June 9, 2015
To our peer review clients:
Annually we make an effort to highlight recent changes in professional standards for our peer review clients. We hope what follows is helpful to you in your accounting and auditing practice.
New Compilation and Review Standards
In October 2014 the AICPA issued SSARS No. 21, which is a major revision of the compilation and review standards, a “clarity standard” intended to make the standards easier to read, understand, and apply. In addition, SSARS No. 21 introduces a new non-attest service for financial statement preparation.
Please note: SSARS No. 21 requires firms replace existing language in their accountant’s reports, engagement letters and other client communications with significantly different language beginning with periods ended on or after December 15, 2015.
The format for the review report has a modern look, resembling the presentation and layout of the current audit report, while the compilation report language regresses, reading much like a compilation report excerpted from the original compilation and review standards issued in the late 1970’s.
Under SSARS No. 21, firms will no longer be able to offer the management use only financial statement preparation service (previously known as “SSARS No. 8” engagements), which had allowed CPAs to prepare and present financial statements in whatever format management wished without reporting on them as long as use was limited to management. In place of the management use standards, SSASRS No. 21 introduces a new financial statement preparation service to the professional standards, which allows CPAs to present financial statements without reporting on them for use not only by management but also for use by third parties, such as lenders, investors, and other members of the public, although their format should comply with GAAP or another financial reporting framework.
The New Financial Statement Preparation Service
If you are not specifically engaged to compile the financial statements, your engagement will either fall outside of SSARS altogether or it will come under the standards for the new financial statement preparation service.
What do we mean by “fall outside of SSARS altogether”? In an appendix to the new preparation standard, the AICPA has indicated that providing “general bookkeeping” such as entering general ledger transactions or processing payments in an accounting software system is “an accounting service” not subject to SSARS. If both you and the client understand the service is not intended to include financial statement preparation, even though the accounting software has a report writing feature, you do not come under either the preparation or compilation standards. This is true even if you are preparing and posting certain adjustments such as the depreciation adjustment. Here is a rule of thumb: Ask yourself, “Who would the client say prepared the financial statements?” If the client would answer “the accounting software” then you have a bookkeeping engagement.
The AICPA announcements regarding the new preparation service may lead you to believe this is a less formal and less time intensive engagement than the compilation service. The AICPA has sold the new service as a response to the “current electronic and cloud-based practice environment.” Actually the time and effort involved under the new service is comparable to that required to perform a compilation engagement. The only meaningful difference between the engagements is the method of communicating the accountant’s involvement to the user, which is done with a legend on each page of the financial statement for the preparation engagement, as opposed to making the communication in the accountant’s report for a compilation engagement. Both engagements require a signed engagement letter from the client.
Matters communicated in the accountant’s report on nondisclosure compilation engagements, such as departures from the applicable financial reporting framework or the decision by management to omit substantially all disclosures, must be conveyed with the use of similar language on preparation engagements, except on the face of the financial statements or in a note to the financial statements instead of in a report.
Consider how the preparation service might apply to interim tax basis financial statements a firm prepares on accounting software. In the past a firm preparing interim financial statements, after obtaining an engagement letter, generated a balance sheet and income statement from QuickBooks, tailored the titles to indicate the income tax basis of accounting was used, included a legend on each page asking the user to “see accountant’s report” and issued a compilation report with boiler plate language stating no assurances were offered. If there were departures from the income tax basis, the accountant described the departures in the report. Preparing the same financial statements under the standards for preparation service, the firm again obtains an engagement letter, generates a balance sheet and income statement from QuickBooks, tailors the titles to indicate the income tax basis of accounting is used, includes a legend on each page advising the user that the firm offers no assurances, and presents the statements to the client. If there are departures from the income tax basis, the accountant describes the departures in selected footnotes or on the face of the financial statements. Note a similar effort is required for the preparation service as for the compilation service.
Preparation services as defined in SSARS No. 21 are included within the scope of peer review for firms already enrolled in the peer review program, but firms with practices restricted to providing this service are exempt from peer review. Although such firms are exempt from peer review under the AICPA standards, depending on the state in which the firm practices, the state board of accountancy may require them to participate in peer review.
New Accounting Standards
There is a welcome trend toward simplification of the accounting standards. For example, a recent AICPA interpretation has removed the requirement to disclose years open to examination by major taxing jurisdictions. Unless your client has a material unrealized tax benefit, this disclosure is now optional. This had been a common finding in peer review, because this disclosure was featured on the peer review engagement checklists.
As noted in our letter last year, FASB has established the Private Company Council (PCC) to better tailor accounting standards for small and midsize companies. The PCC standards are referred to as “PCC Accounting Alternatives.” Alternatives for variable interest entities, interest rate swaps, and goodwill were issued last year and are effective for periods beginning after December 15, 2014. In response to these accounting alternatives, the AICPA issued technical guidance interpreting what the effect will be on the accountant’s and auditor’s reports in the year an alternative approach is implemented. Implementing the alternative standards is deemed a change in accounting principle.
