Statement on Standards for Accounting and Review Services (SSARS) No. 21 has been effective for more than a year now – for engagements on financial statements for periods ending on or after Dec. 15, 2015. Sufficient time has passed to allow the peer review process to shine a light on some of the implementation issues that firms and practitioners may be experiencing.
The most noticeable change to users of the financial statements is the wording of the standard review (limited assurance) and compilation (no assurance) reports, intended to make it clearer to the readers which level of assurance is being provided and the procedures performed. Unfortunately, there are still a few instances where reports have been issued with the superseded SSARS No. 19 wording from the standard in effect in 2014.
Many financial statements are prepared using a special purpose framework; two being cash basis and income tax basis. In this case the accountant’s report must be modified to indicate that management has concluded that the special purpose framework is appropriate, and the report must include an emphasis-of-matter paragraph that refers to the accounting method being used. Certain other situations also require modification to the standard review and compilation reports. Some note a departure from GAAP, include supplemental information not required by GAAP, or fail to include some or all disclosures required under GAAP.
We now have the option of a preparation engagement where no report is issued. Most preparation engagements that I have encountered have not used disclosures. In these cases the statements must still indicate the method of accounting if GAAP is not used, and indicate that disclosures normally included in a financial statement are not included.
Preparation engagements under SSARS are not the same as merely assisting clients in preparing statements, which is more the nature of a bookkeeping service and not subject to SSARS. The appendix to the standard provides examples of the types of services that are subject to SSARS and those that are not. It generally comes down to what your client has engaged you to do and whether any professional judgment is required on the part of the accountant. In addition, if the only engagements your firm performs are preparation engagements, then the firm is not subject to peer review.
Signed engagement letters are required for all engagements performed under SSARS, including preparations. Representation letters are required for reviews. These are not new requirements.
Ethics standards now require CPAs to address the impact of nonattest services on independence for all engagements. This is no different than in the audit environment. To remain independent and avoid the risk of “self-review,” the client must be able to accept responsibility for any nonattest services performed by the accountant. The most common are preparation of financial statements, preparation of income tax returns, and bookkeeping assistance. Management must have someone with the requisite skills, knowledge, and experience (SKE) to accept that responsibility. CPAs need to document our consideration of that SKE, and conclude that we remain independent. Independence is required to perform a review engagement. A compilation engagement can be performed without being independent, as long as the lack of independence is communicated in the accountant’s report. Independence is not required in a preparation engagement.
To perform any level of service under SSARS, a CPA must understand the industry, be familiar with the client, and understand the accounting framework being used.
Inquiry and analytical procedures are required as part of all review engagements. Inquiries are made of appropriate personnel to understand the client. Expectations are developed and compared to actual results. Any significant unexpected result, which might be an indication of a misstatement, would also be part of the inquiry process. We often see that results are simply compared to the prior year and the differences explained. However, based on inquiry, we might expect something different than the prior year, and the actual results might then be as expected and not indicative of a potential issue. Results that are not consistent with expectations are brought to the attention of management for consideration of the impact on the financial statements.
The CPA is not required to evaluate the ability of the client to continue as a going concern. However, if information surfaces that raises possible doubts, then the impact on the financial statements must also be considered by management.
Documentation of the work is needed to demonstrate that the engagement has been performed in accordance with the standards under SSARS. Lack of documentation of the work is the most common issue raised by peer reviewers. In many cases the firm will advise the peer reviewer that procedures were performed, but that the work was not documented. However, only work that is documented is considered to have been performed.
Mitchell K. McKenney, CPA, is managing partner for Buckler McKenney & Nadzadi PC in Monroeville and a member of the PICPA Accounting and Auditing Procedures Committee. He can be reached at firstname.lastname@example.org.