The Statement on Standards for Accounting and Review Services (“SSARS”) No. 19, as issued by the Accounting and Review Services Committee (“ARSC”), is said to be the largest reform to the compilation and review engagement rules since SSARS No. 1, issued in 1978. Several of the major changes are as follows.
Compilations – Lack of Independence Disclosure
Currently, when performing a compilation of financial statements and the accountant’s independence is impaired, the accountant is required to disclose the lack of independence, but cannot disclose the cause.
Under the new SSARS No. 19, the accountant must still disclose the lack of independence but now has the option of disclosing the reason(s). All reasons impairing independence are required to be disclosed if the accountant chooses to provide the disclosure. In addition, the accountant may decide to disclose the reasons for the independence breach in one reporting period and not the next. SSARS No. 19 requires the accountant to use professional judgment in making the disclosure decision.
Review Procedures – Appropriate Level of Evidence
SSARS No. 19 clarifies that a review engagement is an assurance engagement and as such, has similarities to an audit engagement. A review requires the accumulation of evidence to provide the accountant with limited assurance that the financial statements are not materially misstated. An audit requires the auditor to accumulate evidence to provide reasonable assurance that the financial statements are not materially misstated.
SSARS No. 19 clarifies that review procedures should be tailored based on the accountant’s understanding of the industry, knowledge of the client, and awareness of the risk the accountant may unknowingly fail to modify the review report on financial statements that are materially misstated. These procedures may include procedures other than analytic inquiries. The accountant is still required to perform inquiries and analytical procedures in review engagements; however, SSARS No. 19 reminds us the attainment of limited assurance requires the accountant to tailor review procedures to obtain the appropriate level of evidence. This means the inquiry and analytical procedures should be tailored specifically for each client. If the inquiry and analytical procedures result in unexpected findings, the accountant should perform additional procedures that could be similar to those performed in an audit engagement. Two examples are confirming accounts receivable when there is an unexpected increase in the balance at year end, and performing a search for unrecorded liabilities when accounts payable trends do not coincide with expectations.
Engagement Letters Required
Previously, the accountant was required to obtain an understanding with management regarding the services to be performed. It was only suggested that this understanding be in writing, whereas, SSARS No. 19 requires the understanding to be in writing. SSARS No. 19 does, however, leave open the engagement period the written documentation should cover. This enables the accountant to combine monthly or quarterly work with the annual financial statement professional services. We highly recommend review and compilation engagement letters be obtained at least annually, not only to promote communication and excellent client service, but also to ensure the client and accountant understand the engagement and limitations.
What do the new standards mean to you?
You will be required to sign and agree to the terms of an engagement letter. The term of the letter will depend on the policies of your professional services provider.
For compilation engagements:
- If your accountant is not independent, you may want to consider requesting the accountant to disclose the specific reason in their report. For example, if independence is impaired due to the detailed level of accounting services provided, it may be favorable to include that fact so financial statement users do not assume a scenario they may deem to be more severe
- You will see changes in the format of your compilation report
For review engagements:
- You will see changes in the format of your review report
- You may see modifications of the review procedures performed. ACRS’ intention is to require tailored review procedures, in addition to inquiry and analytic, where necessary, based on the accountant’s understanding of the industry, the client, and the associated risks. In order to facilitate the implementation of SSARS No. 19, we suggest early conversations between accountants and clients. It may be that management is already performing procedures the accountants can consider in complying with the professional requirements of SSARS No. 19