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Am I “Preparing” Financial Statements?

Financial-statements-wordartI meet many members throughout the year at various AICPA conferences and their input is truly valuable. We discuss the issues they are encountering in practice and guidance that would help them. Over the past few years, a common question concerned whether members have “prepared” financial statements for their clients.

Each of their scenarios has provided their own unique set of circumstances and it has been insightful talking through how they make judgments about whether the accountant should follow the reporting requirements for compilation engagements. The AICPA has provided a great deal of guidance on the topic but, with the increased use of cloud applications, the questions just keep coming up and becoming even more complex.

The issue is one of the reasons that I am so excited about the Accounting and Review Services Committee’s proposed standards, Preparation of Financial Statements and Compilation Engagements. The proposed standards, along with a third proposed standard, Association With Financial Statements, are part of a trio of standards that the ARSC voted yesterday to expose for public comment. The exposure draft is expected to be available by the end of October and comments will be accepted through May 2, 2014 – after busy season. I encourage everyone to take a look at the proposals once they are posted and provide the ARSC with comments. 

The proposals would help members and here’s how: A bright line between preparation and reporting will be drawn and it will be clear. I’m sure practitioners will welcome that change!

The proposed revised compilation standard would apply when the accountant is engaged to perform the service rather than when the accountant prepares and presents the financial statements. This revision addresses the very complex questions as to whether the accountant prepared the financial statements by making the standard apply when the client wants the accountant to issue a compilation report. Since the service would be engagement driven, a report would always be required. The standard would retain the existing requirement to modify the report whenever the accountant’s independence is impaired for any reason. The reason may be described as SSARS 19 permits.

The ARSC further developed a brand new preparation standard that would apply when the accountant is engaged to prepare financial statements but is not engaged to perform a compilation, review or audit. The preparation service would require the inclusion of a legend on each page of the financial statements that the accountant has prepared stating that no assurance is being provided. Both the revised compilation standard and the new preparation standard can be applied to financial statements with or without note disclosures. 

The proposed association standard deals with circumstances where the accountant permits the use of his or her name in a report, document or written communication that contains financial statements on which the accountant has not issued an audit, review or compilation report. The standard is basically the same as AU section 504. Because AU section 504 addressed unaudited financial statements, the Auditing Standards Board and the ARSC determined that it should be moved from the auditing literature.

These planned revisions are in response to members’ feedback on prior proposed standards. We thank members for their input and look forward to your comments on the new exposure drafts.

Mike Glynn, CPA, CGMA, Senior Technical Manager - Audit and Attest Standards, American Institute of CPAs. He serves as the staff liaison to the Accounting and Review Services Committee. In addition, Mike supports the activities of Auditing Standards Board and its subcommittees by assisting members in drafting and deliberating authoritative professional standards and interpretations.

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