SSARS 21 is Coming

Article originally published in Main Street Practitioner: September/October 2014
By Joseph L. Santoro CPA

This is the first in a series of articles intended to provide NSA members with advance information about the AICPA’s proposed Statement on Standards for Accounting and Review Services [SSARS] No. 21, which is expected to be released in October 2014. This first installment describes a new engagement level – The Preparation – which falls below the level of a Compilation as presented by the Accounting and Review Services Committee of the AICPA.

Not since 1979 has the world of compilation and review services seen such a significant change in operating procedures. Some 35 years ago, Statement on Standards for Accounting and Review Services [SSARS] No. 1 defined two levels of service: (1) The Compilation, which is limited to presenting in the form of financial statements information that is the representation of management, and (2) The Review, which consists principally of inquiries of company personnel and analytical procedures applied to the financial data. While those two levels of service have survived almost four decades and nineteen updates, revisions, or other forms of clarification, the advent of SSARS No. 21, to be released in October 2014, could rock the non-audit community like never before.

SSARS No. 21 among other things adds a new level of service – The Preparation – that can be released by an accountant when financial statements are issued that have not been audited, reviewed or compiled. SSARS No. 21, at 172 pages, is a massive rewrite and codification of virtually every preceding SSARS [the one surviving SSARS is No. 14 with respect to pro forma financial statements], and is effective for engagements performed in accordance with SSARS for periods ending on or after December 15, 2015, with early implementation permitted.

Note, while SSARS No. 21 and its existence in draft form over the past two years was approved at an Accounting and Review Services Committee meeting August 21, 2014, formal release to the accounting profession may not be made until late October 2014. However, according to the AICPA, the early implementation option means that practitioners can begin using the new standard on the release date. Thus, financial statements for the period ending on October 31, 2014 could be treated as a “preparation” if all the related caveats have been addressed.

This article is intended as a “heads up” message of things to come, with emphasis upon the major changes to financial statement reporting. In all there will be four primary components to the new standard. While each will be addressed separately, all four will be released as a single document, SSARS No. 21.

AR-C Section 60: General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services 

This component section is primarily definitional in nature. Discussion focuses on the tone of the engagement for non-audit services, and it provides definitions for such terms as “The Engagement Partner,” “The Engagement Team,” and “The Firm.” Also described is the concept of professional judgment, compliance with ethical standards, and the overall conduct of an engagement in accordance with SSARS.

The section emphasizes two primary professional requirements:

1. Unconditional requirements, meaning: when the word “must” appears within a standard, the accountant may not modify its application.
2. Presumptively mandatory requirements. When the word “should” appears within a standard, the accountant is obligated to comply – except in rare circumstances. When those rare circumstances occur, the accountant is nevertheless obligated to perform alternative procedures to achieve the intent of the requirement. 

Quality control remains an important part of the process. The Engagement Partner should possess competence and capabilities to perform the accounting engagement, but must also possess competence in the field of financial reporting on that engagement. Financial reporting requirements are addressed in the three subsequent sections of SSARS 21: AR-C 70, with respect to the Preparation; AR-C 80, with respect to Compilations; and AR-C 90 for Review Reporting.

Quality control as a concept includes considerations with respect to client acceptance. The accountant should never accept or retain a client whose values conflict with the standards of the accounting profession. The phrase “birds of a feather tend to flock together”, while not within the standard itself, is philosophically ubiquitous: an ethical accountant will only accept ethical clients.

AR-C Section 70: Preparation of Financial Statements 

Perhaps the most attention getting element of SSARS No. 21 is the ability to perform services classified as a “preparation”.

A “Preparation” is:

    a. A non-attest service. That means that independence or the lack thereof is not a factor.

    b. Not subject to information verification. That is, the accountant is not required to verify the
        accuracy or completeness of the information provided by management or to otherwise gather
        evidence to express an opinion or a conclusion on the financial statements or otherwise report
        on the financial statements.

With respect to what an accountant can deliver to a client, the following becomes possible:

   a.  Submission to the client of one or more financial statements, with or without 
        additional disclosures (notes), but specifically without an accountant’s report.

   b.  Submission of “preparation” level financial statements to a bank to obtain credit, also        
        without the inclusion of an accountant’s report.

In fact, the primary differences between a Preparation and a Compilation are summarized in the chart below.

Exhibit 1: Comparison between Compilation and Preparation Engagement Services

Issuing financial statements to a client and/or a creditor without an accountant’s report may seem like heresy. However, in the 21st Century, clients and bankers have grown accustomed to software products such as Quick Books and Peachtree that permit a business owner to provide financial statements absent any reports; the “Preparation” allows an accountant (CPA, PA, or other) to do precisely the same thing without the fear of violating a professional standard. In fact, the “preparation” provisions prohibit the release of a report with “prepared” financial statements.

However, an accountant who is involved with a “Preparation” must – unconditionally– mark each page of the financial statements with a legend to make it absolutely clear to the reader of the financial statements that no assurance of any kind is implied or intended. To avoid any misunderstanding on the part of users with respect to the accountant’s involvement, the wording on each financial statement page must be similar to one of these versions:

1. “No assurance is provided on these financial statements.”

2. “These financial statements have not been subjected to an audit or review or compilation
      engagement, and no assurance is provided on them.”

Note that the “Preparation” standards prohibit the issuance of an accountant’s report. However, the accountant may choose to issue a disclaimer in the form of a transmittal letter that reads as follows:

“The accompanying financial statements of XYZ Company, as and for the year ended December 31, 20XX, were not subjected to an audit, review, or compilation engagement by me (us) and, accordingly, I (we) do not express an opinion, a conclusion, or provide any assurance on them.”

