The Statement on Standards for Accounting and Review Services (SSARS) No. 21, Statement on Standards for Accounting and Review Services: Clarification and Recodification — better known as SSARS 21 — is effective for the calendar year end 2015. Many have heard about SSARS 21 in some form or other. But do you really know what it entails and the changes this new guidance brings?
SSARS 21 is the most significant change to the standards on accounting and review service since their inception in 1978. The American Institute of CPAs (AICPA) Accounting and Review Services Committee’s (ARSC) efforts to clarify and revise standards for reviews, compilations and engagements to prepare financial statements resulted in SSARS 21 in October 2014. Why? A big factor was that the submission trigger, which determined the applicability of the compilation standards, was no longer practical in today’s technology age. The need for an engagement-driven standard consistent with review and auditing standards led to SSARS 21.
SSARS 21 is broken out into four sections: Section 60 — General Principles, Section 70 — Preparation of Financial Statements, Section 80 — Compilation Engagements and Section 90 — Review of Financial Statements
While early adoption was permitted, the guidance is effective for periods ending on or after Dec. 15, 2015.
Section 60: General Principles for Engagements
This section replaces AR section 60 — Framework for Performing and Reporting on Compilation and Review Engagements and helps accountants understand their professional responsibilities. It includes guidance on ethics, professional judgment, conduct of the engagement, engagement level quality and acceptance and continuance.
Section 60 adds engagement partner responsibilities and acceptance and continuance requirements to all SSARS engagements and now a signed arrangement letter is required for all preparation engagements.
The standard refers to an “Engagement Partner,” defined as the person who is responsible for the engagement. It can be a partner or any other person in the firm who has overall responsibility for the engagement and, when required, has the appropriate professional legal or regulatory authority. Firms will have to decide who they will designate as this engagement partner.
AR-C 60.19 states that the engagement partner of a SSARS engagement should possess adequate competence and capabilities to perform the engagement. So what is the engagement partner responsible for? AR-C 60.20 says:
- Overall quality of the engagement
- Directing, supervising, planning and performing the engagement to comply with all applicable professional standards and ethical and legal requirements
- Appropriateness of the accountant’s report, if applicable
- Performing the engagement in accordance with the firm’s quality control policies and procedures
The engagement partner must emphasize that quality is essential in a SSARS engagement by ensuring that the performance of work complies with applicable professional standards and regulations and the firm’s quality control policies and procedures. Additionally, it’s critical to issue an appropriate report when applicable to be able to raise concerns without fear of reprisals.
AR-C 60.24 states that an accountant should not accept an engagement to be performed in accordance with SSARS unless they believe that relevant ethical requirements will be satisfied, that they will receive reliable information needed to perform the engagement and that they have no cause to doubt management’s integrity.
Section 70: Preparation of Financial Statements
This section applies to an accountant in public practice engaged to prepare financial statements but not engaged to perform an audit, review or compilation. This is a nonattest service, so the determination of independence is not required. However, if the client or an affiliate is also an attest client, the performance of this service could affect independence. The guidance of Interpretation 101-3 of the Code of Professional Conduct remains applicable.
A report is not required to be issued, but the standard does require that, at a minimum, each page of the financial statements should indicate “no assurance is provided.” This will allow users of the financial statements to know that there is no assurance provided.
If a statement cannot be included on the face of each statement, then the accountant is required to issue a disclaimer so it is clear that no assurance is provided or perform a compilation in accordance with section 80.
If there are modifications that would otherwise be in an accountant’s report on the financial statements, then these must be included in the notes to the financial statements, or if disclosures are not included, on the face of the financial statements. These include, but are not limited to, departures from U.S. Generally Accepted Accounting Principles (GAAP), special purpose frameworks, omitted or incomplete disclosures and going concern modifications.
It is a significant challenge to determine whether an accountant has been engaged to prepare financial statements or is just assisting in preparing financial statements (i.e. bookkeeping, which is not subject to SSARS). Table 1 provides guidance.
TABLE 1: Is it statement preparation or bookkeeping?
|Examples of Services for which Section 70 Applies||Examples of Services for which Section 70 Does Not Apply|
|Preparing financial statements prior to audit or review by another accountant||Preparing financial statements when the accountant is engaged to perform an audit, review or compilation of such financial statements|
|Preparation of financial statements for an entity to be presented alongside the entity’s tax return||Preparation of financial statements with a tax return solely for submission to taxing authorities|
|Preparation of personal financial statements for preparation alongside a financial plan||Preparing personal financial statements for inclusion in written personal financial plans prepared by the accountant|
|Preparing financial statements in conjunction with litigation services that involve pending or potential legal or regulatory proceedings|
|Maintaining depreciation schedules|
|Preparing financial statements in conjunction with business valuation services|
|Preparing a single financial statement, such as a balance sheet or financial statements with substantially all disclosures omitted||Drafting financial statement notes|
|Preparing or proposing certain adjustments, such as those applicable to deferred income taxes, depreciation or leases|
|Using the information in a general ledger to prepare financial statements outside of an accounting software system||Entering general ledger transactions or processing payments (general bookkeeping) in an accounting software system|
Professional judgment will be required to determine whether the accountant is engaged to prepare financial statements or is merely assisting. Table 1 presents many common situations but discussion with the client will be important to determine the client’s specific needs.
