COMPILATION AND REVIEW ENGAGEMENTS:
NEW DIRECTIONS IN NON-AUDIT SERVICES
Maria L. Bullen, Dominican University of California, maria.bullen@dominican.edu
Gregory S. Kordecki, Clayton State University. gregkordecki@clayton.edu
INTRODUCTION
The American Institute of CPAs’ Accounting and Review Service Committee (ARSC) issued in
2012 two extensive exposure drafts—one on compilation services and one on review services-with far reaching implications for the compilation and review practices of external accountants’
association with the financial statements of clients. While the Committee is currently reviewing
comment letters, the issues are likely to be hotly contested prior to the proposed effective date of
December 15, 2014. The traditional distinctions between audits and various non-audit services
may become blurred. This paper attempts to enumerate the key issues and suggest measures that
would help the practicing profession, as well as preparers and users of financial statements for
closely-held businesses.
The paper describes the general thrust of both exposure drafts but focuses primarily on the earlier
paper dealing with compilations, which carries a comment deadline of November 30, 2012. The
review exposure draft is more recent with a comment deadline of April 30, 2013. Important
trends in compilation engagements are described, including standard-setting, nuances of practice,
and concerns of how the theme of compilation with no assurance varies from the other attest
engagements of reviews and audits which carry some degree of assurance. The role of the attest
function is questioned, and the need for independence of the external accountant from
management, the entity, and its governance, challenged. The paper concludes with examples of
practical implementation concerns.
BACKGROUND
In 2011, the Auditing Standards Board (ASB) of the AICPA achieved ability to redraft all of the
auditing sections in Codification of Statements on Auditing Standards contained in the AICPA’s
Professional Standards. In 2012 the Accounting and Review Services Committee (ARSC) of the
AICPA reached out to the public with the issuance of two Exposure Drafts attempting to
establish similar clarity in compilation and review engagements, and with an effective date for
unaudited financial statements with which the accountant is associated of “on or after December
15, 2014” [ARSC 2012-C, 2012-R].
In addition to having the compilation and review standards easier to read, understand, and apply,
the similar conventions of the auditing literature makes for more uniform standard setting [Glynn
& Gloria, 2012]. The critical differences however between the ARSC and the ASB efforts were
determined to be that governmental entities and smaller, less complex entities would not be
receiving the specific application guidance by the ARSC. The ARSC established the following
clarity drafting conventions:
Objectives for each clarified AR section
A definitions section, as relevant, for each clarified AR section
Separating requirements from applicant and other explanatory material
Numbering application and other explanatory material paragraphs using an A- prefix and
presenting such is a separate section that follows the requirements section
Bulleted lists and other formatting techniques to enhance readability [Editor’s Comments,
2012].
The first of the two exposure drafts proposes three new standards for compilation engagements:
Association with Unaudited Financial Statements, Compilation of Financial Statements, and
Compilation of Financial Statements—Special Considerations. Comments were originally due
August 31, 2012, but extended to November 30, 2012. The second exposure draft proposes two
new standards for review engagements: Review of Financial Statements, and Review of
Financial Statements—Special Considerations. Comments on this second exposure draft are due
April 26, 2013.
SIGNIFICANT OVERALL CHANGES
Adoption of the proposed standards for both compilation and review engagements would lead to
some significant changes in approaches to viewing the external accountant’s work on the client’s
financial statements, and also the various perspectives of not only the external CPA, but also the
management preparer, and the financial statement user. The following areas of change would
affect both compilation and review engagements.
Professional Judgment—explicit statement is made that an accountant should exercise
professional judgment; the extant call for judgment is only implicit.
Signed Engagement Letter—requirements would begin that both parties to the engagement
have signed written communication by (a) the accountant or the accountant’s firm and (b)
management or, if applicable, those charged with governance.
Accountant’s Compilation (or Review) Report—clarified headings throughout the report
would be required to clearly distinguish each section of the accountant’s report. City and state of
issuing office also must be included in the report
Special Purpose Framework (SPF)—replaces other comprehensive bases of accounting
(OCBOA), such as cash, tax, contractual, and regulatory bases, with SPF, and following
requirements—
Suitable financial statement titles and adequate description of how the SPF differs from
GAAP.
Any disclosures that would be required resulting from application of the SPF.
