Betty Montez, CPA, was engaged by Muller, Inc., to provide monthly accounting services consisting of write-up o cash receipts and disbursements journals and quarterly preparation of an adjusted trial balance. During one of Montez's visits to the company, Max Muller, the president, asked her to prepare some financial information for his brother-in-law, who is thinking of investing in the business.
Montez drafted the financial presentation shown in exhibit 1, page 63, and submitted it to Ray Oliver, CPA, the partner in charge of quality review at her firm. He returned the material to Montez with a note asking, "Where's the report."
Montez contended a report was not required because paragraph 2 of Statements on Standards for Accounting and Review Services no. 1, Compilation and Review of Financial Statements, says an accountant need not adhere to the performance and reporting requirements of SSARS no. 1 when preparing a working trial balance for a client. Oliver countered that Montez had prepared financial statements--not a trial balance--and must compile these statements. To support his position, he cited paragraph 7 of SSARS no. 1, which says an accountant should not submit unaudited financial statements of a nonpublic entity to a client or others unless, as a minimum, he or she compiles the statements.
This is a situation in which SSARS applicability is in question. Although SSARS no. 1 clearly excludes "other accounting services" such as preparing a working trial balance or assisting in adjusting the books of account, practitioner do not always agree whether a financial presentation is a financial statement or a trial balance or whether the accountant has "submitted" financial statements.
Consider an accountant who prepares journal entries and posts them to a client-prepared trial balance using computer software that generates financial statements. Has the accountant "submitted" financial statements? Would the answer be the same if the data processing occurred at the accountant's office rather than the client's or if the client entered the data and caused the computer to print the financial statements?
These are the kinds of questions practitioners asked at a public hearing held by the American Institute of CPAs accounting and review services committee (ARSC) in September 1989 to discuss "plain paper" financial statements. Plain paper refers to
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accountant-prepared statements with no indication a CPA is associated with them.
SSARS no. 1 does not permit accountants to submit plain paper historical financial statements to clients or others; however, many practitioners would like amendments permitting issuance of such statements and providing for a level of service below a compilation. SSARS no. 6, Reporting on Personal Financial Statements Included in Written Personal Financial Plans, exempts personal financial statements included in written plans.
After the hearing, ARSC decided not to amend SSARS no. 1 to provide for a level of service below a compilation but decided instead to draft guidance on whether the services practitioners perform are subject to SSARSs. That guidance, in the form of three ARSC-issued interpretations of SSARS no. 1 (see Official Releases, JofA, Sept. 90, page 145), is intended to help accountants answer these questions:
* What attributes differentiate a financial statement presentation from a trial balance?
* When has the accountant "submitted" financial statements?
* May an accountant submit draft financial statements without compiling them?
This article discusses how these interpretations have changed practice and illustrates how they are applied.
FINANCIAL STATEMENT VS.
SSARS no. 1 says whenever accountants submit financial statements to clients or others, the financial statements must, at least, be compiled and reported on accordingly. …