Accountants should not submit un-audited financial statements of a nonpublic entity to a client or a third party, unless the accountant has at least complied with the provisions that apply to a compilation engagement. When more than one service has been performed, the report to be used is the one that relates to the highest level of service rendered.

Advertisement

Accountants should not allow their names to be used in any written document containing the un-audited financial statements of a nonpublic entity unless:

  1. They have compiled or reviewed the statements pursuant to Statements on Standards for Accounting and Review Services; or
  2. The financial statements are accompanied by a statement indicating that the accountant has not compiled or reviewed the financial statements and assumes no responsibility for the financial statements.

 

An acceptable statement would be:

The accompanying balance sheet of X Company as of December 31, 20XX, and the related statements of income, retained earnings, and cash flows for the year then ended were not audited, reviewed, or compiled by us, and accordingly we do not express an opinion or any other form of assurance on them.

 

Accountants who become aware that their names are being used improperly in a client prepared document that includes unaudited financial statements should notify the client promptly and determine whether other action might be appropriate and necessary, such as obtaining legal counsel.

 

Definitions

Non-public entity. An entity other than one:

  1. Whose debt or equity securities trade in a public market.
  2. That makes a filing with a regulatory agency in preparation of a public sale, or
  3. A subsidiary, corporate joint venture, or other entity controlled by an entity described in the two items above.

 

Compilation. Preparation of financial statements from information supplied by management without the accountant expressing any assurance on them.

Review. Inquiry and analytical procedures intended to provide a reasonable basis for expressing limited assurance that the accountant is not aware of any material modifications that should be made to the financial statements to make them conform to generally accepted accounting principles (GAAP) or other comprehensive basis of accounting (OCBOA).

Third party. All parties except members of management who are knowledgeable about the nature of the procedures applied and the basis of the accounting and assumptions used to prepare the financial statements.

Submission. Presenting to a client or third parties, financial statements that the accountant has prepared, either manually or by computer software.

Other Comprehensive Basis of Accounting (OCBOA). A definite set of criteria, other than GAAP, that has substantial support for use in preparing financial statements. A comprehensive basis of accounting may be any basis of accounting:

  1. Used to comply with the requirements of a government agency, such as a basis of accounting used by a state-regulated insurance company.
  2. Used for income-tax purposes.
  3. Used as a cash basis (i.e., cash receipts and disbursements) or, where substantial support exists, a modified-cash basis.
  4. Based on definite criteria that has substantial support, such as price-level basis financial statement.

 

A presentation of financial data, including related notes, derived from accounting records and intended to convey the financial resources or obligations of an entity at a point in time, or the changes therein for a specified period, in accordance with GAAP or OCBOA. For purposes of AR Section 100, prospective financial statements and financial presentations included in tax returns do not constitute financial statements.

 

Understanding With The Entity

Accountants should establish an understanding of the services to be performed with the entity, preferably in writing. A written communication is required if the accountant is engaged to compile financial statements not expected to be used by a third party. The understanding should:

  1. Describe the nature and limitations of the services to be performed.
  2. Describe any report that is to be issued.
  3. Specify that the engagement cannot be relied upon to disclose errors, fraud, or illegal acts.
  4. State the accountant will inform the appropriate level of management of: a) Any material errors found; and b)Any fraud or illegal acts identified, unless clearly inconsequential.

 

Compilation Performance Requirements

The accountant should understand the following:

  1. The accounting principles and practices of the industry in which the entity operates.
  2. The nature of the entity’s business transactions.
  3. The form of the entity’s accounting records.
  4. The qualifications of the entity’s accounting personnel.
  5. The accounting basis on which the financial statements are to be presented.
  6. The form and content of the financial statements.

