Accurate financial information is critical for the smooth running of any organization. Financial statements provide vital information about any firm’s financial health. Statements on Standards for Accounting and Review Services (SSARS) No. 21 clarifies and revises the standards for reviews, compilations and engagements to prepare financial statements. Clear statements open a window for educated decision-making and strategic planning. Different financial statements focus on different areas of financial performances. Financial documents may include balance sheet, profit and loss statement and cash flow statement. Bulk document scanning of these paper files to electronic files provides better security and more efficient data management.
Business firms often consult a certified public accountant (CPA) to design and run their accounting system. Financial statements that have been reviewed by an outside accountant are referred to as certified financial statements. However, statements that have not been certified are referred to as compiled financial statements. Compiled statements are often considered for the timely release of financial information, as the certifying process can take a considerable amount of time.
Certified public accountants perform a wide range of accounting, auditing and tax activities. These skilled professionals ensure that private businesses, organizations, public firms and government agencies remain compliant by properly reporting revenue and paying taxes.
With the increased demand for reliable financial data, several self-regulatory organizations were formed to create certain standards for preparing such financial data. To correct misconceptions about CPAs’ attestation to the information in such statements, the American Institute of Accountants (AIA) and later its successor the AICPA have issued a variety of standards that addressed the preparation of unaudited, unverified financial statements, called “plain paper” statements.
Learn about SSARS
What about the unaudited financial statements offered by CPA? To assist CPAs in preparing financial documents, the AICPA Accounting and Review Services Committee (ARSC) has issued Statements on Standards for Accounting and Review Services (SSARS). The AICPA sets the rules under which its members can issue reports on financial statements.
SSARS 1, Compilation and Review of Financial Statements was issued by the AICPA in December 1978. Based on this rule, preparation of plain paper financial statements was prohibited. Following SSARS 1, many leaders in the profession lobbied for standards that would allow the preparation of financial statement services that did not require even the application of compilation procedures. Following this, in October 2000, SSARS 8, Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements, was issued. However, this rule did not completely resolve the issue, since some in the profession believed that there still existed a need to help smaller clients prepare their financial statements for distribution outside of management.
SSARS 21 – The Real Help for CPAs
SSARS 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, allowed CPAs to prepare financial statements from the unaudited financial books and records. Along with adding a new service and significantly changing requirements and procedures for other SSARS engagements, it also changed the content of engagement letters, reports, and management representation letters.
SSARS 21, while ostensibly requiring no verification similar to that required in an audit or review, does require some procedures similar to those for a compilation, and failure to follow them can lead to allegations of insufficient performance. The standard also sets the stage for third parties to profess that they placed greater reliance on the financial statements because a CPA was involved in their preparation.
- Section 70 of SSARS 21 “applies when an accountant in public practice is engaged to prepare financial statements.” It also states that the procedures may be used and adapted to the specific engagement circumstances in the preparation of other prospective or historical financial data. It requires the accountant to comply with section 60, “General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services.”
- Section 70.04 states that “an engagement to prepare financial statements does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements or otherwise report on the financial statements.”
In the following sections, SSARS 21 addresses the need for an engagement letter, including management’s agreement that either each page of the financial statements will include a statement that no assurances are given on those statements or the CPA will be required to issue a disclaimer that makes the lack of such assurances clear.
Important matters to consider when performing a financial statement preparation service under SSARS 21:
- Consider the risk involved. The risk cannot be mitigated by extending procedures, because a preparation engagement does not require any verification procedures. Consequently, if verification procedures are used, they may significantly increase a CPA’s exposure to liability.
- Judge whether the level of work is so far below the expertise attached to the CPA designation that it lowers the professional image of the CPA or firm providing the service.
- Client acceptance and continuance is a major factor. Clients desiring compilation service tend to be smaller and less sophisticated, which means that the data will be more susceptible to error. So CPAs should consider the client’s behavior throughout the relationship, and in case of any doubt about management’s integrity, consider withdrawing from the engagement.
- Have a clear idea of the client’s business, structure, its accounting system, environment, and the financial reporting framework being used, including the acceptability of that framework.
- Before preparing documents, consider whether the necessary information and data will be available and reliable. If additional data is needed, it could be interpreted that the CPA was aware that a higher-level service than preparation was needed. This could expose a CPA to greater exposure if the financial statements turn out to be fraudulent or contain material errors.
- Certain representations can be contained in a “representation letter.” Here, they need to be included in a client-signed engagement letter. The letter should state that the client is responsible for-
- the selection of the reporting framework used
- the internal controls related to the preparation and presentation of the financial statements
- the prevention and detection of fraud
- compliance with relevant laws and regulations
- the accuracy and completeness of the underlying financial records and documents and the significant judgments required for the preparation of the financial statements
- providing the CPA with access to information needed to prepare the financial statements
- unrestricted access to client personnel
CPAs are advised to discuss the judgments reflected in the financial statements with management so that the management understands the significant ones and accepts responsibility for the judgments used. SSARS 21 further states that if the CPA “becomes aware that the records, documents, explanations, or other information, including significant judgments” are not complete or accurate, the accountant should bring that to the management’s attention and request additional or corrected information. These guidelines are designed to help CPA firms that are engaged in financial statement preparation for various organizations.