Compilations and Reviews:
The Times They Are a Changing
Dallas CPA Society
Convergence, 2013
James A. Smith, CPA
Managing Director,
Smith, Jackson, Boyer & Bovard, PLLC
The Impact of Ethics Interpretation 101‐3
• ET 92.01 defines an attest engagement as an engagement that requires independence. Audits, examinations, agreed‐
upon procedures engagements, reviews, and compilations are, therefore, attest engagements. Attest engagements, except for compilations, cannot be performed if the accountant's independence is impaired. Compilations can be performed provided the accountant's report discloses the lack of independence. Interpretation 101‐3 (ET 101.05) describes the requirements that must be met in order for the performance of nonattest services for an attest client to not impair independence. Revisions to Ethics Interpretation 101‐3
Revisions to ET Interpretation 101‐3
• The following revisions are effective on August 31, 2012:
• Clarified Guidance on the Period of Impairment
• A member’s independence would not be impaired if the member performed nonattest services that would have impaired independence during the period covered by the financial statements, provided that: • 1. the nonattest services were provided prior to the period of the professional engagement, • 2. the nonattest services related to periods prior to the period
covered by the financial statements, and • 3. the financial statements for the period to which the nonattest services relate were audited by another firm (or in the case of a review engagement, reviewed or audited by another firm). Revisions to Ethics Interpretation 101‐3
Added Guidance on the Cumulative Effect of Nonattest Services •
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Performing attest services often involves communication between the accountant and client management regarding (a) the client’s selection and application of accounting standards or policies and financial statement disclosure requirements; (b) the appropriateness of the client’s methods used in determining the accounting and financial reporting; (c) adjusting journal entries that the accountant has prepared or proposed for client management consideration; and (d) the form or content of the financial statements. These communications are considered a normal part of the attest engagement and would not constitute performing a nonattest service. However, judgment should be exercised in determining whether the
accountant’s involvement has become so extensive that it would be considered a separate service that would be subject to the ET Interpretation 101‐3 requirements. NO BRIGHT LINES.
Revisions to Ethics Interpretation 101‐3
Expanded the List of Regulatory Bodies
• The Interpretation requires compliance with independence regulations of authoritative regulatory bodies when an accountant performs nonattest services for an attest client and is required to be independent of the client under the regulations of the applicable regulatory body. Accordingly, accountants must comply with the nonattest services provisions contained in the independence rules of the applicable regulatory body that are more restrictive than the provisions of ET Interpretation 101‐3. • The Interpretation provides a list of authoritative regulatory bodies. This amendment to the Interpretation added the PCAOB to the list of authoritative regulatory bodies.
Revisions to Ethics Interpretation 101‐3
Clarified the General Requirements for Performing Nonattest Services as follows:
• 1. The member should not assume management responsibilities. • 2. Before performing nonattest services, the member should determine that the client has agreed to: • a. Assume all management responsibilities;
• b. Oversee the service, by designating an individual, preferably within senior management, who possesses suitable skill, knowledge, and/or experience. The member should assess and be satisfied that such individual understands the services to be performed sufficiently to oversee them. However, the individual is not required to possess the expertise to perform or re‐perform the services; • c. Evaluate the adequacy and results of the services performed; and • d. Accept responsibility for the results of the services. Revisions to Ethics Interpretation 101‐3
• To avoid assuming management responsibilities when providing nonattest services to the client, the member should be satisfied that management will be able to meet all of these criteria, make an informed judgment on the results of the member’s nonattest services, and be responsible for making the significant judgments and decisions that are the proper responsibility of management.
• In cases in which the client is unable or unwilling to assume these responsibilities (for example, the client cannot oversee the nonattest services provided, or is unwilling to carry out such responsibilities due to lack of time or desire), the member’s provision of these services would impair independence.
Revisions to Ethics Interpretation 101‐3
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3. Before performing nonattest services, the member should establish and document in writing his or her understanding with the client (board of directors, audit committee, or management, as appropriate in the
circumstances) regarding the following:
a. Objectives of the engagement b. Services to be performed c. Client’s acceptance of its responsibilities d. Member’s responsibilities e. Any limitations of the engagement The documentation requirement does not apply to nonattest services performed prior to the client becoming an attest client. The preceding general requirements 2–3, do not apply to certain routine activities performed by the member, such as providing advice and responding to the client’s questions as part of the client‐member relationship. Revisions to Ethics Interpretation 101‐3
Management Responsibilities • If a member were to assume a management responsibility for an attest client, the management participation threat created would be so significant that no safeguards could reduce the threat to an acceptable level. It is not possible to specify every activity that is a management responsibility. However, management responsibilities involve leading and directing an entity, including making significant decisions regarding the acquisition, deployment, and control of human, financial, physical, and intangible resources.
