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The plain paper controversy.


Should CPAs provide a level of service on financial statements below a compilation? Despite years of discussion, the dispute over these "no report-internal use" statements is as intense as ever.


The issue of "plain paper," or legend, financial statements was debated most recently at a public hearing of the American Institute of CPAs accounting and review services committee (ARSC) on September 7, 1989, and at an ARSC special meeting on January 18-19, 1990. Plain paper refers to financial statements that would be marked with a notation indicating they contain departures from generally accepted accounting principles and are intended for the client's internal use only. Such financial statements would not be accompanied by a CPA's report. Currently, Statement on Standards for Accounting and Review Services (SSARS) no. 1, Compilation and Review of Financial Statements, prohibits the submission of plain paper financial statements.

Among the questions discussed were:

* Are the compilation performance and reporting standards in SSARS no. 1 too stringent and not cost beneficial?

* Should SSARS no. 1 be amended to permit a service, for interim or monthly financial statements, below a compilation?

* Should additional "how-to" guidance be developed to explain when SSARS no. 1 applies and when it does not?

The spirit of the September 7 public hearing is captured by the two opinions that follow--Robert L. Israeloff argues for plain paper financial statements and Gerald W. Hepp presents the opposing view.

After spending most of 1989 debating the issue, ARSC concluded SSARS no. 1 should not be amended to provide for a level of service below a compilation. It decided an amendment could lead to abuses and a lowering of the quality of CPA's work and, thus, would not be in the public interest.

ARSC also concluded the current SSARS no. 1 requirements are cost effective. However, based on comments made at the public hearing, ARSC identified a number of practice questions that suggest the need to develop "how-to" guidance or interpretations of SSARS no. 1 to assist CPAs in determining when the standard applies.

There is a pressing need to clarify the following matters because CPAs are applying SSARS no. 1 to situations for which those standards are not required.


CPAs need guidance to help them identify attributes that differentiate financial statements requiring a compilation report from other accounting services (for example, an adjusted trial balance). Adjusted journal entries and trial balances do not constitute financial statements; therefore, when these items are submitted to clients, there is no requirement to attach a compilation report. ARSC will develop guidance that encourages practitioners to avoid presentations that fall into the gray area between a financial statement and a trial balance.


CPAs are subject to SSARS no. 1 requirements when they submit financial statements to their clients or others. The term "submitted financial statements" needs clarification. There is a wide diversity of opinion as to the functions performed by the CPA that result in a CPA-submitted financial statement, which must be accompanied by a report. ARSC agreed a CPA-submitted financial statement is one that the CPA has generated (either manually or through the use of computer software) or is a client-generated financial statement the CPA has materially modified.


CPAs frequently issue draft financial statements (1) when all the information needed to compile the statements is not available or (2) for the client to review. It's okay to do this as long as the CPA intends to issue an appropriate compilation or review report with the final financial statements. Since there is no guidance in the SSARS literature about the issuance of draft financial statements, ARSC will develop an interpretation that will parallel the guidance in footnote 4 of the Guide for Prospective Financial Statements, which was prepared by the AICPA financial forecasts and projections task force and issued in 1986.

The issues debated here will subside when ARSC clarifies the applicability question. The plans are to issue the needed guidance by early summer.

Dan M. Guy vice-president-auditing
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Author:Hepp, Gerald H .
Publication:Journal of Accountancy
Date:Apr 1, 1990
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