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Hot Topics and FAQs from the A&A Technical Hotline

The AICPA Technical Hotline provides non-authoritative advice to members on matters of accounting and financial reporting, audit, attest, compilation and review service standards. This podcast, the AICPA Insights Live webcast on Nov. 22, addresses some of the more commonly asked questions over the past year in the areas of audit, attest, compilation and review engagements. Highlights include the new clarified audit standards, verification requests, supplementary information and Service Organization Controls reporting. (Email subscribers can listen to the podcast on our website).

Hot Topics and FAQs from the A&A Technical Hotline

This podcast was originally recorded Nov. 22. 


MODERATOR:  Now let's get to today's webcast covering "Hot Topics and Frequently Asked Questions from the A & A Technical Hotline.” Kristy Illuzzi joins us today from the AICPA's Accounting and Auditing Technical Hotline team, where, in addition to answering member inquiries, she also contributes to AICPA technical practice aids.  Prior to joining the AICPA, Kristy was the Controller for EngenderHealth, an international not-for-profit organization focused on women's reproductive health.  In addition to overall financial management of the organization, she traveled to Ghana and Kenya to assist field staff in implementation of QuickBooks software.

Kristy was also an experienced manager for Grant Thornton LLP in the nonprofit practice.  Kristy began her career with Arthur Andersen in 1997, where she worked on audits of a variety of Fortune 500 clients, including the Omnicom Group Inc.

Kristy, thanks for being with us today.

KRISTY ILLUZZI:  Thanks, Joel, for that introduction; I appreciate that.  Good afternoon, everybody.  We'd like to start the presentation with our general disclaimer, if you will, and that is that the Technical Hotline and the Center for Plain English Accounting provide non-authoritative advice on accounting, auditing, attestation, compilation and review service standards.  Please note that anything we discuss is our position in light of particular circumstances and is not an official position of the AICPA.  Application of US GAAP is the responsibility of company management and you can read the rest of that disclaimer at your leisure.

So what we'd like to cover today are some hot topics and frequently asked questions that are coming through the AICPA Technical Hotline as well as our new Center for Plain English Accounting, which is part of PCPS, for those of you that are members there.  I suggest taking a look on a PCPS webpage at AICPA; there's some additional information about this new initiative, the Center for Plain English Accounting.  We somewhat act as a national office, if you will, for firms that don't have a national internally, so it's a great resource for our AICPA members.

Some of the items that we will be covering include financial statement adjustments and restatements; compilations with -- that omit substantially all disclosures or all disclosures; the difference between compilation and bookkeeping services, which is one we get quite a bit on the Technical Hotline; GAAP departures for VIEs or variable interest entities, that is still a hot topic even a few years out now from the FASB standards; compiling OCBOA statements or other comprehensive basis of accounting statements, so it could be tax, cash, modified cash and the new framework for small and medium-sized entities would be covered there; as well as -- this is a very hot topic with AICPA right now, regulatory recording and verification requests for what some will call "comfort letters" or some variation thereof.  So this is what we hope to learn today and I hope to give you some information that will help you on these types of engagements and with these issues.

So let's get into the first and that is financial statement adjustments and restatements.  This is a hot topic probably after January, February, March, when companies have actually potentially filed statements and then something comes up that causes you to go back and adjust those statements.  And some things to consider are, if you have adjustments that are below materiality, you may not need to go back and restate those previously issued financial statements; you always look at materiality as sort of the first factor when you're dealing with any sort of adjustment or restatement.

And the auditor is required to quantify the effect of any unrecorded adjustment and put those past adjustments in the representation letter.  So if you do have an adjustment below materiality that comes up as like a subsequent event, you should probably go back and adjust your representation letter and add the effect and make sure, of course, that, overall, with that adjustment, you're still not at materiality, with all of the past adjustments being added up.  And then, again, the overall effect, if that's below materiality, you can most likely pass and don't have to change your audit opinion.

The AICPA can't determine materiality for you.  You know, we will sometimes have people call the Hotline or the Center for Plain English Accounting and they want us to determine materiality.  We really can't do that and that should be performed by the auditor during engagement planning, so, hopefully, you're not dealing with materiality when those adjustments come up.  It should have been something that was determined in the planning process, to determine whether something is material.

Our guidance and AUC -- that's the clarified standard, that's what that "C" stands for; hopefully, we're all getting used to that new nomenclature -- Section 320 has guidance on planning materiality and Section 450 is on the evaluation side.  That's where you would go to get guidance on evaluating those misstatements that you have identified during the audit.  So those are sort of your point places for the authoritative guidance in this area.

