ARSC Issues Exposure Drafts Proposing the Most Significant Change to Compilation and Review Standards Since 1978

As the needs and expectations of the business community have evolved, AICPA members have questioned whether the current framework for the performance of and reporting on compilation and review engagements remains appropriate.  This is especially evident in light of existing independence standards. In determining whether compilation and review standards should be revised, the Accounting and Review Services Committee (ARSC) sought input from small business owners, third party users of small business financial statements and CPA practitioners who serve smaller businesses regarding whether they believe the current reporting requirements and their interplay with the independence rules remain appropriate.   

As part of that input process, an AICPA Reliability Task Force was formed with the support of the AICPA Private Company Practice Section (PCPS).  The Task Force consisted of practitioners, representatives from AICPA standard setting bodies, academics, a banker, and a preparer of financial statements.  The Task Force concluded that third-party users of compiled or reviewed financial statements perceive a difference between independence impairment caused by financial or relationship interests (that do not improve the quality of financial information), and independence impairments caused by the CPA’s performance of certain services (that are designed to improved the quality of financial information). As a result, the Task Force recommended that ARSC consider revising its standards when an accountant’s independence is impaired in connection with the performance of a nonattest service relating to the design or operation of an aspect of internal control over financial reporting.  These nonattest services help management prepare higher quality or more reliable financial statements.

To test the task force views, the PCPS recently commissioned research that led to a report entitled, “An Empirical Test of the Reliability Framework: Evidence from Banking Professionals.” In the report, two professors describe the results of their research on commercial bankers’ perceptions of a CPA’s integrity, expertise, independence, objectivity and reliability, and how that affects judgments about risk. The researchers also looked into whether the type of engagement and the CPA’s provision of nonattest services had an impact on the banker’s impression of financial statement reliability. The results of the research, which will soon be released, were considered by ARSC before approving the proposed Standards.

By exposing the proposed Standards Framework and Objectives for Performing and Reporting on Compilation and Review Engagements; Compilation of Financial Statements; and Review of Financial Statements ARSC believes that these standards will respond to many concerns of smaller business owners, users of small business financial statements and CPAs that serve smaller entities.

In particular, the proposed SSARSs, Compilation of Financial Statements and Review of Financial Statements, provide guidance to practitioners who are engaged to perform a compilation or review engagement when they have also been engaged to perform nonattest services.  The guidance includes reporting requirements when the accountant’s independence is impaired due to the performance of these services.

Another significant reason for the proposed standards is to harmonize the AICPA’s review standard with the International Auditing and Assurance Standards Board’s (IAASB) ISRE No. 2400. Those concepts include the requirement to obtain an engagement letter and use certain terms, including evidence; moderate level of assurance; nature, timing, and extent of review procedures; materiality; and risk.

In addition, the proposed statements recodify AR section 100, Compilation and Review of Financial Statements (AICPA, Professional Standards, vol. 2), into separate chapters for compilation and review engagements. The objective of recodifying AR section 100 is to improve the quality of compilation and review engagements by presenting the requirements and guidance for each specific service in its own distinct section.  In addition, the requirements and guidance in AR section 20, Defining Professional Requirements in Statements on Standards for Accounting and Review Services,and AR section 50, Standards for Accounting and Review Services (AICPA, Professional Standards, vol. 2), have been included in the proposed SSARS, Framework and Objectives for Performing and Reporting on Compilation and Review Engagements.  If the proposed standards are approved as final SSARSs, existing
AR sections 20, 50, and 100 will be superseded and other AR sections will be conformed.  Such conforming changes would be effective at the same time as the proposed SSARSs.

In summary, these significant changes to SSARSs are as follows:

1. The proposed SSARS, Framework and Objectives for Performing and Reporting on Compilation and Review Engagements, introduces the new terms such as moderate assure, review evidence and review risk to the review literature to converge with international review standards. 

2. The proposed SSARS, Framework and Objectives for Performing and Reporting on Compilation and Review Engagements, includes a discussion of materiality in the context of a review engagement.

3. The proposed SSARSs, Compilation of Financial Statements and Review of Financial Statements, require that an accountant establish an understanding with management regarding the services to be performed through a written communication (i.e. an engagement letter).

4. The proposed SSARSs, Compilation of Financial Statements and Review of Financial Statements, establish enhanced documentation requirements for compilation and review engagements, respectively.

5. The proposed SSARSs, Compilation of Financial Statements and Review of Financial Statements, provide guidance to practitioners who are engaged to perform a compilation or review engagement when they have also been engaged to perform nonattest services.  The guidance includes reporting requirements when the accountant’s independence is impaired due to the performance of these services.

6. The proposed SSARS, Compilation of Financial Statements, allows an accountant to include a general description in the accountant’s compilation report regarding the reason(s) for an independence impairment.

The proposed effective date is for compilations and reviews of financial statements for periods beginning on or after December 15, 2010.  Early application would be permitted.

Click here to download the proposed SSARSs.