New Engagement Letter in SSARS 21 Outlines Parameters for Preparation Engagements
Being able to print a set of financials at the click of a button is something we take for granted from accounting software, but it wasn’t always that easy for business owners to see where their business stood. They needed an accountant to turn their data into financials. When the AICPA put out the first Statements on Standards for Review Services (SSARS) back in 1978, application of SSARS 1 had a pretty clear trigger since the accountant had to physically provide a copy of those financials to their clients.
But with cloud accounting software like QuickBooks® Online, what is that trigger? And what if a client just needs a set of financials but doesn’t need a full-blown compilation report?
In response, the AICPA created a new level of service below a compilation, which they describe in Section 70 of SSARS 21. This section provides guidance for the preparation of financial statements. This guidance applies when a client hires an accountant to prepare financial statements and has been in effect since December 15, 2015. You can read an overview here.
It doesn’t apply when you’re just making adjustments to your client’s books and you print out the resulting balance sheet and income statement. It also doesn’t apply if you’re creating financials that will be used as the input for another service such as a tax return. This guidance can also be used for other services such as forecasts or budgets, or for schedules of rent and royalties.
If you’re in doubt with your bookkeeping clients, some practitioners recommend including a statement to the effect that “this engagement does not contemplate the preparation of financials.” in your engagement letters for bookkeeping services.
Even though this is a lower level of service than a compilation, this still requires an engagement letter, which must be signed by both management and the accountant. A verbal agreement won’t suffice. Independence is not required for this level of service.
A signed engagement letter is essential for establishing an understanding with management of the parameters of this type of engagement, so let’s take a look at the elements. You can find an example of an engagement letter in Section 70 of SSARS 21.
- Objective: A detailed list or description of the statements or schedules to be prepared, including the dates of those statements.
- Responsibilities of management: Paragraph 25 of section 60 of SSARS 21 goes into this in detail. Basically, management is responsible for the accuracy and completeness of the data, for internal controls, for choosing the appropriate reporting framework and for cooperating with the accountant to make sure they get the information they need. Management is also responsible for protecting its assets against fraud or theft.
- Affirmation of lack of assurance: The engagement letter needs to explicitly state that each page of the financials must include a statement to the effect that no assurance is being provided. If this is not feasible, then the statements will include a disclaimer from the accountant stating that no assurance is being provided.
- Responsibilities of accountant: The accountant must understand the financial reporting framework being used. This doesn’t mean that you can’t accept an engagement if you lack knowledge of the reporting framework or of the industry. You just need to get that knowledge before you complete the engagement.
- Limitations of the engagement: The accountant will not verify the accuracy or completeness of the data, nor will any assurance be provided. The engagement will not be designed to detect fraud, misstatements or any wrongdoing by the client. No report will be issued and no opinion will be expressed.
- The financial reporting framework being used: The basis of reporting — GAAP, cash, tax or another basis of reporting — must be clearly specified.
- Departures from that framework: Any departures from the specified reporting framework, including omission of required disclosures, must be mentioned.
- Signatures of accountant and a representative of management
The engagement letter may also include a statement that management agrees to hold the accountant harmless. However, it should be noted that some regulators may prohibit arrangements that limit the accountant’s liability.
A copy of the signed engagement letter must be included in the workpapers, which must also include a copy of the prepared financials, at a minimum.
This flexible new standard provides opportunities for practitioners to provide additional services to clients, which I’ll discuss in a future article. Thanks to the new guidance in SSARS 21, accountants now have standards that match the reality of our world.