Compilation (or review) report to state that management has choice of financial
reporting frameworks, and if regulatory or contractual, then statement in the report, or
reference to a note to the financial statements that contains such information. If the
engagement is a compilation where management has omitted substantially all
disclosures, then that must be described in the report.
Inclusion in the accountant’s compilation (or review) report of an “emphasis-of-matter”
paragraph under appropriate heading that the financials are prepared in accordance with
the applicable financial reporting framework, reference to a note in the financials that
describes the framework, and a statement that the SPF is a basis of accounting other
than GAAP.
Inclusion in the accountant’s compilation (or review) report of an “other-matter”
paragraph under appropriate heading, any restrictive usage of the compilation (or
review) report when under contractual or regulatory basis of accounting.
Emphasis Paragraphs—extant standards do not require any emphasis paragraphs. New
standards would require if SPF financial statements were prepared or when there have been
management revisions to the financials for a subsequently discovered fact. If accountant expects
to include an emphasis paragraph in the compilation (or review) report, the proposed standard for
Special Considerations requires to accountant to communicate with management regarding the
expectation and the wording of such paragraph. “Emphasis-of-matter paragraph” is report
wording by the accountant to draw users’ attention to a matter appropriately presented or
disclosed, while “other-matter” paragraph is used to communicate a matter that is not being
adequately presented or disclosed.
Required Supplementary Information (RSI)—is information that a designated accounting
standard setter requires to accompany an entity’s basic financial statements but the information is
not part of the basic finance financial statements, and that the account include an other-matter
paragraph I the accountant’s compilation (or review) report and the extent of any compilation,
review, audit, or other prescribed guidelines work performed.
SPECIFIC PROPOSALS FOR COMPILATIONS AND REVIEWS
With respect to compilations, the new standard would clarify the “submission” argument, in that
the preparation of financial statements is specifically defined as a nonattest service. Preparation
of financial statements is a responsibility of management and an essential part of an entity’s
system of internal control. A compilation service would no longer include the preparation of
financial statements which in whole or in part, would be a nonattest service. Compilation is an
attest service, but not an assurance service. The compilation standards would go further on
consideration of the effect of new or revised information. An explicit statement would require
the accountant to consider the effect of such additional or revised information on the financial
statements, including whether the financial statements are materially misstated.
With respect to reviews, the new standards would clarify the broad scope of a review, still
limited assurance, and short of an audit in the attest hierarchy, but with specific examples of
information that the external accountant may report on. The scope would consider specified
elements, accounts, or items of a financial statement, supplementary information, required
supplementary information, and financial information included in a tax return, or other historical
financial information for inclusion of information subject to a “review” in accordance with the
SSARS.
DISCUSSION ON PROPOSED COMPILATION STANDARDS
The clear explanation of requirements relative to the accountant’s Association with Unaudited
Financial Statements is long overdue. The suggested wording for inclusion in a report makes it
clear that the service provided was not only not an audit, but also, was not a review, and was not
a compilation. This delineation does much for definition of various practitioners’ work and
elevates the notion in general that the work performed in a compilation to be truly an attest
engagement. The proposed statement provides practitioners with guidance for performing
services other than compilations, reviews, and audits, and further establishes the framework in a
more logical fashion as to what type of work constitutes the various engagements, and yields an
approach toward more clear differentiation between assurance, non-assurance, attestation, and
non-attestation engagements [Landes, 2012].
Unfortunately, SSARS does not adequately address an important term, “prepare,” which is
neither defined nor referenced to another standard where it is defined. This term should be
defined in the proposed standard to prevent misinterpretation, such as questions regarding
whether an accountant has ”prepared” financials when he or she has recorded necessary journal
entries in a client’s accounting system during month-end bookkeeping work but has not actually
printed the financial statements from the system. Inclusion of “preparation” as a formal term in
the Definitions section may strengthen the overall document.
The proposed statement on Compilation of Financial Statements clearly states that a
compilation is not an assurance engagement, but is an attest engagement [Reinstein & Weirich,
2012]. In the Definitions section the term “assurance” is clearly identified, but not “attestation.”
