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3 Steps to Maintain Independence When Preparing Financial Statements

Shutterstock_302730485Consider this scenario: A longtime tax client of yours approaches you. They are interested in starting an online gaming platform with a colleague and have already landed a significant contract. The future of this business appears bright. A local bank has agreed to extend them a $75,000 line of credit, contingent on certain ratios and providing monthly financial statements and copies of all tax filings. You client asks you if you would be interested in performing nonattest services on their behalf. They are looking for a CPA to prepare the new venture’s monthly financial statements for the bank so the bank can monitor compliance with its ratio requirements, while the client maintains the books.

The current loan covenant only calls for a complete set of financial statements, classifying the engagement as a nonattest service. You do not need to be independent to prepare your client’s financial statements, however, based on the new venture’s growth trajectory, you believe that at some point in the future, attest services will likely be needed. Because of this, you decide to take certain steps to maintain your independence in case your client’s needs change, and you are asked to provide a service that requires independence down the road. Below are three steps you take to maintain independence.

Step 1: Evaluate whether your client has the suitable skill, knowledge and/or experience to accept responsibility for the financial statement you prepare. Assuming they do;

For details regarding suitable skill, knowledge and/or experience refer to the General Requirements for Performing Nonattest Services interpretation.


Step 2: Explain to your client that they will need to assume all management responsibilities in connection with your preparation services. They will also need to oversee your services sufficiently so that they can evaluate and take responsibility for the financial statements. When a question arises, your client will need to make the final decision, although they can discuss the options with you beforehand. Additionally, they will need to review the work that you’ve done so that they can take responsibility for the financial statements.


The Management Responsibilities interpretation explains what management responsibilities are and provides examples. 

Step 3: Document in writing that:  

  1. Your client has not engaged you to provide an attest service; rather they have engaged you to prepare their new venture’s financial statements using the books and records they are keeping;
  2. Your client will assume all management responsibilities in connection with the preparation of those financial statements; and
  3. That once your client has approved the financial statements you prepare, they will submit them to the bank.


For details regarding documentation refer to the Documentation Requirements When Providing Nonattest Services interpretation.


In Summary: While independence is not a requirement when the only services provided are financial statement preparation and tax services, it is important to anticipate if your client’s needs may change. If their needs change and you’ve structured the engagement so that independence has been maintained, then changing from a financial statement preparation engagement to a service that requires independence, will be possible. The AICPA recently published a non-attest services toolkit that we hope you will find helpful.  You may also be interested in accessing the AICPA Ethics Division’s nonauthoritative Frequently Asked Questions: Nonattest Services.

Ellen Goria, CPA, CGMA, Senior Manager- Independence & Special Projects, American Institute of CPAs.

Person playing a video game image courtesy of Shutterstock


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