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Saturday, November 15, 2014

SSARS 21: Bringing Accounting and Review Standards into the 21st Century


The American Institute of Certified Public Accountants (AICPA) has issued Statement on Standards for Accounting and Review Services (SSARS) No. 21. Some analysts say this update is the biggest change to the accounting and review standards since they were issued more than 35 years ago.

SSARS 21 significantly improves the old standards. The clarified guidance will help financial statement users differentiate between when an accountant performs a compilation engagement, prepares the financial statements or merely assists management in preparing financial statements. This distinction is critical in a cloud-computing environment where internal management and external advisors often collaborate contemporaneously on financial recordkeeping.

Accounting and review standards clarified
SSARS 21 uses the reference “AR-C” to distinguish the clarified accounting and review standards from the old (“AR”) ones. For instance, AR-C 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services, provides an overview to clarify accountants’ professional responsibilities when performing preparation, compilation and review engagements.

As CPA firms implement SSARS 21 during the next year, they’ll follow three other clarified standards, listed in the ascending order of assurance each service level provides:

  1. AR-C 70, Preparation of Financial Statements,
  2. AR-C 80, Compilation Engagements, and
  3. AR-C 90, Review of Financial Statements.

The clarified standards supersede all existing guidance, except AR Section 120, Compilation of Pro Forma Financial Information, which the AICPA plans to review in 2015. A significant portion of the changes brought forth under SSARS 21 will happen behind the scenes as accountants work on preparation, compilation and review engagements. However, CPA clients will notice four noteworthy changes:

  1. “Management use only” compilation agreements eliminated. If your CPA has been providing this service for your business, you’ll need to decide whether to upgrade to a full-fledged compilation (or review) engagement or to simply receive prepared financial statements (below) when the new guidance goes into effect.

  2. “Preparation of financial statements” added. The revised guidance specifically carves out preparation of financial statements as a separate type of non-attest service that a third party, not just management, may use. In previous years, your CPA likely performed this service for you when preparing your tax returns or compiled, reviewed or audited financial statements. Now the clarified guidance tells accountants when and how to conduct preparation engagements.

    For instance, if the financial statements will be used by another CPA to perform your year-end review or audit, a preparation service may be appropriate. To ensure that financial statement users won’t be misled, the guidance requires that every page of prepared financial statements include a legend stating that no assurance is being provided. Alternatively, the accountant may issue a disclaimer report that indicates they did not provide assurance—or upgrade the client to a compilation (or review) engagement.

    If applicable, the face of prepared statements (or the footnotes) must describe any special purpose framework, such as the cash or income tax basis of accounting, used to prepare the financial statements. In addition, the report must disclose any significant deficiencies in prepared financial statements, such as departures from special purpose frameworks or inadequate disclosures.

  3. Reports will look different. Under existing guidance, standard compilation reports generally are three paragraphs long. SSARS 21 shortens the standard compilation report to just one paragraph. However, another paragraph must be added if the statements are prepared under a special purpose framework.

    In addition to identifying any special purpose framework used, review reports may be required to add emphasis of matter (EOM) and other matter (OM) paragraphs, if your accountant believes stakeholders should be aware of a significant matter or to help them better understand the financial statements. EOMs elaborate on concerns already disclosed in the footnotes. OM paragraphs relate to matters that aren’t covered in the footnotes.

  4. Engagement letters require signatures. For prepared, compiled and reviewed financial statements, your accountants will be required to obtain an engagement letter that’s signed by you (management) and them. After adopting SSARS 21, your accountant will issue compiled financial statements only when they’re specifically engaged to do so via a signed engagement letter.

SSARS 21 is not required to go into effect until periods ending on or after December 15, 2015, but early implementation is permitted.

Our Thoughts
While auditors are not required to begin using the standards until the end of 2015, we believe that the new guidance is a significant improvement from the previous standards. Therefore, we plan to adopt the new standards for years ending on or after December 31, 2014. We will be contacting each of our clients, and available to answer questions for non-clients, over the next couple of months to determine whether a compilation or preparation engagement is appropriate for their individual circumstances.

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