Compilation and Review Services
COMPILATION AND REVIEW SERVICES
Public accountants are qualified to provide a range of services related to financial statements. Among the services are reviews and compilations. These services are less comprehensive than audits, which are required for publicly owned companies. Statements on Standards for Accounting and Review Services are issued by the Accounting and Review Services Committee, which is the senior technical committee of the American Institute of Certified Public Accountants (AICPA) designated to issue pronouncements in connection with unaudited financial statements or other unaudited financial information of a nonpublic entity.
NATURE OF ENGAGEMENTS PROVIDED
The most common engagements that are provided by public accountants for nonpublic entities are the compilation and review. Neither of these is as extensive as an audit. An audit requires that the public accountant obtain an understanding of internal control, assess internal control, assess fraud risk, and obtain corroborating evidence to support the figures shown in the included set of financial statements. Compilations and reviews do not have such requirements. While there are specified procedures for compilations and reviews to support the nature of report provided, such procedures are less rigorous and less extensive than those required for an audit.
Compilations is an appropriate description of what the accountant actually does when engaged to provide this type of service. The certified public accountant (CPA) prepares—compiles—financial statements based on information supplied by the company's management. CPAs are expected to be familiar with the accounting principles and practices of the industry in which the entity operates so that the financial statements are compiled in appropriate form for that industry. This standard does not prevent an accountant from accepting a compilation engagement for an entity in an industry with which the accountant has no previous experience. It does, however, impose on the accountant responsibility for obtaining the level of understanding expected for such an engagement. Such understanding is available in AICPA guides, industry publications, financial statements of other entities in the industry, textbooks, periodicals, and relevant Web sites.
To compile financial statements, the accountant must have an understanding of the nature of the entity's business transactions, the form of its accounting records, the stated qualifications of its accounting personnel, the accounting basis on which the financial statements are to be presented, and the form and content for the financial statements. Such knowledge is obtained through experience with the entity or through inquiry of the entity's personnel. There are instances when the accountant recognizes that other accounting services are needed, such as assistance in adjusting the books of accounting or in assuring proper classification of transactions in the accounting system. Such additional services can be provided by the accountant engaged to compile the financial statements.
If any evidence or information comes to the accountant's attention regarding fraud or an illegal act that may have occurred, the accountant should request that management consider the effect of the matter on the financial statements. Additionally, the accountant should consider the effect of the matter on the accountant's compilation report. The accountant may have to resign from an engagement if there is any question about fraud or illegal acts and the client refuses to provide additional or revised information.
The report provided states that a compilation is limited to presenting in the form of financial statements information that is the representation of management (or owners). Also, stated is that the financial statements have not been audited or reviewed and that the accountant is not expressing an opinion or any other form of assurance on them. There are circumstances that permit the accountant to limit the distribution of the report. The guidance is provided in the Statements on Standards for Accounting and Review Services.
An accountant is not precluded from issuing a report for a compilation of financial statements for an entity when the accountant is not independent in respect to that entity. When the accountant is not independent, however, there must be disclosure of the lack of independence. In the last paragraph of the report in such an instance is the need to state: "I am (we are) not independent with respect to [company name] company."
An accountant may be engaged to provide compilations for financial statements for more than one year.
Reviews require that the accountant possesses a level of knowledge of the accounting principles and practices of the industry in which the entity operates and an understanding of the business of the entity that is provided primarily through inquiry and analytical procedures. Additionally, the accountant must obtain written representations from management in which, among several matters, management acknowledges responsibility for the fair presentation in the financial statements of financial position and results of operation and cash flows in conformity with generally accepted accounting practices (GAAP). A review does not provide assurance that the accountant will become aware of all significant matters that would be disclosed in an audit.
Nevertheless, accountants may become aware that information coming to their attention is incorrect, incomplete, or otherwise unsatisfactory. Furthermore, evidence or information may come to the accountants' attention regarding fraud or an illegal act that may have occurred. The accountants should request that management consider the effect of such knowledge on the financial statements. Additionally accountants should consider the effect of all information acquired on their review reports. Additional procedures may be needed if the accountants believe the financial statements are materially misstated.
An accountant must be independent in respect to the client when accepting an engagement to perform a review and provide a report. The accountant's review provides only limited assurance. This assurance is stated in the accountant's report in these words: "I am (we are) not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with GAAP." The report provided by the accountant states that the scope is less than that for an audit that is performed in accordance with generally accepted auditing standards. Also stated is that the accountant does not express an opinion on the financial statements.
It is possible for an accountant to provide a report even though some modification is required. Such modification is described in a separate paragraph of the report. Also, an accountant may be asked to provide a review for financial statements for more than a single year.
WHEN COMPILATIONS AND REVIEWS ARE APPROPRIATE
When does a client hire a CPA to perform a compilation or a review instead of an audit? To understand this issue, it is first necessary to understand why some companies need audits. If the company is publicly owned and must submit financial statements to the Securities and Exchange Commission (SEC), an annual financial audit is a basic requirement for the financial statements submitted. If the management of a small public company that does not report to the SEC or a nonpublic company where the owners or shareholders are separate from the sources for funding, there is a "monitoring" problem not unlike that for the publicly owned companies. In general, the multiple owners or the bank cannot be sure the information provided by the management of the company is reliable. Reliable information, for example, that is submitted to a bank as a source of information to be reviewed for the approval of a significant loan that is supported by a report from a public accountant, has higher value than such financial information with no involvement of a public accountant. Such information, if all other factors are satisfactory, generally means that the cost of the desired capital will be lower than if no such involvement was present.
Now, consider the case of a small sole practitioner who is both the owner and manager of the company. It might be the case that the owner/manager wants financial statements prepared so that his or her performance may be assessed, but does not require the assurance regarding the reliability of the numbers because the owner/manager is the one who provided the figures to the CPA. In essence, the person providing the information is also the user of the report. In this case, the owner/manager would probably engage a public accountant to perform a compilation. A compilation would be sufficient for the owner/manager and would be less costly than a review or an audit.
Many banks want some form of assurance from small business owners (nonpublic entities) before lending them significant sums of money, but realize that an audit is not necessary. Therefore, such a bank is likely to require that there be a review performed by an independent public accountant so that there is provided limited assurance that the financial statements are presented in accordance with GAAP.
There are instances, of course, where the banker of a small business may have multiple sources of information from the interaction between the banker and the owner of the small company. In such instances a compilation provided by an independent accountant may be sufficient.
REVIEWS REQUIRED FOR PUBLICLY OWNED COMPANIES
Publicly owned companies must have quarterly reviews. Publicly owned companies are required to file quarterly financial statements and the company's external public auditor is required to perform a review at the end of the first three quarters before the company files its quarterly financial statements with the SEC. The guidance that is followed in this review is provided by the Public Company Accounting Oversight Board (PCAOB). As of December 2005, however, the guidance required by the PCAOB is that provided by the Auditing Standards Board of the AICPA. That guidance was undergoing review by the PCAOB and was subject to modification.
see also Auditing
American Institute of Certified Public Accountants. (2005). AICPA Professional Standards (Vols. 1–2). New York: Author.
Konrath, Larry F. (1999). Auditing concepts and applications: A risk analysis approach (4th ed.). Cincinnati: South-Western.
Messier, William F., Jr., Glover, Steven M., and Prawitt, Douglas F. (2006). Auditing and assurance services: A systematic approach (4th ed.). Boston: McGraw-Hill/Irwin.
Vicky B. Hoffman