United States: "Plain Paper" Financial Statements Made Not So Plain: An Overview Of SSARS 21

Co-authored by Vincent J. Love, CPA/CFF, CFE, chairman of VJL Consulting, LLC and a member of The CPA Journal Editorial Board.

We are what we pretend to be, so we must be careful what we pretend to be.
—Kurt Vonnegut,
Mother Night (Introduction)

For most of the last quarter of the 19th century, accounting practice consisted mostly of making original entries for transactions and preparing financial statements for owners. Continuing into the early part of the 20th century, the work of accountants and the greater need for accurate financial information raised accounting to a profession with legal status and resulted in the formation of various self-regulatory organizations. A variety of standards (e.g., Statements on Auditing Procedure 23, 33, and 38) issued by the American Institute of Accountants (AIA), and later its successor the AICPA, in the middle of the century addressed the preparation of unaudited, unverified financial statements, called "plain paper" statements, attempting to correct misconceptions about CPAs' attestation (or lack thereof) to the information in such statements.

But it was not until the judgment in 1136 Tenants' Corp. v. Max Rothenberg & Co. [36 A.D.2d 804 (N.Y. App. Div. 1971)], however, that the need for professional standards for accounting and review services became apparent. The trial court in 1136 Tenants' Corp. ruled that a CPA firm was negligent in its duties when it used "inadequate, incomplete, and improperly deployed" procedures when providing its services. Moreover, the appeals court found that "even if defendant were hired to perform only 'writeup' services, it is clear, beyond dispute, that it did become aware that material invoices purportedly paid by [the building management company] were missing, and, accordingly, had a duty to at least inform plaintiff of this." This case, as well as studies sponsored by professional associations that included an analysis of the perception of the users of unaudited financial statements prepared by CPAs, eventually led the profession to develop the Statements on Standards for Accounting and Review Services (SSARS).

SSARS 1, Compilation and Review of Financial Statements, issued in December 1978, established the standards for CPAs reporting on a client's unaudited financial statements. It prohibited CPAs from issuing a report on the unaudited financial statements of a non-public entity unless either compilation or review procedures were applied to those statements. In addition, a report addressing the procedures applied and the level of assurance given, whether limited or none, was required to accompany the financial statements. SSARS 1 explicitly precluded the preparation of financial statements unless the CPA "complies with the provisions of [SSARS 1] applicable to a compilation engagement." Therefore, preparation of plain paper financial statements was prohibited.

Subsequent to SSARS 1, many leaders in the profession lobbied for standards that would allow the preparation of financial statement services that did not require even the application of compilation procedures. This was needed, they argued, to serve small entities that did not have the internal capability to prepare their own financial statements, and it could be accomplished if certain safeguards were in place.

In October 2000, SSARS 8, Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements, was issued. It addressed the performance and communication requirements for financial statements of nonpublic entities that were not intended for third-party use, but rather for sole distribution to individuals in management with sufficient knowledge to understand the statements in their proper context. There was a requirement that each page of the financial statements contain a legend indicating that they were "Restricted for Management's Use Only" or similar language. This change to the SSARS did not completely resolve the issue, since some in the profession believed that there still existed a need to help smaller clients prepare their financial statements for distribution outside of management.

SSARS 21

SSARS 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, allowed CPAs to prepare financial statements from the unaudited financial books and records. Section 70 of SSARS 21 "applies when an accountant in public practice is engaged to prepare financial statements." It also states that the procedures may be used and adapted to the specific engagement circumstances in the preparation of other prospective or historical financial data. (SSARS 26, Statements on Standards for Accounting and Review Services: Omnibus Statement, did not significantly change SSARS 21; it clarified it and added prospective financial statements to the list of information that can be prepared without applying any audit, review or compilation procedures.) This essentially allowed a CPA to perform the same nonattest services on financial data that were a part of many practices during the early days of the profession. There are, however, some important concerns and issues that CPAs should consider before providing such services.

Times have changed. What was available to the profession and its clients in the industrial age is far different than what is available in the information age. In addition, the legal climate is drastically different. Finally, the public perception of, and expectation concerning the work-product delivered by, CPAs has changed drastically.

SSARS 21, while ostensibly requiring no verification similar to that required in an audit or review, does require some procedures similar to those for a compilation, and failure to follow them can lead to allegations of insufficient performance. The standard also sets the stage for third parties to profess that they placed greater reliance on the financial statements because a CPA was involved in their preparation.

