Academic journal article Journal of Accountancy

New Fraud Guidance: Communication Is the Name of the Game Where Fraud Is Suspected

Academic journal article Journal of Accountancy

New Fraud Guidance: Communication Is the Name of the Game Where Fraud Is Suspected

Article excerpt

A new statement on standards for accounting and review services (SSARS) makes specific chances regarding an accountant's consideration of fraud and illegal acts in compilation and review engagements. The AICPA Accounting and Review Services Committee (ARSC) amended SSARS no. 1, Compilation and Review of Financial Statements by issuing SSARS no. 12, Omnibus Statement on Standards for Accounting and Review Services--2005. This article covers SSARS no. 12's changes, which are generally effective for compilations and reviews of financial statements for periods ending after December 15, 2005.

SSARS no. 12 does not change the objectives in such engagements. You need not report illegal acts that are clearly inconsequential and may reach agreement in advance with the entity regarding the nature of such items to be communicated. The statement doesn't require you as the CPA to assess the risk of fraud or to plan a compilation or review engagement specifically to discover fraud. However, this doesn't relieve you of responsibility for informing the client if incorrect, incomplete or otherwise unsatisfactory information comes to your attention during the engagement.

In 2004 ARSC issued SSARS no. 10, which required that the accountant in a review engagement make specific inquiries and obtain written representations from management regarding fraud (see "An Update on Review Engagements," JofA, Aug.04, page 69). At the same time ARSC issued an interpretation to explain what steps should be taken to communicate about fraud or illegal acts when, during the performance of a compilation or a review engagement, the accountant suspects that fraud or an illegal act may have occurred.


SSARS no. 1 (as amended--in this and all other references in this article) says CPAs should establish an understanding with the client, preferably in writing, regarding the compilation or review services to be performed. This should include a description of the nature and limitations of the services to be performed and of any report to be issued. It also should provide that

* The engagement cannot be relied upon to disclose errors, fraud or illegal acts.

* The CPA will inform the appropriate level of management of any material errors and any evidence or information that comes to his or her attention during the performance of compilation or review procedures that fraud or illegal acts may have occurred. In performing such an engagement you need not report any matters regarding illegal acts that are clearly inconsequential and may reach agreement with the entity in advance about which matters will be communicated.


The objective of a compilation is to present information--in the form of financial statements--that is the representation of management, without undertaking to express any assurance on the statements. You are not required to perform any additional procedures or search for fraud or illegal acts. However, during the performance of compilation or review procedures, such as inquiries or analytical procedures in a review or reading the financial statements in a compilation, if any evidence or information comes to your attention regarding fraud or an illegal act, you should request that management consider the effect of the matter on the financial statements and you should consider its effect on the compilation report. If you believe the financial statements are materially misstated, you should obtain additional or revised information.


A review engagement provides limited assurance that the financial statements require no material modifications in order to conform to generally accepted accounting principles (GAAP) or an other comprehensive basis of accounting (OCBOA). Misstatements can be intentional, thus constituting fraud, or unintentional, the result of error. SSARS no. 1, issued in 1978, established that the objective of a review engagement is to provide a CPA with a reasonable basis for expressing such limited assurance. …

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