Changes on Tap for Compilation and Review Standards
EXECUTIVE SUMMARY * In December, the AICPA's Accounting and Review Services Committee (ARSC) issued Statement on Standards for Accounting and Review Services no. 19, Compilation and Review Engagements, representing the most significant changes since 1978. * The standard permits, but does not require, an accountant to disclose the reasons for a lack of independence in a compilation report. This amendment can be implemented immediately. * Other than the compilation reporting option that may be implemented immediately, the standard is effective for compilations and reviews of financial statements for periods ending on or after Dec. 15, 2010. * In response to comments received from smaller firm practitioners, the standard separates the compilation guidance from the review guidance. This should make the standards easier to use. * The standard also includes a discussion of how the accountant obtains limited assurance through the performance of tailored review procedures. ********** Significant changes to the standards for compilation and review engagements will soon take effect. The AICPA's Accounting and Review Services Committee (ARSC) issued Statement on Standards for Accounting and Review Services no. 19, Compilation and Review Engagements, in December. The standard's effective date is for compilations and reviews of financial statements for periods ending on or after Dec. 15, 2010, with early implementation permitted for the new reporting option for compilation engagements when the accountant's independence is impaired. This article discusses the major changes made by the standard. DISCLOSURE OF REASONS FOR LACK OF INDEPENDENCE SSARS no. 19 contains the most significant changes to the professional literature for compilation and review engagements since SSARS no. 1, Compilation and Review of Financial Statements, was issued in December 1978. For more than 30 years, accountants have been required to disclose in the compilation report if they are not independent but have been prohibited from disclosing the reasons. It was thought that while it was important for users to know whether the accountant was independent, the reasons were not relevant and, in fact, could cause confusion among financial statement users. However, with the increasing complexity of new accounting standards, many smaller companies are asking for their accountant's assistance in preparing high-quality, reliable financial statements. This assistance, which often includes preparing and posting payroll and payroll reports, maintaining the general ledger, and preparing and recording journal entries, may cause the accountant to impair his or her independence. As a result, members advised ARSC that third-party users (primarily bankers) wanted to know and understand the reasons for the impairment. What ARSC found out is that many bankers view a technical impairment caused by the accountant's involvement in a client's system of internal control different from an impairment caused by a financial interest or a relationship with the client. After studying the issue, ARSC developed the new standard so that the accountant has the option, but is not required, to disclose the reasons for an independence impairment in a compilation report. The only caveat is that, if the accountant does decide to disclose the reasons for an independence impairment, all reasons must be disclosed. The result will be reports that are more transparent and useful to users of compiled financial statements. SEPARATING COMPILATION GUIDANCE FROM REVIEW GUIDANCE Another significant change is the separation of the compilation guidance from the review guidance. SSARS no. 19 supersedes AR sections 20 (Defining Professional Requirements in Statements on Standards for Accounting and Review Services), 50 (Standards for Accounting and Review Services) and 100 (Compilation and ReNew of Financial Statements). …