Footnote reference is provided to paragraph .01 of ET section 92, Definitions (AICPA Proposed
Standards) of the AICPA Code of Professional Conduct for the definition of attest
engagement—any engagement that requires independence—but if one is interested in clarity,
why not apply the clarity conventions and include the term “attestation” in the formal Definitions
sections of the SSARS literature? The common notion that attestation is a subset of assurance
must be destroyed, if the spirit of the Exposure Draft is to prevail. As a considerable amount of
the general literature outside of the AICPA is very much muddled on specifically what a
compilation is, the Definitions section of the document should be expanded to include the sharp
demarcations.
The proposed statement goes further in treatment of special purpose frameworks, and the
inclusion in the report of an “emphasis-of-a-matter” or “other-matter” paragraph will be of
significant benefit to most users. The report drafting illustrations are good summaries of the
preceding proposed requirements. Several illustrations, examples of cash basis and tax basis,
stress such a basis not only in the introductory paragraph, but also in the management’s
responsibility paragraph, and in an additional paragraph carrying the heading “Basis of
Accounting.” With the current movement, including the AICPA’s outstanding ED on Proposed
Financial Reporting Framework for Small- and Medium-Sized Entities, to transition away from
OCBOA language toward reference of alternative reporting frameworks, the Committee may
wish to revisit how specific language and wording is best applied in the accountant’s report.
In Compilation of Financial Statements—Special Considerations, the extensive examples of
how an “emphasis-of-a-matter” paragraph differs from an “other matter” paragraph are very
helpful, and the report drafting illustrations will be a strong aid to the practitioner. Inclusion of
the going concern bright time line of not exceeding one year is helpful guidance. An accountant
should communicate with management regarding emphasis-of-matter and other-matter
paragraphs, including proposed wording; however, ARSC does not provide guidance regarding
actions the accountant should take if management has objections.
The proposed standard also indicates that there are exceptions to the general rule prohibiting an
accountant from issuing a compilation report when the accountant had been engaged to audit an
entity’s financial statements but has been prohibited by the client from corresponding with the
entity’s legal counsel. Clarification of “rare circumstances” needs to follow. The reporting
language for inclusion of required supplementary information is clear and will help many
preparers and users as well as the accountant.
IMPLEMENTATION CONCERNS FOR REVISED STANDARDS
Finally, the proposed compilation standards carry some helpful guidance for instances when the
accountant is faced with reporting on going concern issues during a compilation of financial
statements that omit substantially all disclosures. Since disclosures are frequently omitted in
practice, this standard might address other instances where an emphasis-of-matter paragraph is
necessary (e.g., extensive related party transactions, unresolved litigation) but considered
inappropriate because the underlying disclosure has been omitted.
Overriding concerns on the proposed statements include any additional burdens that would be
placed on the accountant in compilation engagement work. While the clarity, organization, and
exhibits are helpful, some dangling concepts such as thorough written documentation of the
engagement via an engagement letter or some other written form could be expanded.
Illustrations of those types of writing, including a single document covering scope of services
requested for engaging in regular monthly work, would be helpful. If ARSC’s exposure draft
on review engagement modifications is received with the clarity provided by the exposure draft
on compilation engagement, management, the external accountant, and the financial statement
user will all be well served.
REFERENCES
ARSC--Accounting and Review Services Committee of AICPA (2012-C). Exposure draft—
Proposed statements on standards for accounting and review services: Association with
unaudited financial statements, Compilation of financial statements, Compilation of financial
statements—special considerations, June 29, 2012, comment deadline August 31, 2012,
extended to November 30, 2012.
ARSC--Accounting and Review Services Committee of AICPA (2012-R). Exposure draft—
Proposed statements on standards for accounting and review services: Review of financial
statements, Review of financial statements—special considerations, November 15, 2012,
comment deadline April 26, 2013.
Editor’s Comments (2012). News digest on accounting matters, Journal of Accountancy, Vol
214(5), November, 2012, pp. 17-21.
Glynn, Mike, and Ellen Gloria (2012), Proposed revisions: Clarify responsibilities for preparers,
Journal of Accountancy, Vol 214(2), August. 2012, pp. 50-53.
Landes, Charles E. (2012). Preparation as a nonattest service: What does it mean and why
should I care? AICPA Whitepaper, September, 2012.
Reinstein, Alan, and Thomas R. Weirich (2012). New ethics guidance for CPAs in public
practice and business, The CPA Journal, March, 2012, pp. 59-64.