• Whether an activity is a management responsibility depends on the circumstances and requires the exercise of judgment. Examples of activities that would be considered a management responsibility and would, therefore, impair independence if performed for an attest client include: Revisions to Ethics Interpretation 101‐3
• setting policies or strategic direction for the client; • directing or accepting responsibility for the actions of the client’s employees except to the extent permitted when using internal auditors to provide assistance for services performed under auditing or attestation standards;
• authorizing, executing, or consummating transactions or otherwise exercising authority on behalf of a client or having the authority to do so;
• preparing source documents in electronic or other form evidencing the occurrence of a transaction;
• having custody of client assets;
• deciding which recommendations of the member or other third parties to should be implemented or prioritized;
Revisions to Ethics Interpretation 101‐3
• reporting to those in charge of governance on behalf of management;
• serving as a client’s stock transfer or escrow agent, registrar, general counsel, or its equivalent;
• accepting responsibility for the management of a client’s project; • accepting responsibility for the preparation and fair presentation of the client’s financial statements in accordance with the applicable financial reporting framework; • accepting responsibility for designing, implementing; and
• performing ongoing evaluations of the client’s internal control as part of its monitoring activities. Revisions to Ethics Interpretation 101‐3
Added Two Examples of Nonattest Services That Would Not Impair Independence to the Specific Examples of Nonattest Services Table
• A bookkeeping nonattest service that would not impair independence: Preparing a reconciliation (for example, bank, accounts receivable, and so forth) that identifies reconciling items for the client’s evaluation. • An information systems design, installation, or integration service that would not impair independence: Performing network maintenance, such as updating virus protection, applying routine updates and patches, or configuring user settings, consistent with management’s request. March, 2013 Revisions to ET Interpretation 101‐3
• PEEC has decided to consider the preparation of financial statements (and cash‐to‐accrual conversions) to be a nonattest service in line with the GAO and COSO. This is now part of the non‐attest table in 101‐3.
• CPAs can prepare the client’s financial statements and remain independent provided that there are safeguards in place and the client continues to take responsibility for the financial statements.
• The revision which makes preparation of the financial statements a nonattest service is anticipated to be effective 2 years after it is published in the Journal of Accountancy (for periods ending on or after December 15, 2014). Early implementation is permitted.
March, 2013 Revisions to ET Interpretation 101‐3
• Designing, implementing, or maintaining the client’s monitoring activities are management responsibilities. Therefore, independence is impaired if the accountant accepts responsibility for performing these activities.
• Accountants may not perform ongoing evaluations and remain independent. The management participation threat created by an accountant performing ongoing evaluations is so significant that no safeguards could reduce the threat to an acceptable level.
• Internal audit services, including separate evaluations to determine whether client controls are present and functioning effectively, that do not result in performing ongoing evaluations or assuming other management responsibilities would generally not create a significant threat to independence.
Proposed Clarified Compilation SSARS
The Exposure Draft included the single biggest change in the compilation standards since SSARS 1.
Change from submission driven to engagement driven
• 1. In accordance with the extant SSARSs, an accountant is required to comply with the provisions of AR section 80, Compilation of Financial Statements, whenever the accountant is engaged to report on compiled financial statements or submits (defined in paragraph .04 of AR section 60 as presenting to management financial statements that the accountant has prepared) financial statements to a client or to third parties. The definition of “prepare financial statements” has been one of the most difficult to pin down for purposes of determining whether an engagement was subject to the requirements of SSARS and, therefore, to peer review.
Proposed Clarified Compilation SSARS
• The exposure draft was withdrawn in total in January.
• The ARSC is reconsidering the Compilation Standard from ground zero. The current status is in draft form and there is no certainty that it will be re‐exposed in its current format.
• The key issue from the ED still under consideration is keeping the engagement driven rather than submission driven standard for issuing a compilation report.
• The significant new issue added is to classify compilations as a
non‐attest engagement. This would ultimately remove them from being subject to peer review.