In addition to the increased flexibility provided under the alternative standard on variable interest entities referred to above, which provides an exemption to the consolidation requirement for “common-control leasing arrangements,” accountants now have better guidance from the AICPA on whether management’s failure to consider variable interest entities for consolidation represents a scope limitation. With the publication of TIS 9150.29, it is now clear that you can opt out of a review of variable interest entities for inclusion in consolidated financial statements as long as the accountant’s report discloses this as a departure from generally accepted accounting principles. Previously guidance in this area was lacking.
In June 2014 FASB issued ASU No. 2014-10, which eliminates the special presentation requirements for development stage companies. Effective for annual reporting periods beginning after December 15, 2014, development stage companies will no longer have to present inception-to-date information on the statements of income, cash flows, and shareholder equity, nor will such companies have to label the financial statements as those of a development stage entity.
In August 2014 FASB issued ASU No. 2014-15, which provides formal guidance on going concern considerations. Effective for fiscal years ending after December 15, 2016, the standard requires management to evaluate whether there is substantial doubt about the company’s ability to continue as a going concern within one year after the date the financial statements are issued, as opposed to previous practice of one year after the fiscal year end. The new standard includes specific guidance on footnote disclosure requirements.
In December 2014, FASB issued ASU No. 2014-18, which is a PCC Accounting Alternative allowing small and midsize companies to utilize a simplified approach to recognizing intangibles in a business combination. Effective for fiscal years beginning after December 15, 2015, small and midsize companies will no longer have to recognize non-compete agreements or customer intangibles separately from goodwill.
In January 2015, FASB issued ASU No. 2015-01, which eliminates from GAAP the concept of extraordinary. Previously extraordinary items were defined as both unusual in nature and infrequent of occurrence. The standard is effective for fiscal years beginning after December 15, 2015. The requirement that unusual or infrequent items be presented as a separate component of income from continuing operations still applies. You may have an item that is both unusual and infrequent but such an item can no longer be described as extraordinary. ASU No. 2015-01 is part of FASB’s “Simplification Initiative,” which is intended to reduce the cost and complexity of complying with professional standards. Other FASB projects under the Simplification Initiative currently in process include: a) simplifying the measurement of inventory by defining market value to be net realizable value (eliminating the other alternatives for market in existing standards; b) better guidance on when to classify debt on the balance sheet as either current or noncurrent; c) eliminating the requirement to classify deferred income tax assets and liabilities between current and noncurrent – all will be noncurrent; and d) simplifying application of the equity method of accounting for investments.
The most significant accounting standard of recent years is the standard on revenue recognition, which was issued May 28, 2014. The effective date for nonpublic companies had been periods beginning after December 15, 2017. However, as of April 2015, FASB is considering approving a one year extension, moving the effective date forward to periods beginning after December 15, 2018.
Peer Review Process
As noted in our letter a year ago, the AICPA has agreed to cooperate with the Department of Labor to identify firms that perform ERISA audits without obtaining a system review including ERISA in its scope. This has had a ripple effect on the peer review process affecting all firms. For example, on system reviews the peer reviewer now needs to obtain a description in writing of your firm’s policies and procedures for ensuring the engagement listing you provided the reviewer is complete. Another change in the peer review process this year is that the peer reviewer is required to ask firms for documentation of the firm registration and the licensing of staff involved in accounting and auditing engagements.
Firms with Audit Clients
In May 2013 COSO issued its updated “Internal Control – Integrated Framework” and although it retains the basic definition of internal control and the five components contained in the 1992 version, you may need to revise some of your planning documentation to comply with the new framework. The new 2013 COSO Framework was effective December 14, 2014.
Firms with Yellow Book Clients
The AICPA Peer Review Board has noted a significant lack of compliance with the independence requirements contained in the 2011 edition of the Yellow Book. The AICPA is asking peer reviewers to focus on this and on the financial preparation service in particular. If you are the auditing firm and also prepare the financial statements, the peer reviewer will make further inquiries and may include a finding in your peer review. According to the AICPA, the Government Accountability Office believes that “other than in very limited circumstances, preparing financial statements for an auditee would result in a significant threat for which safeguards should be applied and documented.” Safeguards include discussing the significance of threats with the engagement team, educating management, successful completion of a disclosure checklist by management, and having a qualified professional who is not on the engagement team perform a pre-issuance review. The peer reviewer will be looking for documented safeguards.
Firms with Single Audit Clients
Office of Management of Budget (OMB) has issued the “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards.” The short title is “Uniform Guidance (UG),” and it provides updated guidance for administering and for auditing federal awards. UG replaces the circulars on administrative requirements and cost principles, such as A-110 and A-87, and supersedes Circular A-133 on the Single Audit.