You may be asking whether the new financial statement preparation service that has been created by SSARS 21 is the same as the pre-SSARS 21 management — use only compilation engagement. These are not the same, even though they are both nonreporting options. SSARS 21 Section 70 enables the CPA to prepare financial statements for use by a third party, not just management, without having to issue a compilation report.
If the financial statements are prepared in accordance with a special purpose framework, the CPA is required to describe the financial reporting framework used. The financial statements must disclose, either on the face of the financial statements or in a selected note or notes, any material misstatements such as those caused by a known departure from the applicable financial reporting framework or inadequate disclosures.
In a management-use-only compilation engagement, a CPA would state in the engagement letter that material departures from the applicable financial reporting framework may exist and that the effects of those departures, if any, may not be disclosed.
Using a comprehensive disclosure checklist will be important to capture all required disclosures for a preparation engagement.
So how is a preparation engagement different to a compilation engagement? Well, both need an engagement letter that is signed by management. There is no determination of independence for a preparation engagement, but this does need to be considered for a compilation. For a preparation engagement you need a statement on each page of the financial statements indicating there is no assurance and a report is required for a compilation. Third-party use is allowed for both preparation and compilation engagements. Omission of disclosures is allowed, if disclosed for both, and departures from the applicable framework must be disclosed for both as well.
There are many similarities between the two engagements, and the new preparation engagement now allows more flexibility in being able to provide services to clients to fit their needs.
Section 80: Compilation Engagements
This section applies to engagements to compile and report on financial statements. It does not matter if the financial statements are for management use only or used externally — either way, a report is required. Under SSARS 21, accountants perform compilations when engaged to do so. The submission trigger that drove whether or not to compile has been removed.
Accountants are required to obtain an engagement letter signed by the accountant and management or those charged with governance, as appropriate. Management must sign the letter to ensure they have read it and understand the terms.
The compilation report is now streamlined with no headings, so as to differentiate it from a review and an audit. The report is also much shorter; one paragraph instead of three and no title, but the city and state where the accountant practices should be included. Additional paragraphs are required for the following:
- Special-purpose framework
- Substantially omit all disclosures
- Independence impaired
- Known departure from applicable financial reporting framework
- Supplementary information
Section 90: Review of Financial Statements
This section applies to engagements to perform a review of financial statements. A signed engagement letter by the accountant and management is required for all review engagements. There are very few changes to this section other than getting it in line with the clarity redraft.
The review report does look different because it uses headings and the accountant is required to name the city and state of the issuing office. This can be achieved by using letterhead.
While pre-SSARS 21 guidance stated that emphasis paragraphs were never required, the new guidance requires an “emphasis of matter” and “other matter” paragraphs to be included in the accountant’s report for the following items:
- Financial statements prepared in accordance with a special purpose framework
- A changed reference to a departure from the applicable financial reporting framework when reporting on comparative financial statements
- Reporting on comparative financial statements when the prior period is audited
- Reporting a known departure from the applicable financial reporting framework that is material to the financial statements
- 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 review report on the revised financial statements differs from the accountant’s review report on the original financial statements
- Supplementary information that accompanies reviewed financial statements and the accountant’s review report thereon
- Required supplementary information
If the accountant expects to include an emphasis of matter or other matter paragraph in the accountant’s review report, the accountant should communicate with management regarding this expectation and the proposed wording of the paragraph.
The accountant is required to obtain evidence that the financial statements reconcile to the accounting records. This is most commonly done by comparing the financial statements to the entity’s general ledger or trial balance.
If other accountants have audited or reviewed the financial statements of significant components, such as a subsidiary, then the accountant should obtain and read these reports. If responsibility for the other accountants’ work is not assumed, then reference to the review or audit report should be made.
The accountant is required to accumulate and evaluate misstatements while performing a review and determine whether modifications should be made to the financial statements. In addition, if there are material known departures from the applicable financial reporting framework, the accountant should consider whether modifications to the standard review report are adequate or whether he or she should withdraw from the engagement.
SSARS 21 is here. It’s the new reality and it’s effective for calendar year 2015. The new standard has created a new service: a preparation engagement. Preparation engagements allow flexibility in what service to provide to a client to best suit their needs. It allows an accountant to prepare financial statements without the issuance of a report and does not require the consideration of independence.
SSARS 21 now requires an engagement letter signed by management to ensure they understand the terms. Compilation engagements are now driven by what the accountant has been engaged to perform and not the old submission trigger — and a report is always required. The compilation report is streamlined to distinguish it from assurance reports. Review engagement guidance was basically updated to conform to clarity standards but now emphasis of matter and other matter paragraphs are required.
The new guidance needs to be adopted by firms and will require staff training and updates to the quality control policies. This is an opportunity to have those discussions with clients to find out what they really need; if a preparation engagement meets their needs, it should be implemented. The new reality is here and you should now be ready to embrace it.
As published in Disclosures