• This is a major change from the previous ED which only reacted to the PEEC change which made preparation of financial statements a non‐attest function.
Proposed Clarified Compilation SSARS
• The bottom line of this is that bookkeeping services and assistance to clients in preparing financial statements would not require a CPA to issue a compilation report.
• The CPA would be subject to SSARS only if the client engaged the CPA to issue a compilation report on those statements.
• Even if subject to SSARS, the compilation engagement would ultimately not be subject to peer review.
• There is an additional issue: Accountancy Laws. The Texas Public Accountancy Act specifies that any engagement governed by SAS, SSARS, or SSAE is subject to peer review. That law applies regardless of what the AICPA says, unless the ARSC were to eliminate the compilation from its standards, which does not seem likely. The answer is changing the UAA.
Proposed Clarified Compilation SSARS
Requirement to Obtain a Signed Engagement Letter or Other Suitable Form of Written Communication • Although extant AR section 80 requires that the accountant document the understanding with management regarding the services to be performed for compilation engagements through a written communication with management, it does not require that the written understanding be signed by either the accountant or management. • The draft proposed SSARS requires that the engagement letter or other suitable form of written communication be signed by (a) the accountant or the accountant’s firm and (b) management or, if applicable, those charged with governance. Proposed Clarified Compilation SSARS
Reporting on the Financial Statements • 1. The proposed SSARS, Compilation of Financial Statements, requires the use of headings throughout the accountant’s compilation report to clearly distinguish each section of the report. • 2. Additionally, the proposed SSARS requires that the accountant’s compilation report name the city and state of the issuing office. The Accountant’s Compilation Report on Financial Statements Prepared in Accordance With a Special Purpose Framework
• The proposed SSARS introduces the term special purpose framework to SSARSs. The term special purpose framework includes the cash, tax, and regulatory bases of accounting and other bases having substantial support that have traditionally been referred to as other comprehensive bases of accounting (OCBOA) as well as the contractual‐basis of accounting. The proposed SSARS includes several new requirements with respect to reporting on financial statements prepared in accordance with a special purpose framework, including the following: Proposed Clarified Compilation SSARS
• A requirement that the accountant consider whether the financial
statements are suitably titled, and, as applicable, include a summary of significant accounting policies and adequately describe how the special purpose framework differs from generally accepted accounting principles (GAAP); • A requirement that the accountant consider, unless the financial
statements omit substantially all disclosures, when the financial statements contain items that are the same as, or similar to, those in financial statements prepared in accordance with GAAP, whether the financial statements include informative disclosures related to matters that are not specifically identified on the face of the financial statements or other disclosures are necessary for the financial statements to achieve fair presentation; • In the case of financial statements prepared in accordance with a contractual basis of accounting, a requirement that the accountant consider whether the financial statements adequately describe any significant interpretations of the contract on which the financial statements are based; Proposed Clarified Compilation SSARS
• A requirement that the accountant’s compilation report on financial statements prepared in accordance with a special purpose framework: • — make reference to management’s responsibility for determining that the applicable financial reporting framework is acceptable in the circumstances when management has a choice of financial reporting frameworks in the preparation of such financial statements, • — describe the purpose for which the financial statements are prepared or refer to a note in the financial statements that contains that information when the financial statements are prepared in accordance with a regulatory or contractual basis of accounting, Proposed Clarified Compilation SSARS
• A requirement that the accountant’s compilation report on financial statements prepared in accordance with a special purpose framework include an emphasis‐of‐matter or an other‐matter paragraph, under an appropriate heading, that • — indicates that the financial statements are prepared in accordance with the applicable financial reporting framework; • — refers to •
the note to the financial statements that describes the framework or •
a description of the framework if the financial statements omit substantially all disclosures; and • — states that the special purpose framework is a basis of accounting other than GAAP. Proposed Clarified Compilation SSARS
• A requirement that the accountant’s compilation report on special purpose financial statements include an other‐matter paragraph under an appropriate heading that restricts the use of the accountant’s compilation report solely to those within the entity, the parties to the contract or agreement, or the regulatory agencies to whose jurisdiction the entity is subject when the special purpose financial statements are prepared in accordance with either: • — a contractual basis of accounting, or • — a regulatory basis of accounting, unless the special purpose financial statements together with the accountant’s compilation report are intended for general use. Proposed Clarified Compilation SSARS