Moving on, if you find an adjustment to the part of your financials that is material, do you have to go back and reissue the prior-year report?  There, the answer is maybe.  Now, if you're issuing current-year comparative financials in the short term -- and that is kind of loosely defined as usually within sixty days -- you might be able to just adjust in the current-year report, noting all those prior-year balances have been restated.  And you would typically also emphasize that matter in your audit report, the fact that, "As described in Note X, the company has restated its prior-year accounts receivable balance to reflect whatever it might be," and then you would have a footnote as well that discusses that change in greater detail.

That's something that we get questions about a lot, how to deal with restatements, how do you label the financials?  Do you need an emphasis of matter paragraph?  And the answer is typically yes.  You should clearly, on the statements themselves, anything that has been restated should say so and you should have an emphasis of matter paragraph as well as a footnote that discusses any of those material changes that were made.

Now, there is a question as to whether or not you would reissue previously issued reports and that would involve some auditor judgment.  And you would, of course, think about who received those financial statements, what they were relying upon them for potentially, what the change really did to the client's financial position.  I might say that, if you had a prior-year adjustment that affected a debt covenant ratio and forced the client out of compliance with a debt covenant, that's a pretty good example of where I would not only issue those comparative current-year financials, but probably also go back and reissue that previously issued report if I knew it went to the bank, they were relying on it and it affected their debt covenant ratio.  So that's just one example, but, of course, you would use your judgment there.

If you didn't audit the prior year and it was actually another auditor that was used in the prior year and you found an error, you would want to contact those prior accountants and this does happen quite a bit; we get the question on the Hotline on what your responsibility is for prior-year adjustments when it comes to a prior accountant.  And the first step is always to contact that prior accountant first to see if they're going to go back and reissue their previously issued report or if it's something that you're going to take responsibility for in your report and adjust prospectively.

So -- but the first step is always to contact that prior accountant.  If they do not get back to you, which we know, in reality, does happen, then you would need to proceed and use your judgment on how you would handle that, if they're not responding to your request.

Prior-period adjustments when showing comparative financials.  Typically, adjustments that are not material, you might just be able to show as a current-year adjustment and would not even to note that there's been a restatement or a change if it's below materiality.  If material, again, best practice is for any prior-year columns to be clearly marked as restated.  I've also seen where, let's say, if it just affects one or two balances or accounts, you might, next to that particular balance, let's say fixed assets, it would say "Fixed Assets, Restated (See Note X)," and refer to it that way.  So it really kind of depends on how pervasive that adjustment is, how many line items on your financial statements that it affects, but it is best practice to clearly note somehow on each statement affected that there has been an adjustment or a restatement and then, in parens, you would refer to the note to the financials that discusses the matter further.

Moving on to our next topic and this one that's a -- also a pretty hot topic.  The Center for Plain English Accounting actually came out this month with an article on this and a paper on compilations that omit substantially all disclosures.  Now, I just want to preface this with: We are giving this information based on the way the SSARS are currently written.  They are redrafting the SSARS and there's exposure draft out there to make some changes; it's not effective yet.  This will change somewhat once that is issued, but this is current practice, at least through 2014.  This is the way that we suggest dealing with compiled financial statements that omit substantially all disclosures and this question does come up quite a bit.

Let's say you have an issue of going concern.  You have a prior-period restatement.  You have a subsequent event that needs to be recognized in those financials and you are dealing with a nondisclosure compilation.  How do you deal with that information?  What do you do?

The current SSARS, as they are written, only allow you to emphasize matters that are discussed in the notes for the financials, so that's kind of where the rub comes in, if you will, or the issue.  Now, as I said before, they are redrafting the SSARS to allow the practitioner to emphasize any matter they wish, even if it is not addressed in the financials and that's kind of to recognize these nondisclosure compilations and how to deal with these issues.  But, right now, it's a little bit trickier the way the SSARS are written.

Now, one thing you can do is consider requesting that management include a note to disclose the issue.  There is nothing in the SSARS that precludes you from having one footnote.  You're still omitting substantially all disclosures.  The wording changes a little bit on those note disclosures and we'll get into that, but there's nothing that would preclude you from doing that.  And you are allowed to do a nondisclosure compilation as long as it does not lead to a misleading presentation of those financial statements.

One might say that leaving something out like a recognizable subsequent event or a material restatement might be deemed misleading, so you want to be careful if you're leaving out items that really could be construed as misleading.

Can the financial statements, when you're omitting substantially all disclosures, also omit the statement of comprehensive income?  And the answer is yes.  You would have a note in your report that you're omitting both the statement of comprehensive income and substantially all disclosures, as required by US GAAP.  And the AICPA actually does have some sample wording on this that I put into the presentation that you would actually put in your report, to note that both the statement of comprehensive income and substantially all disclosures are missing.