UG has six subparts. Subpart F covers the audit requirements. Linkage from current guidance to new guidance can be found at: http://www.whitehouse.gov/omb/grants.docs
Your single audit clients have to implement the new administrative requirements for all new federal awards and for additional funding to existing awards received with new terms and conditions by December 26, 2014. Therefore on audits including months before and after this date, such as clients with June 30, 2015 fiscal year ends, compliance requirements and cost principles may change during the course of the year. As auditors, you will likely have to test some expense under old requirements and some under the new requirements. The AICPA Guide to Single Audits and the 2015 Compliance Supplement will both have two parts, one part for guidance on awards under UG requirements and the other part for guidance on awards prior to UG implementation. Subpart F on audit requirements isn’t effective until years ended December 31, 2015, so you will continue to follow A-133 in the current audit season, even though you may have to test both the old and the new compliance requirements. When it is effective next year, Subpart F will increase the threshold for Single Audits from $500,000 to $750,000. The Type A minimum threshold increases from $300,000 to $750,000. Risk assessments on Type B programs can stop once the number of high risk Type B programs identified is equal to 25% of the number of low risk Type A programs. Coverage from low risk auditees is reduced from 25% to 20% and for other auditees from 50% to 40%. The de minimis for small programs is increased from $100,000 to $187,500. The threshold for reporting questioned costs increases from $10,000 to $25,000.
Firms with Governmental Clients
For year ended June 30, 2015, your governmental clients must implement GASB #68 and #71 on pensions. GASB #68 requires recognition of the full pension liability in the statement of net position. The measurement date used by the actuary can precede fiscal year end by as much as a year however. For example, the liability provided by the actuary for year ended June 30, 2015, might be as of June 30, 2014, which is the date Oregon PERS will be using. In that circumstance, what does the client do with the monthly payments to PERS between July 1, 2014 and June 30, 2015? These payments cannot go to reduce the pension liability. Per GASB #71, the credit is to cash and the debit is to a deferred outflow account. With respect to the June 2015 liability paid in July 2015, the credit is to accounts payable trade and the debit is to the same deferred outflow account. In addition to recording the increased pension liability at June 30, 2015, a prior period adjustment will have to be recorded for the liability at June 30, 2014, and that adjustment should also recognize the balance in the deferred outflow account at the beginning of the period. The GASB 68 Implementation Guide is a free download at www.gasb.org. A number of useful GASB 68 Excel worksheet templates are available at: www.crawfordcpas.com.
With respect to Oregon PERS, all local governments will be deemed cost sharing multi-employers insofar as financial statement and presentation are concerned. Even though employers under agent multiple plans will continue to receive actuarial information for their individual plans, this information should not be used in the financial statements. In June 2015, PERS will provide audited schedules with the amounts to include in your client’s financial statements and in their footnote disclosures. All local governments in Oregon will be reporting a net pension asset as of June 30, 2015, rather than a liability (although by June 30, 2016, this will have whipsawed to a liability due to the recent Oregon Supreme Court decision on the COLA adjustments). The format the actuary is using for the schedule is to bracket the net pension asset, which accountants may read incorrectly as a liability. The actuary normally inserts positive amounts in the schedule and these amounts are intended to represent liabilities. This makes sense because virtually all other states have a net pension liability as of June 30, 2015. In Oregon we need to read these entries as “negative liabilities” or, in other words, a net pension asset. The schedule will have additional amounts to be posted to your client’s financial statements, including actuarially determined deferred inflows and outflows that will amortize over subsequent years. Such deferred outflows are in addition to the deferred outflow generated by your client’s monthly PERS payments described in the prior paragraph. Oregon PERS will be providing the beginning net pension liability to use in your prior period adjustment at a later date. Any PERS side accounts or pension prepaid contribution accounts recorded on the statement of net position in prior years should be eliminated as part of the prior period adjustment. The OSCPA Governmental Committee will be posting a GASB 68 footnote template on the OSCPA website.
Ethics Codification
Another codification project, this one on ethics, is effective for fiscal years commencing after December 15, 2014. The familiar ET Sections 100 to 500 are gone. There are separate parts for CPAs in public practice verses those in business. It follows a threats and safeguards model, more principles than rules based. Your key focus should be on ET 1.295, which revises the guidance for maintaining independence when you provide nonattest services, such as income tax preparation, to audit and accounting clients. Preparation of the financial statements is now deemed a nonattest service. Your engagement letters for compilation, review and audit should be revised to address the financial statement as a nonattest service, ideally in a separate paragraph with a bolded heading. The AICPA has revised the peer reviewer checklists this year to emphasize ethics documentation.
Our Peer Review Clients
When scheduling your peer review with the state society, the scheduling form requests information about the firm you have hired to perform the peer review. This is the information you will need if you select our firm to perform your peer review:
Name of Reviewing Firm: Read & Bose, PC
AICPA Firm Number: 10083621
Team Captain's Name: Harry Bose
AICPA Member Number: 01153765
This letter will be posted on our home page, along with additional guidance on peer reviews.
Our web site address is: www.peer-review.com.
Our email address if your wish to contact us about peer review is: harryb@readandbose.com.
Please do not hesitate to contact us if you have any questions. We appreciate your business
Very truly yours,
Read & Bose, PC