SSARS No. 9: clarifying CPA compilation and review procedures: What will the AICPA, SEC, and others come up with next��and what does it all mean to you? RMA's ongoing series looks at implications for bankers

SSARS No. 9 provides additional disclosures for companies using compilation and review procedures--the bulk of the financial statement portfolios in many bank loan officers' files.

It's a two-fer. Omnibus Statement on Standards for Accounting and Review Services (SSARS)--2002, No. 9 amends SSARS No. 1, Compilation and Review of Financial Statements, and SSARS No. 4, Communications Between Predecessor and Successor Accountants. The AICPA's point in issuing No. 9 is to clarify certain compilation and review report disclosures and key communications between predecessor and successor accountants.

Amendments to SSARS No. 1

1. All compilation and review reports should include the CPA's (manual, typed, or electronic) signature.

2. "Standard" compilation and review reports no longer require separate Statements of Retained Earnings or Statements of Comprehensive Income. Companies can disclose required information regarding retained earnings as part of the statements of equity or in the footnotes. However, the CPA's compilation and review reports should make reference to any (optionally) disclosed Statements of Retained Earnings or Statements of Comprehensive Income. SSARS No. 9 thus recognizes that generally accepted accounting principles (GAAP) require disclosing changes of equity, but not necessarily in a separate financial statement.

3. The contents of Management's Representations for all Review Engagements should reflect recent revisions for such audit representation letters. CPAs should now ascertain that such letters show that management ensures the following:

* Knowledge of its responsibility for fair presentation (per GAAP or other comprehensive basis of accounting [OCBOA]) of the financial statements.

* Its belief that the statements are fairly presented (again per GAAP or OCBOA).

* Inclusion of complete and truthful responses to inquiries made during the review.

* Specific representation that information provided to the accountant is complete.

* Inclusion of all information and comments regarding subsequent events.

Moreover, management should date such letters no earlier than the dates of the CPA's reports and include all comparative periods covered by the review report(s)--even those periods prior to current management.

4. Effective quality control systems (e.g., AICPA Statements on Quality Control Standards) do promote adherence to SSARS. However, deficiencies or noncompliance with such systems do not by themselves indicate nonconformance with professional SSARS standards.

Amendments to SSARS No. 4

1. Successor accountants (1) should now ask (verbally or in writing) the predecessor accountants (2) about matters that will help the successor accountant decide whether or not to accept the engagement. Such matters include:

* Any knowledge of fraud or illegal acts, as well as the predecessor accountants' understanding of the reasons for the change of accountants.

* Information that could influence the assessment of the integrity of management.

* Disagreements with management about accounting principles or the need to perform certain procedures.

* Management's cooperation in providing requested, additional, or revised information.

2. The successor accountant must get the client's permission to obtain such representation letters or ask why clients may refuse to grant such permission. In the latter case, the successor accountant must consider the implications of the refusal; for example, did interpretations or violations of GAAP or unpaid accounting fees lead to such rotation of accountants?

3. However, the predecessor accountant may decide that potential litigation or other unusual circumstances could preclude making such disclosures to the successors.

4. After getting the client's permission, the predecessor accountant may also agree to allow the successor to use its client's workpapers.

Summary

The provisions of SSARS No. 9 should clarify CPAs' responsibilities in the performance of compilation and review engagements in the following areas:

* Signing their reports.

* Disclosing Statements of Retained Earnings and Comprehensive Income.

* Developing management representation letters and understanding the limits of quality control standards.

* Enhancing communications between predecessor and successor accountants.

* The overall acceptance of new engagements.

Bankers and loan officers should recognize these new rules as they analyze their clients' compiled and reviewed financial statements.

Notes

(1) Successor accountants are those who are considering accepting or have accepted the engagement.

(2) Predecessor accountants are those who have reported on the most recently compiled or reviewed financial statements or who have resigned from the engagement, declined to stand for reappointment, or otherwise will not complete such engagements.

Contact Reinstein by e-mail at a.reinstein@wayne.edu.

[c] 2004 by RMA. Alan Reinstein, CPA, DBA, is George R. Husband Professor of Accounting at the School of Business, Wayne State University, Detroit, Michigan.

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