What if management wants to present some disclosures but not all?  And this is kind of what we were talking about before, if you decide to include, let's say, one disclosure about going concern or a restatement or a subsequent event or a debt covenant violation, you are allowed to do that.

They should be labeled; instead of regular just notes to financial statements, it would be labeled, "Selected information.  Substantially, all disclosures required by accounting principles generally accepted in the United States of America are not included."  That label would typically not be appropriate if only one or two disclosures has been omitted; that's where you get into -- that's US GAAP, but then you have a departure from the applicable financial reporting framework, rather than calling it "Select information.  Substantially, all disclosures have been -- have not been included."

So it would be -- in the case where, let's say, there's a going concern, you think that it might be misleading to not let the reader know that, management agrees to emphasize that matter, to put a footnote in their report, you would label that going concern note as "Selected information.  Substantially, all disclosures required by US GAAP are not included," and then you would refer to that note in your compilation report.  It would say something like, "As described in Note X, the company has issues with continuing as a going concern," and you would then describe that matter further; management would describe it in the footnote that you add to those statements.

Compilation versus -- oh, and we have a question from someone that I will offer now.  It's -- this is coming from Kathy and it's "Where would the selected information be labeled?"  That selected information would be where the notes to the financial statements would typically go, so behind the balance sheet, the income statement, the statement of cash flows.  Instead of having a heading note to financial statements, you would have that heading about selected information.  So, essentially, it's treating it the same way you would treat notes to financial statements; it's just labeled slightly different.  So I hope that answers your question, Kathy.

Keep those questions coming; I will be answering them as they come in.

The next topic we're going to cover is compilation versus bookkeeping.  And this is another big one that comes through the Technical Hotline pretty often.  And it's a question of whether or not you actually are performing -- you know, you're engaged to do some bookkeeping or accounting entries for a client, but are you getting into the point of "Ooh, maybe I should structure this as a compilation."  And sort of there's no clear -- clearcut guideline for it.  "This is definitely compilation, this is definitely bookkeeping," but the AICPA certainly does have some guidance in this area.  We also have -- if you have access to our technical practice aids, we have some technical practice aids on this exact issue.

And the first one is, if you're engaged to do all the accounting entries for a client using software, but the client has full access to run their own reports, are you performing compilation services?  And the answer is possibly.  Some factors you want to think about are the process used to create the financial statements and who really is heading up that process or leading that process; whether the client engaged you to prepare financial statements or if that was reasonably expected of the accountant, due to the circumstances; the extent of work effort that they contributed to the existence of the financial statements.

So an example I always give here is, if you have an accountant who is basically cutting all of the checks and posting all of the deposits, but they don't do any closing entries, they don't record depreciation and amortization.  You know, year-end, they don't do any accrual or anything like that.  You know, the likelihood that they are performing a compilation is probably less likely than if they are doing all of those functions.  If they are posting all of the deposits and running all the checks and posting all the entries on a monthly basis and the closing entries, they're posting depreciation and all of that, I would say you really start to get closer to a compilation than just doing strict bookkeeping services.

You also have to think about where the underlying accounting information resides and who that is with.  I will say that just because the client has access to a QuickBooks file does not necessarily get you off the hook from performing a compilation or preparing financial statements, if you're still the one that is sort of in the system all the time, generating those reports.  The client might have the ability to do it, but, let's be honest, maybe they're not.  You know, any time they need a balance sheet or an income statement, they're going ahead and asking you to do that.  You really start kind of crossing that line, from bookkeeping to compilation, is the way that I kind of see that.

Now, I always suggest to people who call the Hotline or ask through the Center for Plain English Accounting that, if you know that your client is giving financial statements to a bank or a third party and they are saying, "Kristy Illuzzi prepared these financial statements," even if my name's not on those and there's no report on them, I'm probably going to want to structure that as a compilation, because, again, it's that whole reasonable expectation.  If it's expected that you are the one who's associated with those financial statements, I always think it's best to go with a compilation, especially if they're going to third parties, so you make it very clear what you are and are not doing to those financial statements.  A compilation report clearly says, "We have not reviewed or audited these statements."

So, unfortunately, sometimes the way I answer questions for our members is more from a legal perspective than it is an accounting and auditing one, but just that's sort of my thoughts on that, whether you're thinking of compilation versus bookkeeping.

What if a tax client asks you to prepare tax-basis financial statements?  Do you still have to follow the SSARS?  The answer there is yes.  The SSARS apply no matter what accounting and financial reporting framework you're using, so just 'cause you're using tax-basis doesn't mean you don't have to follow the SSARS.

