Cloud computing and other technology applications can make it hard to tell who prepared a private company’s financial statements, especially if a CPA provides bookkeeping assistance. The existing compilation guidance — issued by the American Institute of Certified Public Accountants (AICPA) in 1978 — may soon be modernized. Under the proposed changes, CPAs will perform compilations only when clients engage them to do so. Unless you specifically need a compilation, you may be able to take advantage of a new, more basic “preparation” standard.
Almost every business prepares reports on its financial performance to help owners, managers, investors and lenders make decisions. The AICPA recognizes that different types of entities have different financial reporting needs. Therefore, CPAs offer three levels of financial statement services: audits, reviews and compilations.
Many smaller private companies opt for compilations, currently the most basic level of financial statement service. In a compilation engagement, a CPA doesn’t dig beneath the surface with any inquiry or analytical procedures. Instead, he or she assists management in preparing the financial statements without expressing an opinion or providing any assurance about whether the statements are in accordance with Generally Accepted Accounting Principles (GAAP) or any other applicable financial reporting framework.
CPAs are bound by the AICPA’s Statements on Standards for Accounting and Review Services (SSARS). When CPAs issue compiled financial statements, these rules require them to:
- Obtain an understanding of the client’s industry and operations,
- Read the financial statements,
- Consider whether the statements appear appropriate in form and free from obvious material errors, and
- Issue a standard compilation report.
Currently, CPAs who prepare and present financial statements must, at minimum, perform compilation engagements. Under the proposed standard, CPAs wouldn’t perform compilations unless their clients specifically engaged them to do so. This proposal would also eliminate the management-use-only exception to the compilation guidance.
Adding preparation services to the mix
Under a new “preparation” standard, CPAs would be allowed to prepare financial statements for management or a third party and not issue a compilation report. This proposed SSARS would apply when a CPA is asked to prepare financial statements but isn’t engaged to perform an audit, review or compilation on the statements.
Every page of a prepared financial statement would be required to include a statement or legend stating that no CPA provides any assurance on the financial statements. In addition, the CPA would be required to ensure that the financial statements adequately refer to or describe the applicable financial reporting framework, adequately disclose any known departures, and aren’t misleading.
Differentiating management-use-only and prepared statements
If approved, the proposed SSARS will significantly change private company compilation engagements for periods ending on or after Dec. 15, 2015. But some companies may opt for early implementation.
For example, suppose a company’s controller gives a CPA access to the company’s cloud computing network to help record fixed assets, depreciation, sales tax and other miscellaneous transactions that are outside the controller’s comfort zone. The owners have been relying on reports generated using QuickBooks® for several years, but now they want financial statements to show to lenders to refinance debt. Does the company need to upgrade its CPA services to a compilation engagement?
The preparation standard would give clients the option to engage a CPA to prepare — but not compile — its financial statements. Then the owners could distribute these prepared financial statements to anyone without establishing CPA independence or issuing a compilation report.
Clarifying everyone’s roles
Financial statement preparation is ultimately management’s responsibility, regardless of the level of CPA involvement in the financial reporting process. The AICPA’s proposed changes to the compilation guidance attempt to clarify everyone’s roles and give small businesses greater flexibility when using outside bookkeeping and accounting expertise.
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