A New, Lower Level of Assurance for Financial Statement Preparation With SSARS 21
Back in 1978 when the AICPA issued SSARS 1, “submitting financials” meant that the accountant physically provided a bound copy of a company’s financials to management. This standard applied whenever an accountant was submitting unaudited financials to a client, and required that this would at least be a compilation engagement, if not a review or audit.
Since that date, practitioners have been asking for standards that allow them to provide financials to management without the burden and expense of a compilation engagement. Today, with cloud technology and accounting software that readily spits out a nice set of financials, it’s not always clear when an accountant has “submitted” financials to a client, nor is it always clear who the preparer is.
In practice, many accountants made up their own definitions. Some slapped a compilation report on every set of unaudited financials they touched. Others issued compilations only when the client asked for them.
In response, in October 2014, the AICPA issued Statements on Standards for Accounting and Review Services 21 (SSARS 21). This standard, which has been effective since December 15, 2015, has four parts:
- Section 60 — General Principles
- Section 70 — Preparation of Financial Statements
- Section 80 — Compilation Engagements
- Section 90 — Review of Financial Statements
SSARS 21 Section 70 allows CPAs to prepare financials from unaudited books and records. This creates a new, lower level of assurance than a compilation. It separates reporting from preparation, which makes it a better fit in today’s world. Under SSARS 1, the trigger for application was the submission of financials to management. Here, SSARS 21 applies when a CPA in public practice is engaged to prepare financials, an easier line to draw.
What’s in Section 70
Let’s take a look at what this new guidance says about preparing financials.
- Section 70 applies when preparing financials that are not a compilation, review or audit. It does not apply when financials are being prepared as part of another engagement, such as a tax return or personal financial statement.
- An written engagement letter is required, which must be signed by both the accountant and management. This engagement letter should clearly describe the responsibilities of the CPA and of management so that misunderstandings can be avoided. It also explicitly states that the CPA is providing no assurance for the financials, so management shouldn’t rely on them inappropriately.
- No report is required, but each page of the financials should include a phrase along the lines of “No assurance is provided on these financials.” If this can’t be done, then the accountant must include a disclaimer that clarifies that the accountant is providing no assurance on the financials. Alternatively, the accountant can perform a compilation engagement.
- Unless a disclaimer is included, the public accounting firm’s name need not appear in the financials.
- Because this is a non-attest service, the accountant does not need to be independent.
- The financials can be reported on a GAAP, cash, tax, regulatory, contractual or another appropriate basis. Management is responsible for selecting the basis for reporting.
- The basis of reporting should be included on the face of the financials or elsewhere in the financials.
- Depending on the basis, additional disclosures may be required. If the financials omit all or substantially all of the required disclosures, a statement to that effect must be included.
- At a minimum, the work papers must include a copy of the signed engagement letter and the prepared financials.
- The lack of assurance does not mean a lack of procedures. Section 70 states that the guidance and requirements in Section 60 of SSARS 21 must be followed. This guidance includes adhering to ethical standards, using professional judgment, conducting the engagement in accordance with the standards, applying quality controls and determining whether to accept and to continue with a client relationship.
- The accountant is not required to verify completeness or accuracy of the financials, but if it’s clear that the information provided is incomplete or inaccurate, then the accountant needs to request additional or corrected information.
- The client may freely share these financials with third parties. Previously, sharing financials with outside parties required a compilation engagement.
SSARS 21 is a welcome update to the reporting standards for CPAs, and will make it possible to provide clients with a level of service they need, without the burden of performing a compilation engagement. The key here is to make sure that management and other third parties, such as bankers, understand the level of assurance being provided.