The SSARS allow you to use any applicable financial reporting framework.  The same would apply to cash, modified cash basis and the new framework for small- and medium-sized entities, so you can't think sort of just because you're not using US GAAP, you can get around following the SSARS and issuing a compilation report.

What are your responsibilities if preparing statements for management use only?  There's still the old SSARS 8 -- it used to be called -- engagement, which means that you are still following the SSARS, but you don't issue a report.  Essentially, those financials are only used by management, so you would still follow the SSARS, you should have an engagement letter with the client that clearly also says, in that letter, that you are not going to be distributing to third parties, so management's very clear and signs on that, that, essentially, it's for their use only.  Any financial statements and notes generated for the client should clearly be marked, "For management use only."

If you're sending them electronically, which we get this question sometimes.  The AICPA doesn't dictate sometimes the form or function of how you send something or do it.  But the suggestion here is that you should watermark or otherwise note, "For management use only," even if you are sending those statements electronically.  So I suggest a watermark or a pdf, just because, again, for security purposes; the client then can't easily go in and make changes.  But, really, that's something that will be up to you to determine the best way to work with your client, if you're going to be sending those statements electronically.

Okay, on to GAAP departures for variable interest entities.  This is still a big one that we get a lot of questions on.  I know that this guidance was issued several years ago by FASB.  They have tried to make it a little bit better for non-public companies and they're starting to try to ease up on some of these rules, but we still get a lot of questions about variable interest entities and how to handle departures or clients that really don't want to consolidate the VIE.

So, if the client is a primary beneficiary of a VIE and is unwilling to consolidate that VIE -- which we know, in the real world, is happening -- what should you do if you are working on a compilation or a review engagement?  Well, for a compilation or a review engagement, you're not giving an opinion, you would discuss the departure in your report and it would be a departure from the applicable financial reporting framework that you would need to discuss.

Remember, this would only be if the client's the primary beneficiary and some people forget that.  Just because you have a VIE relationship between two or more entities does not mean that every entity consolidates.  It is only the primary beneficiary of the VIE that is required to consolidate.

So if you have a beneficiary of a VIE with not the primary beneficiary, the requirements under US GAAP are that any related-party transactions or disclosures would have to be made, that, in fact, there is a relationship with that entity.  And then, of course, any related-party notes would have to be there as well, but they would not be required to consolidate.  So that's just something to keep in mind.

If you do have a primary beneficiary of a VIE and they're not consolidating and you are engaged to perform an audit, unfortunately, because, with an audit, you are giving an opinion, you would be prohibited from issuing a clean or unqualified opinion in that case.  Typically, you would have to issue a disclaimer or an adverse opinion, depending on whether that limitation was client-imposed or not.

We do get this question from time to time about "Can I just qualify my opinion for this VIE issue?"  And, typically, VIE issues are so pervasive and the effect on the financial statements of leaving out an entire entity and its operations would almost always be material, I would say that, unless you have a VIE entity that is so miniscule compared to the entity that you are auditing, that might be the only case where you could do a qualified opinion.  But, in most cases, if you are not consolidating another whole entity, that, again, would be an adverse or disclaimer of opinion.

And I think this might be an area out there where there could be some things going wrong.  Again, we do get questions from practitioners that are issuing or about to issue a qualified opinion on this.  When we go through the facts and circumstances, it really is a disclaimer or adverse opinion that should be issued.  So this is just one to definitely think about.

Compiling OCBOA statements, our next -- and it's not OCBOA any more.  I use the term "OCBOA" because I know that practitioners are still using it, but it's really an "other applicable financial reporting framework," is now the way that it is addressed in the SSARS as well as in the audit standards; that's sort of the new language.  But I know a lot of us are used to these old acronyms, so I will continue to use that here, just for those that are used to that language.

Just to reiterate, an other comprehensive base of accounting or special reporting framework would include the cash basis of accounting, modified cash basis of accounting, the tax basis and now the new AICPA's framework for small- and medium-sized entities; that was just issued this past summer.  For those of you that are not familiar with it, I suggest you go to the AICPA website and have a look.

It is -- I consider it a hybrid between US GAAP and the tax basis.  It is kind of based on the tax basis of accounting, but has more robust disclosures and some of the concepts of US GAAP are pulled in, but it's not as complex as US GAAP.  It doesn't require consolidation of VIE or discussion of uncertain tax positions in the financial statements.  And, for some users of financial statements, of nonpublic companies, it might be a better and less-costly framework to use and it's a little bit more robust than the cash basis or the tax basis, which are pretty -- let's call them the more simplistic bases of accounting, if you will.