Section 70.04 states that "an engagement to prepare financial statements does not require the accountant to verify the accuracy or completeness of the information provided by management or otherwise gather evidence to express an opinion or a conclusion on the financial statements or otherwise report on the financial statements." In the following sections, however, SSARS 21 addresses the need for an engagement letter, including management's agreement that either each page of the financial statements will include a statement that no assurances are given on those statements or the CPA will be required to issue a disclaimer that makes the lack of such assurances clear. Moreover, section 70 requires the accountant to comply with section 60, "General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services."

A reading of sections 60 and 70 leads one to realize that several matters are critical to consider when performing a financial statement preparation service under SSARS 21. The most important business consideration when deciding whether to offer financial statement preparation services is the risk involved. This is more than simply labeling the service as "high risk." The risk cannot be mitigated by extending procedures, because a preparation engagement does not require any verification procedures. Consequently, if verification procedures are used, they may significantly increase a CPA's exposure to liability. The CPA or the firm will be associated with the financial statements, no matter what legend or report is used to disclose the lack of any verification of the underlying transactions and balances displayed on the face of the statements or the sufficiency of any note disclosures. CPAs must also consider whether the level of work is so far below the expertise attached to the CPA designation that it lowers the professional image of the CPA or firm providing the service.

Client acceptance and continuance is another factor. As stated above, the information given to the CPA will not be verified. Furthermore, clients desiring this service will tend to be smaller and less sophisticated, which presumably means that the data is more susceptible to error (and manipulation). CPAs should therefore exercise greater scrutiny of the character and integrity of the prospective or continuing client before a preparation engagement is accepted. The client's behavior should be considered throughout the relationship, and if there is any doubt about management's integrity, serious consideration should be given to withdrawing from the engagement.

CPAs also need to have an understanding of the client's business, structure, its accounting system, environment, and the financial reporting framework being used, including the acceptability of that framework. Because clients may not have the ability to prepare their own financial statements, CPAs should consider whether the necessary information and data will be available and reliable. If additional data is needed, this could be construed as evidence that the CPA was aware that a higher-level service than preparation was needed. This could expose a CPA to greater exposure if the financial statements turn out to be fraudulent or contain material errors.

Certain representations are needed to prepare financial statements. In other services, these are contained in a "representation letter." Here, they need to be included in a client-signed engagement letter. The letter should state that the client is responsible for—

  • the selection of the reporting framework used,
  • the internal controls related to the preparation and presentation of the financial statements,
  • the prevention and detection of fraud,
  • compliance with relevant laws and regulations,
  • the accuracy and completeness of the underlying financial records and documents and the significant judgments required for the preparation of the financial statements,
  • providing the CPA with access to information needed to prepare the financial statements, and
  • unrestricted access to client personnel.

In essence, the engagement letter becomes a representation letter, and CPAs must remember that all of these representations are coming from a client who may be unable internally to prepare its own financial statements.

Finally, CPAs are expected to exercise professional judgment throughout the preparation engagement, and the basis of that judgment should be appropriately documented in the working papers. SSARS 21 also requires CPAs to discuss the judgments reflected in the financial statements with management so that management understands the significant ones and accepts responsibility for the judgments used. This may not absolve the CPA from any liability, however, as those judgments are made by management that might not even have the financial knowledge necessary to prepare its own financial statements.

SSARS 21 further states that if the CPA "becomes aware that the records, documents, explanations, or other information, including significant judgments" are not complete or accurate, she should bring that to management's attention and request additional or corrected information. This requirement does place some burden on CPAs, even while they do not have to verify the data. With hindsight, a case could sometimes be made that a CPA should have known of the problem and asked for additional or corrected data. There is also the question of whether the fact that the necessary information is incomplete or inaccurate reflects on the character and integrity of the client.

The Profession and What It Represents

CPAs are required to adhere to one or more of the AICPA, state society, or regulatory codes of conduct and their general standards or provisions when performing any service, such as professional competence, due professional care, planning and supervision, and obtaining sufficient relevant data. The vast majority of state societies use the AICPA Code of Professional Conduct or one with essentially the same provisions. All of them recognize the need to place integrity and the public good above commercial considerations.

The CPA designation is earned only after education and experience criteria are met and a difficult examination is passed. It is a license to practice using the title of Certified Public Accountant. There are continuing education requirements that must be met to remain licensed, as well as requirements to comply with regulatory and self-regulatory organizations' ethics and performance criteria. These requirements, which center on the CPA's exclusive right to report on financial statements, have raised the public's image of the financial competency of the CPA to a very high level. Unlike other organization-conferred designations, which ostensibly only demonstrate a special skill, the CPA designation is an exclusive, government regulatory authority–granted license to practice and perform certain services.

