For some reasons, a company may change its accountant. Example:  ABC Company’s financial statement for 2011 fiscal year has been reviewed by Andrew Clarkson, CPA. For some reasons, the company invited Lie Dharma Putra CPA to review its 2012 statement, and Putra accepted the new engagement. Andrew Clarkson is called predecessor and Lie Dharma Putra is successor accountant.

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In most cases, successors need to communicate with the predecessor accountants. SSARS 4 discusses the circumstances when communications between predecessor and successor accountants may be desirable and the types of inquiries a successor may decide to make.

It was initially based on SAS 7, “Communications between Predecessor and Successor Accountants” (superseded by SAS 84). However, unlike the auditor-to-auditor communications in SAS 84, communications are not required in a compilation or review engagement (with the exception noted when the financial statements are believed to be materially misleading). So how, a communication between successor and predecessor accountant is conducted? Read on…

 

Why Does Successor Need to Communicate With Predecessor Accountant?

A successor accountant may decide to communicate with a predecessor accountant when:

  • The information obtained about the prospective client is limited or requires special attention;
  • The change in accountants occurs substantially after the end of the accounting period for which financial statements are to be compiled or reviewed; or
  • There have been frequent changes in accountants.

The successor accountant should:

  • obtain the client’s permission before communicating with the predecessor; and
  • ask the client to authorize the predecessor to respond fully to inquiries.

The successor’s inquiries may be either oral or written and ordinarily would include questions that might assist a successor in deciding whether to accept the engagement. Inquiries may cover:

  • Management’s integrity.
  • Disagreements about accounting principles or about the need to perform certain procedures.
  • Management’s cooperation in providing information.
  • The predecessor’s understanding of the reasons for the change in accountants.

The predecessor should respond promptly and completely to the inquiries noted above. If the predecessor limits his or her response because of unusual circumstances, such as litigation, that should be disclosed. The successor should evaluate the reasons and implications of a limited response in deciding whether to accept the engagement.

 

Access To Working Papers (With Consent Letter Example)

A successor may also wish, after the client obtains authorization from the predecessor, to review the predecessor’s working papers. The predecessor and successor should agree on those working papers that are available and those that may be copied. Valid business reasons (e.g., unpaid fees) may cause the predecessor not to allow access to working papers.

Before permitting access to the working papers, the predecessor accountant may wish to obtain a consent letter and an acknowledgement letter from the successor accountant. Here is an example consent letter and an acknowledgement letter from predecessor accountant to its former client.

 

Client Consent Letter Example (From Predecessor Accountant to Client)

[Date]

ABC Company
[Address]

You have given your consent to allow [Lie Dharma Putra CPA firm] as successor accountants for ABC Company, access to our working paper documentation for our [compilation or review] of the December 31, 2011 financial statements of ABC Company. You also have given your consent to respond fully to [Lie Dharma Putra CPA firm] inquiries. You understand and agree that the review of our working paper documentation is undertaken solely for the purpose of obtaining an understanding about ABC Company and certain information about our [compilation or review] to assist [Lie Dharma Putra CPA firm] in [compiling or reviewing] the December 31, 2012 financial statements of ABC Company.

Please confirm your agreement with the foregoing by signing and dating a copy of this letter and returning it to us.

Attached is the form of the letter we will furnish [Lie Dharma Putra CPA firm] regarding the use of the working paper documentation.

Very truly yours,

[Predecessor Accountant]
By: Andrew Clarkson, CPA

 

Accepted:

ABC Company
By: ________________________ Date:_____________________

 

 

Let’s say ABC Company accepted the consent letter. The next letter submitted by predecessor accountant is an acknowledgment letter. An example is shown next.

 

Example of Successor Accountant Acknowledgement Letter (From Predecessor to Successor Accountant)


[Date]

[Successor Accountant]
[Address]

 

We have previously [reviewed or compiled], in accordance with Statements on Standards for Accounting and Review Services, the December 31, 2011 financial statements of ABC Company. In connection with your [review or compilation] of ABC’s 2012 financial statements, you have requested access to our working papers prepared in connection with that engagement. ABC has authorized our firm to allow you to review those working papers.

Our [review or compilation], and the working papers prepared in connection therewith, of ABC Company’s financial statements were not planned or conducted in contemplation of your [review or compilation]. Therefore, items of possible interest to you may not have been specifically addressed. Our use of professional judgment for the purpose of this engagement means that matters may have existed that would have been assessed differently by you. We make no representation about the sufficiency or appropriateness of the information in our working papers for your purposes.

We understand that the purpose of your review is to obtain information about ABC Company and our 2011 results to assist you in your 2012 engagement of ABC Company. For that purpose only, we will provide you access to our working papers that relate to that objective.

Upon request, we will provide copies of those working papers that provide factual information about ABC Company. You agree to subject any such copies or information otherwise derived from our working papers to your normal policy for retention of working papers and protection of confidential client information. Furthermore, in the event of a third-party request for access to your working papers prepared in connection with your [reviews or compilations] of ABC Company, you agree to obtain our permission before voluntarily allowing any such access to our working papers or information otherwise derived from our working papers, and to obtain on our behalf any releases that you obtain from such third party. You agree to advise us promptly and provide us a copy of any subpoena, summons, or other court order for access to your working papers that include copies of our working papers or information otherwise derived therefrom.

Please confirm your agreement with the foregoing by signing and dating a copy of this letter and returning it to us.

 

 

Very truly yours,

[Predecessor Accountant]

By: Andrew Carkson, CPA

 

Accepted:

[Successor Accountant]

By: Lie Dharma Putra, CPA Date:______________________

 

The above example is based on SSARS 400.12 (famously called SSAR 4). According to SSAR 400.12, even with the client’s consent, access to the predecessor accountant’s working papers may still be limited. Experience has shown that the predecessor accountant may be willing to grant broader access if given additional assurance concerning the use of the working papers.

Accordingly, the successor accountant might consider agreeing to the following limitations on the review of the predecessor accountant’s working papers in order to obtain broader access:

  • The successor accountant will not comment, orally or in writing, to anyone as a result of the review about whether the predecessor accountant’s engagement was performed in accordance with the Statements on Standards for Accounting and Review Services.
  • The successor accountant will not provide expert testimony or litigation services or otherwise accept an engagement to comment on issues relating to the quality of the predecessor accountant’s engagement.

The paragraph below illustrates the above:

Because your review of our working papers is undertaken solely for the purpose described above and may not entail a review of all our working papers, you agree that (1) the information obtained from the review will not be used by you for any other purpose, (2) you will not comment, orally or in writing, to anyone as a result of that review about whether our engagement was performed in accordance with Statements on Standards for Accounting and Review Services, (3) you will not provide expert testimony or litigation services or otherwise accept an engagement to comment on issues relating to the quality of our engagement.

 

Materially Misleading Financial Statements

If during the engagement, the successor accountant becomes aware of information that causes him or her to believe that the financial statements reported on by the predecessor may need to be revised, the successor should ask the client to communicate the matter to the predecessor.

If the client refuses to do so or if the predecessor’s response is inadequate, the successor should evaluate the implications for the engagement and consider whether to resign. The accountant may also wish to consult with legal counsel.

Please note that SAS 84 does not apply to engagements governed by SSARS 4. Furthermore, no standards apply to situations where the prior years’ financial statements were compiled or reviewed and the current year is to be audited, or vice versa. Footnote 3 of SAS 84 indicates that a successor auditor may find the guidance in Section 315 useful in communicating with the predecessor accountant who compiled or reviewed the prior financial statements. Similarly, a successor accountant may find the guidance in SSARS 4 useful in communicating with a predecessor auditor.