And so, again, because of the some of the complexities with US GAAP that we're all familiar with -- some of them we're covering today -- sometimes these standards might be more appropriate.  Of course, you would need to check with a regulator, a bank, the board of directors, the users of the financial statements to make sure that that would be appropriate and that they'd be willing to accept those financials.  But, if you're a nonpublic company, this is another thing that people on the -- who call the Technical Hotline will sometimes ask, they say, "Am I required to use US GAAP?"  That, to me, is an interesting question, because, if you are not a public company, there is no requirement anywhere in the AICPA or FASB standards that says you have to use US generally accounting -- US generally accepted accounting principles.  It really is up to the entity, the users of the financial statements to determine what framework is going to work best for them.

Now, of course, US GAAP is generally accepted.  It's the common one.  It's the one that people, I think, maybe know, even if they don't understand it that well.  It is commonly accepted, but, just to be clear, it is not -- for nonpublic companies, there is no required accounting framework.

There are -- when it comes to these other comprehensive basis of accounting, though, there are no authoritative standards, which makes it a little bit more tricky.  With US GAAP, you have FASB, who is a standard-setter dictating what those standards look like.  When it comes to other comprehensive basis of accounting, I don't want to say it's the Wild West out there -- hopefully, it's not that bad -- but there certainly is a lot of diversity in practice on these other bases.

There are plenty of resources out there when it comes to other comprehensive basis of accounting.  I know that the AICPA has practice aids on applying OCBOA.  We also have a practice aid on applying OCBOA to state and local government organizations.  And I believe PPC also has some practice aids on implementing other comprehensive basis of accounting.

And I think it is important that, if you're performing engagements using these other comprehensive basis of accounting, that there be a level of consistency.  So, to look to those practice aids and some of the information that is already out there is helpful, because it does establish somewhat of a level of consistency, because there is no standard-setter, that can be a little bit tricky when using other comprehensive basis.

Again, using OCBOA or a special purpose framework -- I need to get used to the new language as well -- may be appropriate when the entity's not contractually or otherwise required to issue GAAP financial statements, so they don't have a contract with the government or with a regulator or with a bank that specifically says you have to issue US GAAP financial statements.  When the users, both internal and external, understand those other basis of accounting and find it relevant for their needs.  The tax basis, for example, is being presented to people who are unfamiliar with the Tax Code, may not be all that useful; that's just an example.

It also is more cost-effective, typically, to use an other basis rather than using US GAAP, because a lot of the disclosures are not as robust, some of the accounting is more simplistic, so it typically does cost less to use an OCBOA framework.

And if the entity's operations are, let's say, conducted on a cash or tax basis, that's when typically -- you know, if all of your information going into QuickBooks is tax basis, because that's all an entity cares about is filing its tax forms, the board and management understand that, the bank understands that, if they're getting financing, then it might be appropriate to use that basis as well.

And OCBOA statements sometimes are easier to understand and use.  For anyone who has ever read an SEC filing where they not only are subject to all the US GAAP requirements but also the SEC requirements, some of those disclosures and information are quite complex and, even for a CPA like me, can be a little bit overwhelming, reading some of those statements.  So you have to think about the users of the financial statements and how easy they're gonna be to understand and comprehend.

And here is -- you will have access to this presentation, so you should have this information -- the sources of guidance on OCBOA statements.  I mentioned these before, but these are the specific names of these publications.  AICPA practice aid is titled Accounting and Financial Reporting Guidelines for Cash and Tax Basis Financial Statements.  We also have one for state and local government.

The auditing requirement, when you are auditing special-purpose frameworks is in AUC Section 800, those give some special considerations when you are auditing in other than US GAAP environments.

And then the compilation and review guidance is found in the SSARS.  So, for compilations, that's AR Section 80; for review engagements, it would be AR Section 90, where you could find guidance.  And I would say that use of other applicable financial reporting frameworks is probably more common in the comp and review environment.

Some commonly asked questions related to OCBOA compilations.  "Can I compile cash- or tax-basis financials and omit substantially all disclosures?"  Yes, however, you would have a departure from the applicable financial reporting framework and that should be noted in your reports.  Any applicable financial reporting framework, even OCBOA, should have disclosures that go along with it.  So any time you are omitting substantially all disclosures, you would have a departure that would have to be noted in your compilation report.

"If asked to prepare tax-basis financials, can you present two entities as consolidated?"  The answer is typically not.  Unless they file a consolidated tax return, it would not be appropriate to consolidate tax-basis financial statements.

"When using the modified cash basis, can I present investments at fair value?"  Typically, no.  If -- the way that the modified cash basis works is you do have some modifications from the regular cash basis, but, typically, those are for things like fixed asset depreciation and amortization.  Essentially, you would not use fair value and that concept is not even defined under any modified cash-basis financial statements.  So the answer there would be no.

