By: Brad Johnson, CPA, MS
Member of the NCACPA A&A and Not-for-Profit Committees
The history of Statements on Standards for Accounting and Review Services (SSARS 21), issued October 23, 2014, began in 1963 when a CPA firm, Max Rothenberg & Co., accepted an engagement to prepare financial statements for the 1136 Tenants Corporation, and now 51 years later, CPAs can once again prepare a client’s financial statements without being under the requirements of an assurance engagement.
SSARS 21 is the culmination of the efforts from Clarity Project for SSARS similar to the one done on the SASes. SSARS 21 supersedes all SSARS except SSARS 14 on proforma financial statements. That SSARS will be reissued as a separate SSARS. The end result is AR-C 60—General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services; AR-C 70—Preparation of Financial Statements; AR-C 80—Compilation Engagements; and AR-C 90—Review of Financial Statements. The Clarity Project included updating the SSARS by using the drafting conventions adopted by the Accounting Standards Board in clarifying the auditing literature including the use of bullets, separating requirements from application material and establishing objectives.
SSARS 21 creates a new level of service called “preparation of financial statements,” and even though it will look like what firms might perform for a compilation, “preparation” is a non-attest service, does not require independence, and soon is expected to be excluded from peer review. Compilations are attest services which do not provide any assurance. An engagement letter, signed by both the client and the firm, will stipulate the level of service—preparation or compilation.
In 1963, the Rothenberg Firm issued the financial statements which were then commonly referred to as “plain paper unaudited” statements. After the New York Supreme Court affirmed a judgment against the Firm in 1971, the Accounting and Review Services Committee of the AICPA, seven years later in 1978, issued SSARS 1, Compilation and Review of Financial Statements.
Today SSARS 21, in effect, returns to the 1960s era by promulgating “preparation.” Financial statements will have, at a minimum, the legend on each page “no assurance is provided.” Before SSARS 1, such statements, as in the Rothenberg case, were called “unaudited.”
Under SSARS 21, the service of “preparation,” is defined:
- “An engagement to prepare financial statements is a non-attest service and does not require a determination about whether the accountant is independent of the entity.”
- “In addition, an engagement to prepare financial statements does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or conclusion on the financial statement or otherwise report on the financial statements.”
The required documentation for the preparation service is an engagement letter signed by both the accountant and management and a copy of the financial statements.
In a preparation engagement, SSARS 21 prohibits the issuance of an accountant’s report. The accountant may elect to issue a disclaimer in the form of a transmittal letter that reads:
“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.”
The CPA is also to conform the titles on the financial statements to titles which are in accordance with generally accepted accounting principles. When the statements exclude full footnote disclosure, the CPA must make that known with a legend on the financial statements, typically on the initial page.
What happens when a CPA is engages to “prepare” monthly financial statements, and also is engaged to perform an assurance engagement at year end? According to SSARS 21, “…performance of the preparation services may impair independence (at the yearend) unless the safeguards described in this subtopic (professional standards, ET sec. 1.295) are met.” In general, the CPA cannot assume management responsibilities and remain independent.
The effective date is for financial statements prepared for periods ending on or after December 15, 2015. Early implementation is permitted.
Most of the prior requirements for performing compilations and reviews remain intact with several important changes including the emphasis on the key definitions
Unconditional Requirements: When the word “must” appears within a standard, the accountant may not modify its application.
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.
Among other major changes in SSARS 21: Management use only financial statements (SSAARS 8) will no longer apply when SSARS 21 is effective. One engagement letter can include both preparation and other services such as a compilation or review and can cover multiple periods, although these so called “evergreen” letters are not recommended.
- New version of the attest report with only one paragraph to draw attention to the different level of service.
- Engagement letter required to be signed by both the CPA and the client.
- Evidence is required that the financial statements reconcile to the accounting records.
- Misstatements are to be accumulated and evaluated with the determination as to whether modifications should be made to the financial statements.
- Various changes to the review report.
Brad Johnson, CPA, MS, is an auditor with the CPA firm Minor, Anglin & Associates, PA, in Durham. He is a member of two NCACPA committees—Accounting & Attestation and Not for Profit. He has over twenty years of experience in private industry as a controller and CFO.