Emphasis‐of‐Matter and Other‐Matter Paragraphs in the Accountant’s Compilation Report • Paragraph .25 of extant AR section 80 states that emphasis paragraphs are never required. However, the proposed SSARSs, Compilation of Financial Statements and Compilation of Financial Statements—Special Considerations, require the accountant to include an emphasis‐of‐matter or other‐matter paragraph in the accountant’s compilation report relating to the following matters: • Financial statements prepared in accordance with a special purpose framework; • Reporting on prior period financial statements and the accountant’s compilation report includes a changed reference to a departure from the applicable financial reporting framework; and
• Reporting when management revises financial statements for a subsequently discovered fact that became known to the accountant after the report release date and the accountant’s compilation report on the revised financial statements differs from the accountant’s compilation report on the original financial statements. Proposed Clarified Compilation SSARS
• In addition, the proposed SSARS, Compilation of Financial Statements—Special Considerations, requires the accountant to include an emphasis‐of‐matter paragraph in the accountant’s compilation report when the accountant considers it necessary to
draw users’ attention to a matter appropriately presented or disclosed in the financial statements that, in the accountant’s professional judgment, is of such importance that it is fundamental to the user’s understanding of the financial statements, provided that the accountant does not believe that the financial statements may be materially misstated. • The proposed SSARS, Compilation of Financial Statements—Special Considerations, requires the accountant to include an other‐matter paragraph in the accountant’s compilation report when the accountant considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the accountant’s professional judgment, is relevant to the users’ understanding of the compilation, the accountant’s responsibilities, or the accountant’s compilation report. Proposed Clarified Compilation SSARS
• If the accountant expects to include an emphasis‐of‐matter or other‐matter paragraph in the accountant’s compilation report, the proposed SSARS, Compilation of Financial Statements—Special Considerations, requires the accountant to communicate with management regarding this expectation and the proposed wording of this paragraph.
Required Supplementary Information • The proposed SSARS, Compilation of Financial Statements—Special Considerations, defines required supplementary information as information that a designated accounting standard setter requires to accompany an entity’s basic financial statements. Required supplementary information is not part of the basic financial statements; however, a designated accounting standard setter considers the information to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. In addition, authoritative guidelines for the methods of measurement and presentation of that information have been established. Proposed Clarified Compilation SSARS
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The proposed SSARS defines designated accounting standard setter as a body designated by the Council of the AICPA to promulgate GAAP.
The proposed SSARS establishes a requirement that the accountant
include an other‐matter paragraph in the accountant’s compilation report on the financial statements to refer to the required supplementary information and establishes reporting requirements when — the required supplementary information is included and the accountant compiled the required supplementary information; — the required supplementary information is included and the accountant did not compile, review, or audit the required supplementary information; — the required supplementary information is omitted; — some required supplementary information is missing and some is presented in accordance with the prescribed guidelines; — the accountant has identified departures from the prescribed guidelines; and/or
— the accountant has unresolved doubts about whether the required
supplementary information is presented in accordance with prescribed guidelines. Proposed Clarified Compilation SSARS
• The critical question is whether it is a good idea to allow CPAs
to prepare financial statements, even though their name is not associated with them, in an environment where there is no oversight (peer review) and essentially no performance standards (other than the general standards of due care and professional competence). Many CPAs have wanted for a long time to have their bookkeeping services unshackled from the SSARS compliance and peer review requirements. Others think it is demeaning to the profession to bring this work out from under the higher performance standards of CPAs.
• The comment period has been extended until November 30.
• The effect date in the ED is statements dated after 12/15/14.
Clarified Review SSARS
• In November, 2012, the ARSC released an Exposure Draft of the Clarified Review sections of SSARS. Many of the same changes in the format of the report (emphasis of a matter, other matters, section headings, etc.) that were in the compilation ED are present. The organization of the SSARS will be substantially changed as a part of the clarity revision,
but the practical effect of most of our practices should not be significant. It also includes a requirement that the client sign the engagement agreement. • The comment period on this ED ended April 26. Comment letters can be viewed on the AICPA website. There is no current date for final release of the Review Standard, but it will hopefully be out by year end. The Compilation Standard is the current hot issue.
Links to More Information
• The SSARS Review ED and supplemental information can be downloaded @
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http://www.aicpa.org/Research/ExposureDrafts/CompilationReview/Pages/EDofSSARS.
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