Moving on to a very hot topic at this point and you may have seen, if you subscribe to the Journal of Accountancy -- which, if you're a member, I'm sure you do get that -- as well as our email communications, our daily updates.  This is an area where the AICPA has been spending a lot of time, focusing on verification requests.  And this comes up in a regulatory environment, the bank environment and we'll get into that in a few minutes.

But this is really an area that is a hot topic that, from a political standpoint, the AICPA is really trying to work with regulators, banks, help them understand how what they're asking for relates to the AICPA standards.  And, in some cases, what these regulators, banks and other third parties are asking goes well beyond what the AICPA allows under our standards or typically what a practitioner would be able to do under our standards.  So I can tell you this is certainly an area where the AICPA is putting a lot of effort in to try to make sure that others are understanding a little bit more about our standards and what is allowed and what is not allowed.

So the first is regulatory reporting and you may have received -- recently, in the J of A, there was an article about this.  And auditors are increasingly being asked to report on forms that are prescribed by regulators.  And this would be something that -- recently, it came up with the New York City Tax Commission.  They actually came up with a form that was a required form for any entities that resided in New York City.  And those forms are not always in compliance with the state accountancy laws or the AICPA standards and that's a real problem.  And, sometimes, there can be a lot of pressure that are put on accountants to fill out these forms, especially if you're being told that Joe Smith down the street from you just issued this form or filled out this report or your client's going to go elsewhere to have this service done or they're going to pull their comp and review business out from under you and give it to someone else who's willing to fill out these forms.

So we understand that there is sometimes pressure here; if one firm is doing this, it kind of makes all the other firms think that they need to do this as well.  So you really do -- I mean, in certain cases, you may be asked to compile or review information on regulator-prescribed forms.  Now that's a little bit different, but if you're actually being asked to fill out a prepopulated form that doesn't comply with AICPA standards, that is a real problem.

Some options that the AICPA gives -- and, again, this is in a recent Journal of Accountancy article; I believe it was just in the October or November issue that dealt with this.  And, essentially, we give some options to the practitioner.

One is you can contact the regulator to determine if a reworded form or a separate report will be accepted.  Meaning, would they be willing to sort of make some revisions to their form so that it is in compliance with AICPA standards?

Another is to contact your state society and this is what happened, I believe, with the New York City form, was that this was raised through to the New York state society and they bubbled it up to the AICPA to work on this together.  But, essentially, you can work with your state society to resolve the issue and your state society might be willing to work directly with that regulator or requesting party to come to an agreement on what can be done if those forms don't comply with the AICPA standards.

You also can provide a letter to the regulator explaining that their request doesn't comply with generally accepted auditing standards and you can attach a report that does comply with generally accepted auditing standards.  I would say that this is probably something to do if you're dealing with a lot of time sensitivity.  If you've gone to your state board and they're still working, potentially, with the regulator, but your client is going to get dinged if they don't get something in by a certain date, you might want to do this third bullet in the interim as you're working with the state society or trying to work with the regulator on making some revisions to that form or that report.

The term "comfort letter" and a lot of people use this term somewhat interchangeably and I've done this in the past as well.  I am guilty of calling anything that relates to liquidity of a client or their ability to continue as a going concern, I consider all of that a comfort letter request.  That's not really accurate, because AUC Section 920 of the AICPA standards specifically define the term "comfort letter" and, essentially, it should only be used when referring to a securities offering request.

So the term "comfort letter," typically, is for SEC registrants that are going under a public offering and that's sort of what the term should be used as.  However, some other requests that I -- many will consider comfort letters, but really are verification requests are when you are asked to provide information or some sort of confirmation in association with pending loans.  Employee medical insurance, child adoption application, use-tax certification, employ -- verification of employment.  You know, there are many areas where verification requests are coming, so that term, again, should not be used interchangeably with "comfort letter."  If you're talking about something outside of a securities offering, it is typically called a "verification request."

This is very common when it comes to loans.  If you have clients that are trying to obtain financing, many times, you'll be asked to verify the client's self-employed status, verification of income from self-employment, profitability of their business, impact on the business if money is withdrawn.  I've even seen statements such as "This company's not going to go out of business in the next year."  Statements about their cash flows.  If something, again, were to happen to the business that they would -- they'll be able to go ahead with that loan or with a certain purchase.  You know, again, there were many different types of verification requests that are out there and practitioners do need to be careful about responding to these requests and how they respond, because, many times, this falls outside of the AICPA standards and what would be allowed.

You know, many times -- you do have alternatives available to you and a list of some of those alternatives is here.  One is you can certainly provide an audit compilation or review report of personal financial statements or, if this is for an entity, you would be able to provide an audit compilation or review of that entity's financial statements.  And you may already have that, if you're -- if they're currently a client of yours, you might be able to just provide that, as long as they are not "management use only" reports; you might be able to distribute that to a bank or someone requesting, of course, with the client's permission.

