherwise conflict with prevailing accounting doctrine and must be modified accordingly.