In October 2014, the AICPA Accounting and Review Services Committee issued SSARS 21 as part of what is known as “the Clarity Project”. This pronouncement has brought about changes in the rules governing the scenarios in which CPAs can provide financial statements to their clients.
Previous Rules for Financial Statement Preparation
For years accountants in public practice have prepared and issued financial statements to clients for either internal or external usage or both. Frequently, questions would arise as to what assurances were being provided, and what accountability existed, if any, regarding the issuance of compiled financial statements, “plain paper” statements, “management use only” statements, and statements submitted electronically, to name a few.
Professional guidance related to the preparation and issuance of these statements failed to achieve a clear distinction between the types of statements and the accountability associated with them. Further, confusion has occurred with the advent of electronic remote access, cloud accounting and processing, and the expansion of electronic preparation and submission of financial statements.
Prior to the issuance of the new standards, most CPAs that issued financial statements would, at a minimum, prepare and issue statements accompanied by a compilation report which states that no opinion or assurance is being provided.
Financial Statement Preparation under SSARS 21
Professional accounting and review standards for the preparation and reporting of financial statements have recently undergone significant changes, resulting in clarifying not only the available options to clients who require financial statement products, but also the CPA’s role in the production of the statements.
The AICPA Accounting and Review Services Committee issued Statements on Standards for Accounting and Review Services (SSARS) No. 21 for the purpose of clarifying the standards for the preparation of financial statements and differentiating those from compilation and review engagements. The new standards apply to financial statements ending on or after December 15, 2015 (meaning this will be effective for those with year ends of December 31, 2015 and later).
The following summarizes the principal categories of financial statements (excluding audited financial statements) now available to clients and what they will provide:
Financial Statement Preparation
This most basic level of reporting is a non-attest service (i.e., no assurances are provided) where financial statements are provided to the client, often as part of a basic bookkeeping service. Under this scenario, the client determines what basis the financial statements will be reported under (cash, income tax, etc). With this basic level, the CPA’s independence from the client is not a factor. In addition, no report is required to accompany the statements nor is the identification of the CPA preparing the statements.
In instances where this basic type of financial statement is provided, each page of the financial statements will include language indicating that no assurance is provided. It may also include a disclaimer indicating that the statements were not audited, reviewed or compiled, and that no opinion or other assurance is provided. Each page of the financial statements will also reflect the basis of accounting used (i.e. cash, income tax, etc.), and that disclosures are omitted.
An engagement letter signed by both the CPA and the client is required. This type of financial statement does not apply to financial statements issued in conjunction with tax returns, personal financial statements, business valuations, litigation-related statements, compilations, reviews, and audits. Most often these statements mirror and function as an internally generated statement for client usage in managing the company.
Effectively, these statements are prepared from the clients accounting system and no verification is performed.
Compiled Financial Statements
Compiled financial statements are often utilized by those seeking lesser amounts of financing, or to satisfy other business requests seeking an externally prepared financial statement.
Compiled financial statements are also a non-attest service, and as such, no assurance is provided. However, the CPA is required to consider the proper form and absence of material errors in the statements. No testing, analytics, internal control assessments or other such procedures are involved.
A report letter accompanies the financial statements and states that:
- a compilation engagement has been performed and not an audit or a review
- that no verification procedures were performed, and
- that no opinion or assurance is provided.
An engagement letter signed by both parties is required and the CPA must meet certain requirements and performance measures.
In a compilation engagement, obvious misstatements noted in the balances presented or problems with the format or form of the statements are addressed with the client and revisions proposed.
Unlike the multi-paragraph report letters issued on compilations prior to SSARS No. 21, the new standard only requires a simple one paragraph report that clearly identifies the statements, the absence of any assurances, and mentions Management’s compliance with SSARS performance standards. The CPA’s signature, city and state of practice and procedure completion date are required and any absence of independence, disclosures, or statements not prepared in accordance with generally accepted accounting principles will be disclosed in the report.
Reviewed Financial Statements
Reviewed financial statements satisfy situations of credit extension requests of a more significant size and/or complexity that require some additional level of assurance.
Changes regarding reviewed financial statements are more cosmetic and clarifying in nature. The objective of the review remains the same; to perform procedures to provide limited assurance that there are not material modifications that should be made to the financial statements in order for them to conform to the applicable reporting framework.
In review engagements, analytical procedures are performed on the financial data, accompanied by client interviews, and a reconciliation of accounting data to the financial statements.
Independence is required of the CPA, and Management is responsible for the preparation of the financial statements. An engagement letter signed by the CPA and the client is also required.
The report letter required in a review reflects the independent status of the CPA, outlines management and client responsibilities, and includes the accountant’s signature, and city and state of practice and report date. The letter includes a conclusion on whether the accountant is aware of any material modifications that should be made for the statements to be in accordance with the reporting framework. A letter detailing management’s representations to the CPA is also prepared and signed by the client.
What type of financial statement do you actually need?
The issuance of SSARS No. 21 is a significant change in the way the CPA can provide financial statements. The client should first consider the purpose of the financial statement and what it is needed and then make the determination of what type of engagement best fits the need.
For more information, feel free to contact Joe Molis at email@example.com.