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Creating a Bright Line between Accounting and Reporting

Grease (film)(Photo credit: Wikipedia)

Let’s go back in time to December of 1978. You are longing for the weekend and thinking about going to see the new movie “Grease”that everyone is talking about. You need to get away from the three channels on your television set, as all that you see is the news about anti-Shah protestors in Iran and the craziness of someone giving a baseball player $32 million in a four-year contract.  Maybe President Carter can do something to get us back on track. Well, at least you have your brand new Betamax and can record whatever television you miss – as long as it is not more than one hour long...

At work, your client has asked you to perform bookkeeping services for them. The client needs you to process their payroll, record certain journal entries in their general ledger book and calculate the amount of sales tax that they need to remit to the state. Additionally, the client needs you to prepare monthly financial statements for the owners and the bank that provides the entity’s line of credit. You sit down with a few sharpened pencils and ledger paper and draft those financial statements. The recently issued Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements,requires that you, at a minimum, perform a compilation engagement with respect to those financial statements that you submit to your client. So, you issue a compilation report along with those financial statements. The application of the compilation literature is easy to understand and apply.

Now, let’s fast forward to today. It is October 2014. You are still thinking about the weekend but, you tend to lose focus easily with all of the distractions on hand like your brand new smartphone. Maybe you will go see a new movie, or maybe you will just stay home and watch “Grease”on demand.

Oh well, there is always work. Your new client has engaged you to perform bookkeeping services for them. You have been given access to the client’s cloud computing system and make a number of journal entries to record payroll tax payments, sales tax payments, depreciation expense and revenue adjustments for a given period. Meanwhile, the client’s internal bookkeeper records amounts billed and certain recurring expenses such as utilities and office expenses. At the end of the month, the bookkeeper prints a copy of the financial statements from the cloud accounting software and presents them to the owner and the bank that provides the entity’s line of credit. Have you prepared those financial statements? Has the bookkeeper? Or has the application itself? While you might come to one answer, a colleague of yours, given the same set of circumstances, may come to a very different conclusion. And you may both be right! This diversity in practice is not in the public interest. As a result, significant revisions were made to the preparation standards to reflect the current practice environment.

SSARS 21 eliminates the need for you to determine an answer to the difficult question of who (or what) prepared the financial statements by eliminating the submission requirement and making the compilation literature apply when the accountant is engaged to perform a compilation service.

In the following video, I provide an overview of SSARS 21 and highlight the revisions to standards for engagements to prepare financial statements and compilations. I encourage you to visit the AICPA's SSARS 21 webpage for up-to-date information on SSARS 21, but visit often as the webpage is frequently updated with new resources. Additionally, you may be interested in participating in an informative webcast, Understanding the SSARS 21 Clarification and Revision, taking place on Nov. 7, Nov. 17, Dec. 4 and Dec.17.

Michael Glynn, CPA, CGMA, AICPA Senior Technical Manager, Audit and Attest Services, American Institute of CPAs.

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