Given the high esteem in which the profession is held, why should CPAs perform services that could be performed extremely well, and at lower cost, by a good bookkeeper or even a computer program? As mentioned above, a legend stating that the financial statements were not audited may still put a third-party reader on notice that a CPA was involved in the preparation of the financial statements, even if the CPA's name is not included in the legend. SSARS 21 does not preclude a CPA from including his name in the legend, but this offers a greater risk of liability and could imply that the preparer is trading on the trust the public has in the CPA designation. It is far more sensible for a CPA to serve as a consultant, setting up the computer system and controls necessary for the client to achieve its internal reporting objectives. For reporting to third parties, the compilation engagement should, in the authors' view, be the lowest level of reporting, especially since its limitations are already recognized by the legal system. What is the difference in cost between the two services, even considering a lack of independence disclosure in the compilation report?

The high regard the public has for the profession is best protected by keeping the CPA's name off of plain paper financial statements. Eli Mason, an active critic of his profession when he believed it was going astray, said in a letter to the AICPA Accounting and Review Services Committee in 1997:

I have heard that your committee may reconsider "plain paper financial statements." As a long-time practitioner, I have had a negative feeling about such so called financial statements, as I believe they demean the professionality [sic] of certified public accountants. These statements are intended to avoid responsibility by those who prepare and are associated with said financial statements, but to the contrary, clients have historically submitted such statements to banks and credit grantors despite caveats, footnotes, and "poison warnings" appended thereto. ("No Plain Paper Please," The CPA Journal, May 1997, http://bit.ly/2pyW2Q8.)

Legal Considerations

The legal liability of CPAs who purport to perform SSARS 21 services could turn on whether those CPAs actually performed procedures beyond what the standard contemplates—in which case they will be beyond the legal protection that the standard attempts to create. This is precisely what occurred in 1136 Tenants' Corp. In that case, the accountant's testimony that certain services performed went beyond the scope of "write-up" work and the time records revealing that the accountants examined bank statements were sufficient to create an issue of fact as to the scope of services actually performed, with the accountants ultimately being held to the standard of having been engaged to perform an audit.

By SSARS 21's own terms, CPAs who undertake to do more in terms of verification or analysis could find themselves being measured against the higher standards applicable to compilation or review engagements. This is particularly a concern in jurisdictions where privity rules allow negligence suits to be brought against CPAs by non-clients, as those non-clients would not be subject to the argument that their signatures on the engagement letters prevents them from arguing that a higher level of service was actually intended. It is entirely foreseeable that an opportunistic creditor or bankruptcy trustee would advance such an argument to establish a CPA's liability.

As was the case in 1136 Tenants' Corp., a CPA's own billing and engagement documentation is likely to be the key evidence militating against the argument that he only performed limited-scope clerical services. If a CPA undertakes to provide such services, extra care must be taken not to create the appearance that a higher level of service was actually performed. In the past, similar arguments have been made by litigants trying to establish that a CPA did more than was required for a compilation.

Another factor that will weigh against any CPA is the "expectations gap." The public expectation that CPAs are learned, careful, and thorough professionals is challenged by the notion that a CPA can assemble a client's financial statements without some level of professional analysis or responsibility. As experience has proven, juries and judges harbor these expectations.

In Summation

SSARS 21 once again gives CPAs the authority to issue plain paper financial statements. In this regard, the profession has come full circle—but have CPAs learned from history? Hopefully, CPAs will take the steps necessary to reduce engagement risk to an acceptable level and to protect the profession's public image.

CPAs who decide to proceed with a financial statement preparation engagement should consider the following steps to reduce the engagement risk and comply with the standards:

  • Perform and document client acceptance and retention procedures
  • Adhere to engagement quality control standards
  • Obtain a written engagement letter clearly setting forth the client's and the CPA's responsibilities
  • Meet with management to be sure that the representations are clearly understood, and document the meeting
  • Follow up on any unusual or suspicious balances, activity, or unavailable data encountered
  • Avoid including the name of the CPA in the legend required on each page of the prepared "plain paper" financial statements.

Financial statement preparation engagements are risky and can be performed adequately, effectively, and at a lower cost by non-CPA bookkeeping firms or computerized accounting systems for many smaller clients. CPAs who decide to perform financial statement preparation engagements should ask themselves if it is in the client's best interest, if they want to accept the engagement risk, whether they have complied with all of the procedures required by the standards, and whether the engagement will increase or decrease their and the profession's public image.

Originally published by The CPA Journal, May, 2017.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.