Since 1978, Statement on Standards for Accounting and Review Services (SSARS) 1 provided the official guidance on compilations and reviews. This guidance has remained relatively unchanged until now. Effective for financial statement periods ending after December 15, 2010, SSARS 19 applies, providing the most significant changes to these services in over 30 years. It is expected that this new standard will be welcomed by small firms and sole practitioners.
The prior standards apply to both review and compilation engagements alike, and many practitioners found this mixture confusing. Smaller firms often limit their services to just compilations. An important change with the new standard is that compilation issues are now completely separated from review issues. Additionally, the standard adds concepts that had been absent from the previous standards, including materiality and evidence.
Materiality had previously only been included in audit standards. Pursuant to SSARS 19, a misstatement would be material if it would influence a user’s decision. To determine this, all surrounding circumstances should be considered, including those relating to the user’s intended use of the statement. Documentation to support materiality is not required, but would be advisable to maintain. The standard also introduces the concept of review evidence. A review is defined as an evidentiary service. Through analytical procedures and inquiry, combined with professional judgment, the accountant is to obtain sufficient review evidence to provide a reasonable basis for obtaining limited assurance that no material modifications are needed to the financial statements. The original exposure draft raised the level of assurance provided by a review to “moderate assurance”, but the final version returned to the pre-SSARS 19 level of “limited assurance”.
Another important change is that engagement letters should be used for all review and compilation engagements. The standard states that engagement letters are “presumptively mandatory” and that it would be a rare circumstance where an engagement letter is not required to document with management the understanding of the engagement to be performed. In practice, practitioners are urged to use engagement letters for all compilation and review engagements. The statement does not address whether the letter can be a perpetual letter, or needs to be issued annually. Again, the better practice would be to obtain an engagement letter each year. The use of an engagement letter should be a welcomed requirement, as engagement letters serve as effective risk management tools when properly utilized. They not only confirm the scope of the services provided and therefore help eliminate subsequent disputes, but can include terms which limit the exposure of the accountant.
Documentation requirements have also been enhanced. For compilations, significant findings or issues should be documented to include sufficient detail to provide a clear understanding of the work performed. For reviews, documentation must be included for significant findings, including the inquiries made and responses thereto, as well as the analytical procedures performed and the results therefrom.
The most significant change to reporting under the new standard is that the practitioner may include the reasons why he or she is not independent. As before, a practitioner can issue a compilation report even if the practitioner is not independent. The fact that the practitioner is not independent still must be disclosed in the report, but the standard now allows the disclosure to include the reasons for the lack of independence. The disclosure of the reasons for the lack of independence need not be provided, but if it is, all such reasons must be given. Accordingly, should the practitioner decide to disclose the reasons for the lack of independence, careful consideration is necessary to include all such reasons.
About the author: Thomas Falkenberg is a partner at Williams Montgomery & John Ltd., concentrating his practice in defending accountants and other professionals. He was previously litigation counsel for Arthur Andersen LLP, and can be reached at tff@willmont.com, or 312-443-3240.
The viewpoints in this article are intended solely for general educational purposes. They are not intended for the purpose of providing specific legal, accounting or other professional advice to any particular recipient or with respect to any particular jurisdiction. The author makes no representations, warranties or guaranties as to its technical accuracy or compliance with any law (federal, state, or local) or professional standards; and assumes no responsibility for any recipient of this document to correct or update its contents for any reason, including changes in any law or professional standard.