For years, clients have wanted to get quick and reasonably priced (read “inexpensive”) financial data at interim and year-end from their CPAs. CPAs may have wanted to deliver, but until Statement on Standards for Accounting and Review 21 (SSARS 21) and the new preparation service, this could not be done without an accountant’s compilation report. Effective Dec. 15, 2015, or earlier if so adopted, AR-C Section 70 (Section 70) permits a preparation service of financial statements, or virtually any financial data, without CPA “association” with the information. There is no assurance, no verification, and no report provided by the CPA. Will this be a dream service or a nightmare? As is usually the case, it depends.
The preparation services in Section 70, while deemed a nonattest, do require some formalized documentation, compliance with some performance standards, and a healthy bit of due professional care. This column reviews the guiding caveats that CPAs must consider and follow.
Prepared financial statements are general-use reports, meaning that a client may use or distribute the statements in any way and to anyone he or she may choose. So, while the preparation service provides no assurance, if third-party users such as bankers receive these statements, it is likely that decisions will be made, in some part, based on those statements. And if those third parties accept prepared statements for, say, loan financial covenants with no accountant’s report, and something goes awry, we don’t know yet what the result may be.
Even though prepared statements provide no assurance or verification, there are due professional care requirements:
- The client must use a known, applicable financial reporting framework. The CPA’s knowledge must extend to the point that the CPA can recognize whether or not there is a material departure from the framework. If that framework is other than Generally Accepted Accounting Principles, the framework must be disclosed or communicated on the financial statements. While footnotes are optional, material departures or omissions should be disclosed; if the financial statements are likely misleading, proper communication of those matters must be considered and disclosed.
- If the CPA is providing other non-attest services (such as bookkeeping, write-up, or payroll), these services tend to communicate greater knowledge of the underlying information, and suggest verifications have been provided, and third-party users may project a greater assurance even though none is provided.
- The CPA is knowledgeable about the client, the client’s business, and the client’s industry.
- Terms, agreed-to corepresentations, and expectations must be formalized in an engagement letter signed by the client and the CPA.
Each page of the financial statements, and any attachments, must display a legend indicating that no assurance is provided. If the client will not permit such a legend, the CPA must either affix an accountant’s disclaimer report to the financial statements or step the engagement up to a compilation (and report thereon). Either way, there is letterhead association. Further, since only CPA-prepared financial statements will have the “no assurance” legend, third parties will likely know that the CPA prepared the financial statements.
A preparation service is not appropriate for a period when the CPA is auditing, reviewing, or compiling the financial statements, but the CPA may provide preparation at any interim date and still audit, review, or compile the year-end. While the CPA need not assess independence in a preparation engagement, the CPA would still be required to de-termine whether this nonattest service might impair independence in an attest engagement.
If prepared financial statements are the only financial reporting engagements the CPA undertakes, there would be no requirements for peer review.1
However, if the CPA provides other attest services that do require peer review, preparation engagements may be selected for inclusion in the CPA’s peer review.
Other important considerations for the CPA include the following:
- As a totally new financial statement service, users may not understand what they are receiving, and could misinterpret the representations.
- The issuance of Section 70 with SSARS 21 for preparation services replaces management-use-only financial statements (SSARS 8), which was a restricted-use engagement, and one where the accountant was not responsible to alert the user to the reporting framework or departures thereto.
- While preparation may be an extension of bookkeeping services, it is more than that: it has performance and documentation standards and requirements. Plan, budget, and price accordingly. It is far more involved than clicking print in a client’s QuickBooks data file.
- The CPA must recognize the requirements of the Code of Conduct. The CPA must maintain objectivity and integrity,2 be free of any conflicts of interest, and not knowingly misrepresent the facts when performing any professional services.
Extensive involvement with the internal accounting can rise to the level of assuming management responsibilities, which result in the management participation threat to independence so significant that no safeguards could reduce the threats to an acceptable level, impairing independence and thus prohibiting the CPA from performing an independence-required attest service for the client or for a material related-party entity.
The CPA must prepare before undertaking preparation services: learning the scope extent and related requirements for the preparation services, educating the client about the advantages and limitations of a preparation service, and communicating with third-party users about the preparation service to ensure they would accept the financial statements without assurance or association.
PICPA’s Accounting and Auditing Procedures Committee has a brochure that can help you discuss and distinguish optional financial statement reporting engagements. It is available for members to download and use with clients and third-party users. You can access it at www.picpa.org/reportingengagements.
1 Note that the profession is currently reevaluating peer review and potential changes. There is no indication at this time that the Section 70 peer review status will change.
2 A CPA must apply the Conceptual Framework to assure objectivity and integrity by assessing threats and safeguards relative to the seven threat areas: adverse interest, advocacy, familiarity, management participation, self-interest, self-review, and undue influence.
James J. Newhard, CPA, is a sole practitioner in Paoli, a CPE presenter for Loscalzo Associates in Shrewsbury, N.J., and a member of the
Pennsylvania CPA Journal Editorial Board. He can be reached at firstname.lastname@example.org.