Other preparation presentation items of note include:

1. The accountant should modify the titles on the financial statements when the statements are not in accordance with generally accepted accounting principles [GAAP]. Thus, the title “balance sheet” should be replaced with something similar to “Statement of Assets, Liabilities, and Equity – Income Tax Basis”.
2. When the statements do not include full note disclosures, the accountant must bring that fact to the reader’s attention even though there is no accountant’s report. This is done by placing words such as those that follow on the face of the financial statements themselves:

“Management has elected to omit substantially all of the disclosures
 ordinarily included in financial statements prepared in accordance with
 [the applicable financial reporting framework, such as GAAP or Tax].
 If the omitted disclosures were included in the financial statements, they
 might influence the user s conclusions about the company’s assets, liabilities,
 equity, revenues, and expenses. Accordingly, these financial statements are not
 designed for those who are not informed about such matters.”

One last point about the Preparation: there must be a signed engagement letter. A sample engagement letter for a Preparation is provided below.

Exhibit 2: Preparation Engagement Letter under SSARS No. 21

To: Appropriate Representative
ABC Company

You have requested that we prepare the financial statements of ABC Company, which comprise the balance sheet as of December 31, 20XX, and the related statements of income, changes in stockholder’s equity, and cash flows for the year then ended and the related notes to the financial statements. We are pleased to confirm our acceptance and our understanding of this engagement to prepare the financial statements of ABC Company by means of this letter.

Our Responsibilities

The objective of our engagement is to prepare financial statements in accordance with accounting principles generally accepted in the United States of America based on information provided by you. We will conduct our engagement in accordance with Statements on Standards for Accounting and Review Services (SSARS) promulgated by the Accounting and Review Services Committee of the AICPA and comply with the AICPA’s Code of Professional Conduct, including the ethical principles of integrity, objectivity, professional competence, and due care.

We are not required to, and will not, verify the accuracy or completeness of the information you will provide to us for the engagement or otherwise gather evidence for the purpose of expressing an opinion or a conclusion. Accordingly, we will not express an opinion or a conclusion or provide any assurance on the financial statements.

Our engagement cannot be relied upon to identify or disclose any financial statement misstatements, including those caused by fraud or error, or to identify or disclose any wrongdoing within the entity or noncompliance with laws and regulations.

Management Responsibilities

The engagement to be performed is conducted on the basis that management acknowledges and understands that our role is the preparation of the financial statements in accordance with the accounting principles generally accepted in the United States of America. Management has the following overall responsibilities that are fundamental to our undertaking this engagement, in accordance with SSARS, to prepare your financial statements:

a. The prevention and detection of fraud.

b. To ensure that the entity complies with the laws and regulations applicable to its activities.

c. The accuracy and completeness of the records, documents, explanations, and other information, including significant judgments, you provide to us for the engagement to prepare financial statements.

d. To provide us with:

(1) Documentation, and other related information that is relevant to the preparation and presentation of the financial statement;

(2) Additional information that may be requested for the purpose of the preparation of the financial statements; and,

(3) Unrestricted access to persons within ABC Company to whom we determine necessary to communicate.

The financial statements will not be accompanied by a report. However, you agree that the financial statements will clearly indicate that no assurance is provided on them.

Other Relevant Information

Our fees for these services….

Please sign and return the attached copy of this letter to indicate your acknowledgment of, and agreement with, the arrangements for our engagement to prepare the financial statements described herein, and our respective responsibilities.

Sincerely yours,  

____________________________________
Signature of accountant or accountant’s firm

Acknowledged and agreed on behalf of ABC Company by:

____________________________________________
Name, Title, and Date

To download your own copy of this form, click here.

This new level of service – The Preparation – is expected to become a common practice component very soon. The AICPA anticipates that many firms will opt to have “preparation” engagements for the interim statements followed by higher service levels at year end. For example, if an accountant is concerned that certain monthly adjustments for inventory or receivables or depreciation may not be precisely calculated on a monthly or quarterly basis, the accountant will be permitted to have “preparation” level services for monthly and/or quarterly reports, followed by a year-end Compilation, with or without full disclosures, or a Review.

In fact, it is possible to have full year preparation level services and not provide any higher level of service until such time has management or a creditor insists. And, as of September 2014, the AICPA’s Peer Review Section is developing a procedure to eliminate the peer review requirement for preparation level services.  Clearly the preparation level of service will have a major impact on accounting practices, large or small. In subsequent articles we will discuss the preparation and the revisions to Compilations and Reviews as described in the new SSARS No. 21.

Joseph L. Santoro is a certified public accountant, an AICPA member, and, since 1981, a member of the National Society of Public Accountants. In addition to an MBA degree, Mr. Santoro holds certificates as a Certified Valuation Analyst, Accredited Business Advisor, and Master Analyst in Financial Statement Forensics. A former two-term NSA District 1 Governor, he has chaired numerous NSA committees, including Budget, Education, National Affairs, and Peer Review. Currently he is chair of NSA Accounting Standards Committee and serves also as a member of the Board of Directors for the Accreditation Council for Accounting and Taxation [ACAT], for whom he has for many years worked as a subject matter expert for its credentialing examinations. Although retired from the CPA practice he founded more than 30 years ago, Mr. Santoro, who is known nationwide as an author and lecturer for Gear Up, with which he has been associated for more than 20 years, continues to provide lectures on Accounting and Taxation at more than 80 seminars each year.

Editor’s Note: These articles were written September 14, 2014 based upon the revised proposed SSARS No. 21 as of August 21, 2014. Subsequently, the ARSC Committee met twice more to make additional revisions that culminated in the release of SSARS No. 21 in December 2014. Readers are advised to check for themselves the final approved text of SSARS No. 21 for any differences between the proposal and the final standard. NSA will update these articles for those differences in the near future.