By Jeffrey L. Sailor, CPA
In 1978, we had SSARS 1, the first official guidance on compilations and review. Fast forward to 2010, and the compilation and review world is still operating under the same basic guidance. Although 18 standards and various interpretations have been issued subsequent to SSARS 1, the compilation and review standards have remained relatively unchanged until now.
On Dec. 30, 2009, the Accounting and Review Services Committee (ARSC) released the long-awaited SSARS 19. This AICPA pronouncement represents the first major revision to compilation and review standards in more than 30 years.
During the years the ARSC has received numerous comments from various groups, including users and smaller firms, about the lack of transparency of financial statements and overall guidance. In response, the ARSC issued SSARS 19, which supersedes prior guidance and includes three sections: overall framework; compilation standards and guidance; and review standards and guidance.
It’s important to note that compilation issues now are completely separated from review issues. This was done in response to concerns from many smaller practitioners and firms that limited their services to compilations. Those constituents felt it was confusing to mix review issues with those of compilations.
SSARS 19 is effective for financial statement periods ending after Dec. 15, 2010, with one exception for early implementation.
Most of the commonly accepted practices established by prior standards and interpretations have been retained. In recent years, peer reviews and users have brought the ARSC’s attention to various issues that never were considered 30 years ago. Consideration of those issues resulted in various interpretations and specific-issue standards. The improvement is that the myriad of recent guidance now has been incorporated into one organized document.
Although this is a very comprehensive standard that incorporates new and existing information, this article focuses on the key new elements.
Standard Revises Compilation and Review Framework
The framework section of the standard provides definitions; objectives and limitations of compilations and reviews; an outline of professional requirements; the hierarchy of SSARS literature; the elements of compilation and review engagements; and materiality.
This is the first time the concept of materiality has been discussed in the SSARS. The statement says misstatements would be considered material if they would influence the users’ decisions. This consideration would include the surrounding circumstances, including the users’ needs. In a review, practitioners should consider these factors when selecting procedures.
A new element for compilations and reviews is the requirement of a written engagement letter, or similar written communication, with management regarding the understanding of the engagement to be performed. It’s important to understand that this applies to all compilations, regardless of the frequency of issuance or the basis of accounting used. Thus it would apply to monthly modified-cash bookkeeping services (assuming financial statements are submitted), as well as annual reviews.
Another common element for compilations and reviews is the requirement for enhanced documentation. Although this may not create any major practical changes regarding reviews, it imposes a new level of responsibility regarding compilations.
For compilations, the standard states that the documentation is the principal support for the report, and that it must provide a clear understanding of the work performed. Although the content of the documentation will vary depending on the circumstances, it should always include the engagement letter; issues noted and how they were handled; and the communication of illegal acts or fraud, if any.
The illustrative reports have been changed for compilations and reviews. Practitioners will need to take care to update all reports to conform to the new requirements. One major change is that the identification of GAAP now includes the country of origin. Before SSARS 19, this was required only in audit reports.
Report May Contain Reason for Lack of Independence
Practitioners have been, and still are, allowed to issue a compilation report without being independent, provided the lack of independence was disclosed in the report. However, until now, the reason for the lack of independence was not allowed in the report. So, if a user wanted to know the reason for the lack of independence, they had to contact the practitioner.
Because of numerous requests for better transparency in reporting, the committee decided to allow the disclosure of the reason in the report. Although there is no guidance regarding how much or how little to say about the matter, two points are clear. First, it is an option, not a requirement. Second, if practitioners choose to disclose the reason, they must disclose all reasons. Early application is allowed for this disclosure for any reports issued after Dec. 30, 2009.
SSARS Now Includes Review Concepts
Regarding reviews, SSARS literature introduces and discusses the concept of “review evidence” for the first time. The standard explains that through analytical procedures, inquiries and other specific procedures, based on professional judgment, practitioners will accumulate review evidence sufficient to provide a reasonable basis for obtaining limited assurance that no material modifications will need to be made to the financial statements. The standard also emphasizes the fact that practitioners should tailor review procedures to meet the circumstances, and that practitioners should focus on areas where there is a greater risk of misstatements.
It’s important to note that the goal in a review still is only “limited assurance.” The exposure draft of SSARS 19 had changed the level of assurance in a review from “limited assurance” to “moderate assurance” to be more in line with international standards. However, because the international standard is being reconsidered, the committee decided to wait and leave the level at “limited.”
The exposure draft also would have permitted the performance of a review while the practitioner was not independent because of the performance of certain non-attest services related to internal control. However, respondents met this with considerable comments, positive and negative. So, to give the issue proper attention, the committee decided to readdress it in 2010.
The economic environment has changed dramatically during the past 30 years, as have the needs of financial statement users. With the restructuring of compilation and review standards in SSARS 19, practitioners will be better prepared to respond to those needs.
Jeffrey L. Sailor, CPA operates a practice in Ocala and is president of Jeff Sailor Seminars, a NASBA and QAS sponsor of professional continuing education.