You can perform an examination, review or compilation of pro forma personal information or you can do that with just an entity's financial information.  So, if they want to see the effect of something, if you will, you might be able to do that as a pro forma presentation.

You can also perform an examination or a compilation of prospective financial information.  So, if they'd like to see a budget or forecast or what the company's financials are going to look like in a year or two from now, you are allowed to examine or compile that information.  So that might be another alternative.

Performing agreed-upon procedures under AT 201 and agreed-upon procedures would be you agree with that entity specifically the procedures you are going to do, the tests you are going to perform, the information you are going to verify, you provide that in a -- the form of a report, "Here are the procedures we performed.  We did or did not find any variations or issues."  So just keep in mind that, under AT 201, you are prohibited from doing any sort of procedures with regards to liquidity or ability to pay debts or -- you know, this really has to be, under AT 201, it has to fall under what is allowed under AT 201.

So you have to be a little bit careful there; in some cases, if they are asking for an effect of something on the business or their ability to continue as a going concern, those would be prohibited under AT 201 as well.  So just have to be a little careful there and I would say look to the standard itself in AT 201 and there is some really good information in there about what you are allowed to do under that standard.

And then have the client provide copies of recent tax returns, because, in some cases, they might be asking for something that could easily be -- you know, it's on the tax return.  Now, of course, you have not audited that tax return, but -- and that would have to be clearly construed to the requesting party and, of course, your client would have to agree to release their tax return.  I know, in some cases, there's personal information in there, information that they would not want a requesting party to receive.  So it is important that your client be well-aware of what they are giving to any requestor here.  But, sometimes, information that's being asked for, again, is at least on the tax return.  And, again, although that return has not been audited or reviewed or compiled, it is some corroborating evidence for that party requesting, so that might be another alternative.

"What if a bank or a regulator asked you to sign a document and verify a client's revenue for the year?"  And I just noticed there's a typo there; so I apologize.  That should say, "What if a bank or a regulator asked me to sign a document and verify a client's revenue for the year?"  "Verify" is sort of an interesting word.  I think that some banks, regulators, outsiders out there think that, potentially, the term "verify" means "audit."  Others think "verify" is just "Hey, just check on their tax return or something and be sure that that's the amount."

So I would say, first of all, verification of revenue, that's a tricky term and you might want to check with the regulator as to what they really mean there by the term "verify."  We do discuss this a little bit further in AT Section 9101 and what that is is the interpretation to Section 101 of the AICPA Attestation Standards.  So, if you have access to AICPA's professional standards, which --

If you don't know this, I should probably tell you, that, on the AICPA website, under the research tab, there is standards, under research standards, AICPA has all of our compilation, review, audit, attest, ethics and quality control standards listed out there for the public.  So, any time you need to go back to an AICPA standard and you want an easy way to do that, go to the AICPA website, which is aicpa.org and click on "Research" and then click on "Standards" and you will have access to all of those standards, in their most recent format.

And, for those of you -- hopefully, we'll all familiar now with the clarified standards, 'cause they have been in effect for almost exactly a year now -- those standards are also all up on the AICPA website.  The old standards are still up there as well, if you are performing engagements for periods prior to December 2012, which, especially when it comes to comps and reviews, could definitely be the case.  But, on the audit side, if you are performing engagements prior to that period, we do still have the old standards up there, if you need to look at them and I know, for peer-review purposes, sometimes, too, you need access to those old standards.  So they are both still up there on the AICPA website.

So, back to -- back to the bank or regulator asking for this documentation and verification of the revenue, you could provide verification of revenue if you perform sufficient audit work and obtain sufficient evidence.  So I would say that, if you are asked to verify a client's revenue for the year, if you have completed an audit for that client for that same period that are au- -- asking you to verify that revenue amount, you would probably feel pretty comfortable responding to that request, if you have performed the audit.  What I might also do is attach a copy of the audited financial statements, if that's something that the client is comfortable with and those are, again, not "management use only" financial statements or not a restricted-use report.  You might attach that to the request as well.

If that information is not available, the accountant might also provide completed tax returns from that client.  Again, doing any of this would require your client's permission.  If you compiled, reviewed or, again, audited those statements, with the client's permission, you may also be able to provide that to the requestor.

You could also ask them to engage you to perform agreed-upon procedures on the client's revenue or you could compile specified elements.  You can compile just the total revenue line item of the company's financial statements.  That would be another option to you.  So I would say, if you didn't perform an engagement on that revenue, if you did not compile, review or audit that revenue, that this might your only alternative -- unless, of course, they'd be okay with a tax return, your only alternative might be to do a separate engagement to perform agreed-upon procedures with regards to that revenue.

