SSARS 19 Significantly Changes 18 Previous Compilation and Review Standards
In November 2009, the Accounting and Review Services Committee (ARSC) approved the most substantial revisions to the standards for compilation and review services since 1978. The new standard, Statement on Standards for Accounting and Review Services, Compilation and Review Engagements
(SSARS 19), changes the previous 18 standards and will be available in early 2010.
The ARSC considered a number of objectives during the development of this new statement. One objective the committee achieved was reorganizing the standards for easier use. This undertaking was primarily accomplished by separating the compilation guidance from the review guidance. SSARS 19 is divided into three sections: a framework, compilations, and reviews.
“The standard is easier to follow and clearly identifies requirements,” says Chas McElroy, executive principal of assurance and accounting with LarsonAllen and member of the ARSC. “After 31 years, it is time for a change.”
In 1978, two new levels of financial statement reporting services called compilation and review engagements were created. Previously, financial statements that were not audited were merely referred to as “unaudited” financial statements. Guidance on these two new service levels all began with the issuance of the first Statement on Standards for Accounting and Review Services, or “SSARS.” Since then, revisions and improvements were made by including minor incremental changes to the SSARS.
New definitions and concepts in SSARS 19
The new framework provides relevant definitions for both compilations and reviews. In addition, it adds concepts that were absent from the standards, including materiality and evidence.
Materiality and evidence
Previously, materiality was addressed only in the audit standards. As a result, many would analogize to those standards when performing accounting services. This was burdensome since the audit standards also included guidance on using materiality in performing audit steps, such as tolerable misstatement and individually significant items. SSARS 19 now defines materiality for compilation and review engagements from an accounting perspective. Documentation of materiality is not required; however, it may be appropriate.
The new framework also introduces the concept of evidence. A review is defined as an evidentiary service. Evidence, however, is only needed to obtain limited assurance.
Engagement letters will now be required for all compilation and review services. The statement did not address whether the letter must be obtained annually or whether a perpetual letter could be used; it is left to the accountant’s professional judgment.
Extent of knowledge required
Knowledge of the client’s industry and business is now separately defined for compilations and reviews. As a result, the extent of knowledge obtained will need to be greater for reviews than compilations. For reviews, it needs to be sufficient to assist in the determination of the nature, timing, and extent of review procedures. The level of risk of incorrectly issuing an unmodified review report should also be considered in determining the inquiries to be made and which analytical procedures to perform.
Documentation requirements have also been expanded under the new standards.
For compilations, in addition to the engagement letter, significant findings or issues should be documented. In general, documentation should include sufficient detail to provide a clear understanding of the work performed.
Reviews must now include documentation of significant findings, and continue to require documentation of inquiries made and responses, as well as the analytical procedures performed and the results.
The most significant change is the paragraph a practitioner adds to a compilation report when the accountant is not independent. Effective with the issuance of the new standard, the reason for impairing independence, while not required, can be explained in the accountants’ compilation report. While examples of various independence impairment paragraphs are provided, there is no restriction on the extent of the impairment description. If the additional explanation is included, however, all reasons that independence is impaired must be included.
The reports for both compilation and review were also expanded and now will include a new paragraph explaining management’s responsibility.
The new standard will be effective for periods ending on or after December 15, 2010, with the exception of the optional explanation of the reasons for impairment of independence description in the accountants’ compilation report, which is allowed immediately.
A new technical practice aid on compilations and reviews will be released in late spring 2010 and provide guidance on practical issues encountered when performing these types of engagements.
For more information, contact Steve Bodine, assurance and accounting principal, at email@example.com or 612-376-4791, or your LarsonAllen advisor.