 

The accountant also is required to:

  1. Read the compiled financial statements, considering their form and any obvious material errors.
  2. Request that management consider the effect on the financial statements of evidence or information concerning fraud or illegal acts that came to the accountant’s attention.
  3. Consider the effect on the compilation report of evidence or information concerning fraud or illegal acts that came to the accountant’s attention.
  4. Document any written or oral communication to management concerning fraud or illegal acts that came to the accountant’s attention.
  5. Consider resigning from the engagement if the owner of the business is involved in fraud or illegal acts that came to the accountant’s attention.
  6. Consider contacting the accountant’s legal counsel and insurance provider when evidence or information concerning fraud or illegal acts come to the accountant’s attention; and
  7. Realize that while bound by confidentiality, disclosure of evidence or information concerning fraud or illegal acts that came to the accountant’s attention may be required in order to comply with legal or regulatory requirements, respond to a subpoena, or communicate with a successor auditor under AR Section 400.

 

It is important to note that the accountant is not required to make inquiries or perform procedures to verify or review information supplied by management.

 

Reporting On The Financial Statements

Financial statements that are reasonably expected to be used by a third party should be accompanied by a report. The basic elements of the report are as follows:

  1. A statement that a compilation was performed in accordance with Statements on
    Standards for Accounting and Review Services, issued by the American Institute of
    Certified Public Accountants (AICPA).
  2. A statement that the report is limited to presenting in the form of financial statements information that is the representation by of management.
  3. A statement that no audit or review has taken place and the accountant therefore does not express an opinion or any assurance on the financial statements.
  4. A signature of the accounting firm or the accountant, which may be manual, stamped, electronic, or typed.
  5. The date on which the compilation was completed. Each page of the financial statements should be marked, “See Accountant’s Compilation
    Report”.

 

The form and content of a standard compilation report applicable to GAAP financial statements are as follows:

I (we) have compiled the accompanying balance sheet of XYZ Company as of December 31, 20X1, and the related statements of income, retained earnings, and cash flows for the year then ended, in accordance with Statements on Standards for Accounting and Review Services, issued by the American Institute of Certified Public Accountants.

A compilation is limited to presenting in the form of financial statements information that is the representation of management (owners). I (we) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

 

The form and content of a standard compilation report applicable to OCBOA financial statements (in this case, prepared using the cash basis of accounting) are as follows:

I (we) have compiled the accompanying statement of assets and liabilities arising from cash transactions of XYZ Company as of December 31, 20X1, and the related statement of revenue collected and expenses paid for the year then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants.

A compilation is limited to presenting in the form of financial statements information that is the representation of management (owners). I (we) have not audited or reviewed the accompanying financial statements and, accordingly, do not express an opinion or any other form of assurance on them.

 

Special Reporting Situations

Financial Statements That Omit Substantially All Disclosures An accountant is permitted to compile financial statements that omit substantially all of the disclosures and/or the statement of cash flows required by GAAP if the omission is clearly stated in the report and there is no intention on the part of the client to mislead actual and potential users of the financial statements. Under these circumstances it is appropriate to add a final paragraph:

Management has elected to omit substantially all of the disclosures (and the statement of cash flows) required by generally accepted accounting principles. If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the company’s financial position, results of operations, and cash flows. Accordingly these financial statements are not designed for those who are not informed about such matters.

 

* If some disclosures are made, they should be labeled “Selected Information—Not All Disclosures Required by Generally Accepted Accounting Principles Are Included .

If an accountant compiles OCBOA financial statements that omit substantially all disclosures, it is appropriate to add a final paragraph:

Management has elected to omit substantially all the disclosures ordinarily included in financial statements prepared on [insert basis of accounting; for example, the income tax basis of accounting].

 

If the omitted disclosures were included in the financial statements, they might influence the user’s conclusions about the company’s assets, liabilities, equity, revenue, and expenses.

Accordingly, these financial statements are not designed for those who are not informed about such matters.

 

Lack of Independence

An accountant who lacks independence may still issue a compilation report. The lack of independence should be disclosed as the last paragraph of the report:

I am (we are) not independent with respect to XYZ Company.

 

The reason for the lack of independence should never be disclosed.

 

Source Of Standard Used In This Post:

SSARS 1, Compilation and Review of Financial Statements
SSARS 10, Performance of Review Engagements
SSARS 15, Elimination of Certain References to Statements on Auditing Standards and Incorporation of Appropriate Guidance into Statements on Standards for Accounting & Review Services