Some additional resources on these verification requests, comfort letters, regulatory reporting, there are several.  The first is our new Center for Plain English Accounting came out with an alert dated November 5th, 2013.  For those of you that are not familiar -- I said this at the beginning of the webcast, but I will say it again, because I am now a member of the team, the Center for Plain English Accounting -- you can get more information on that if you go to aicpa.org/cpea; that stands for "Center for Plain English Accounting."  You can get more information on that.

We are part of the PCPS group and it is a -- there is a required membership, but we do put out alerts, monthly alerts on very relevant audit and accounting topics and issues.  We do webcasts and answer questions in writing related to audit and accounting issues.

So that paper that came out November 5th addresses this issue.  There was also the Journal of Accountancy article, which I mentioned before, and that was the November article and I do have a link here to the J of A issue, if you'd like to read that further.  That was the one regarding regulator-prescribed forms.  That was a great article done by Ahava Goldman, who works in our auditing standards team, as well as Dr. Thomas Radcliffe, who's a brilliant man.  He actually does work on our Center for Plain English Accounting as well.  So you will see that article.

The AICPA website also has resources to assist practitioners, including a sample letter for contacting a regulator about prescribed report forms that do not comply with GAAS.  So this is a great resource.  I definitely suggest you going here if you are receiving these requests.  The AICPA has sample letters, communications, suggestions on how to deal with specific requests from regulators.

And then -- for those that are not familiar as well -- the AICPA, a couple years ago, came out with our Financial Reporting Center, which is, again, on the AICPA website under "Interest Areas, Financial Reporting Center," and there's a quick link here on the bottom.  But, essentially, they provide information on A & A hot topics and issues.  It's available exclusively to AICPA members, so the public does not have access to this information.  And, recently, they also posted some information related to verification requests and regulator-prescribed forms.

So those are just some of the resources that are available to you.  You'll find that, if you also go to the AICPA website and just search the term "comfort letter" or "verification request," you will get lots of hits on information that is up there on our site.

Wanted to just provide some contact information for you and information about the Technical Hotline as well.  I don't know if those of you out there have used our Technical Hotline before, but it is available to all members and the Technical Hotline is open Monday through Friday, from 9 AM to 8 PM EST, excluding major holidays, of course.  Left the direct phone line here for you, so, again, members call that direct line.

You do get a live person.  You don't have to push a whole bunch of buttons to talk to somebody or the pound key or the zero, which I know is -- you know, some members who call, it's very funny.  They'll say, "Wow, I actually got to speak to a person.  I don't have to go through a whole menu of prompts."

So you do get a live person and can ask them anything in the realm of compilation, review, audit, attest, quality control standards.  We do not answer ethics questions; that's a separate hotline, when you call the AICPA's main number, I believe it's 888-777-7077, the ethics hotline is Option 6.  But we -- the Technical Hotline answers all other questions in the A & A arena.

You can also submit your questions online.  This is a quick link to the Hotline form, where you can submit a question, your contact information.  Be sure to put a phone number there, because the AICPA Technical Hotline is prohibited from responding in writing to your questions.  So you will get a call back with an answer to your questions; just be sure to provide your phone number.

The Technical Hotline also has a presence on aicpa.org, where you can get more information.  We also post any recently issued technical inquiry service questions and answers.  For those of you who have access to our technical practice aids, that's what these are.  Essentially, when questions are coming in to our Hotline on a regular basis, we, many times, will turn those into TIS or technical inquiry service questions and answers that are available to our members.  And, up on this section of the AICPA website, we do include any that have been issued over the past year -- I believe is our cutoff -- will be up there as a member benefit on our website.  And those can be a really great resource.

I strongly suggest checking out the recently issued ones with regards to the clarity standards that have been issued over the past year and some recent questions we've gotten through our Hotline and other areas with regard to group audits and some of the other trickier areas of the new standards.  So those are pretty good to check out.

And then information on the new Center for Plain English Accounting, which I described to you before.  That is part of a PCPS initiative.  We just launched on November 1st.  That can be found at aicpa.org/cpea.

So we have five minutes to spare.  Wanted to thank you for attending and, at this time, I'd be happy to answer any additional questions you might have, since we do have a few minutes to do that.  So I will just give a minute and see if anybody does have any questions.  If not, we will then start to wrap up the program, so we can make sure we end at 2 PM promptly; I know it is a Friday afternoon, so we will respect your time and be sure that we are done at 2 PM.  But, if you do have any questions, please feel free to send those in now.


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