Academic journal article Journal of Accountancy

A New Approach to Compilations

Academic journal article Journal of Accountancy

A New Approach to Compilations

Article excerpt

Proposed revisions to SSARS no. 1 make some bold changes.

After years of attempts to alter the requirements or exempt certain services, the AICPA accounting and review services committee (ARSC) has issued an exposure draft that seeks to make fundamental changes in compilation engagements. The December 31, 1999, ED would revise Statement on Standards for Accounting and Review Services (SSARS) no. 1, Compilation and Review of Financial Statements, which established performance and reporting standards for compilation and review engagements. Previous auditing standards required accountants to add a disclaimer to the unaudited financial statements they were associated with. Exhibit 1, page 39, provides an overview of the changes the new ED proposes.



SSARS no. 1 was supposed to establish a minimum level of service for unaudited financial statements of nonpublic entities. To accomplish this, there is a trigger in paragraph 7 that says that, "The accountant should hot submit unaudited financial statements of a nonpublic entity to his or her client or others unless, as a minimum, he or she complies with the provisions of this statement applicable to a compilation engagement. Submission of financial statements is defined as presenting to a client or others financial statements that the accountant has (a) generated, either manually or through the use of computer software, or (b) modifies by materially changing account classification, amounts, or disclosures directly on client-prepared financial statements." (Italics have been added for emphasis.) This means that if the accountant generates a financial statement or modifies a client-generated financial statement, he or she has "submitted" a financial statement, triggering the need to comply with the performance and reporting standards in SSARS no. 1.

Although this trigger effectively established a minimum level of service, in the years since SSARS no. 1 was issued, the accounting profession, the competitive environment and technology have all change. These progressive changes have led to problems for practitioners, including deciding whether or not SSARS applies (see case study 1, at right). Many times an accountant is forced either to compile financial statements or violate the SSARS professional standards.

Case Study 1

To Apply SSARS or Not, That Is the Question

A client asks for help finding a problem in an income statement that he or she has just printed--net income just doesn't "look right." You sit down and begin to review the prior month's entries in the client's computerized accounting database and notice that four checks totaling $15,000--a material amount--were coded incorrectly as "repairs and maintenance." Based on your close association with the client and your knowledge of the prior month's activities, you know the checks should have been coded as "leasehold improvements." To solve the problem you simply change the account classifications and log out of the software.

Did you just "submit" financial statements? In our opinion, you did, because you materially modified the client's financial statement by changing account classifications (paragraph 7 of SSARS no. 1). Did you intend to compile the financial statements? Probably not. Must you now compile the client's financial statements? According to SSARS no. 1, you must.

What if, instead of going to the client's office, you made the same modifications on a disk in your office or by modem? In our opinion, the answer would be the same; you submitted financial statements and now you must compile those statements.

The other problem accountants face derives from market influences. As client relationships change, many practitioners feel constrained by the requirements of SSARS no. 1. There are instances when a client needs financial statements solely for management purposes. Yet SSARS no. …

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