Changes to the standards for compilation and review engagements are on the horizon. These changes will impact accounting firms performing compilations and reviews as well as businesses requesting such services.

The industry standard, set by the Accounting and Review Services Committee of the American Institute of Certified Public Accountants (AICPA), issued Statement on Standards for Accounting and Review Services (SSARS) no. 19, Compilation and Review Engagements, which is effective for periods ending on or after Dec. 15. SSARS no. 19 provides the most significant changes to the professional literature for compilations and reviews since 1978.

A compilation is limited to assisting management in preparing financial statements. The accounting firm takes data provided by the client and assembles it into a standard financial statement format. When performing a compilation, the accounting firm does not check or verify the client’s data and provides no assurance on the financial statements. However, the accounting firm is expected to be independent, as defined by the AICPA. If not, independence is “impaired” and that fact must be disclosed in the compilation report. An accounting firm is typically not independent of the client if they provide significant bookkeeping services, maintain the general ledger, or approve and post journal entries. Ownership interest or family relationships may also impair independence.

One of the most significant changes regarding compilations involves the independence impairment disclosure. In the past, accounting firms were not allowed to disclose the reason for impairment. However, many third-party users of financial statements, primarily bankers, wanted to know the reasons for the impairment, as many bankers view technical impairments caused by the accounting firm’s involvement in certain systems to be different from ownership or family relationships.

SSARS no. 19 will allow accounting firms to disclose the reason they are not independent. However, the standard does not require such disclosure. If the accounting firm does decide to disclose independence impairment, all reasons for impairment must be disclosed. The accounting firm cannot pick and choose what to disclose.

A review process is a step up from a compilation and requires the accounting firm to obtain what the AICPA refers to as “limited assurance.” Limited assurance can generally be obtained through the use of analytical procedures and inquiry of the client’s management, but typically does not extend to audit testing such as viewing source documents or obtaining third-party verification.

An important change regarding reviews is the amount of planning the accounting firm will need to perform prior to conducting review procedures. Accountants are now discouraged from using a canned list of analytical and inquiry procedures during the planning stage. They should tailor procedures to areas that are at greater risk of misstatement. Also, if analytical procedures and client inquiry alone do not satisfy the accounting firm performing the review, they may need to dig deeper and possibly perform audit procedures necessary to obtain limited assurance on the financial statements.

SSARS no. 19 will also require the understanding of all compilation and review engagements to be in writing, in the form of engagement letters. Prior to this change, the understanding of services could be agreed upon verbally. These engagement letters can cover multiple services to be performed, such as monthly compilations and an annual review to cover the entire year.

In general, SSARS no. 19 is meant to improve the reliance that management and other users of the financial statements can place on statements that have been reviewed. At Wright Griffin Davis and Co. we are preparing for SSARS no. 19 and have met with our staff to ensure that the changes are implemented.

Sherry Brubaker, CPA, is an audit manager with Wright Griffin Davis.