‘Plain Paper’ Financial Statements Made Not So Plain: An ... · SSARS 21 SSARS 21,Statements on Standards for Accounting and Review Services: Clarification and Recodification,allowed

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‘Plain Paper’Financial StatementsMade Not So Plain:

An Overview ofSSARS 21

By Vincent J. Love and Thomas R.ManiseroWe are what we pretend to be, so wemust be careful what we pretend to be.

—Kurt Vonnegut, Mother Night (Introduction)

For most of the last quarter of the19th century, accounting practice

consisted mostly of making originalentries for transactions and preparingfinancial statements for owners.Continuing into the early part of the 20thcentury, the work of accountants and thegreater need for accurate financial infor-mation raised accounting to a professionwith legal status and resulted in the for-mation of various self-regulatory orga-nizations. A variety of standards (e.g.,Statements on Auditing Procedure 23,33, and 38) issued by the AmericanInstitute of Accountants (AIA), and laterits successor the AICPA, in the middleof the century addressed the preparationof unaudited, unverified financial state-ments, called “plain paper” statements,attempting to correct misconceptionsabout 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 profes-sional standards for accounting and reviewservices became apparent. The trial courtin 1136 Tenants’ Corp. ruled that a CPAfirm was negligent in its duties when itused “inadequate, incomplete, andimproperly deployed” procedures whenproviding its services. Moreover, the

appeals court found that “even if defen-dant were hired to perform only ‘write-up’ services, it is clear, beyond dispute,that it did become aware that materialinvoices purportedly paid by [the buildingmanagement company] were missing,and, accordingly, had a duty to at leastinform plaintiff of this.” This case, as wellas studies sponsored by professional asso-ciations that included an analysis of theperception of the users of unaudited finan-cial statements prepared by CPAs, even-tually led the profession to develop theStatements on Standards for Accountingand Review Services (SSARS).SSARS 1, Compilation and Review of

Financial Statements, issued inDecember 1978, established the stan-dards for CPAs reporting on a client’sunaudited financial statements. It prohib-ited CPAs from issuing a report on theunaudited financial statements of a non-public entity unless either compilation orreview procedures were applied to thosestatements. In addition, a report address-ing the procedures applied and the levelof assurance given, whether limited ornone, was required to accompany thefinancial statements. SSARS 1 explicitlyprecluded the preparation of financialstatements unless the CPA “complieswith the provisions of [SSARS 1] appli-cable to a compilation engagement.”

Therefore, preparation of plain paperfinancial statements was prohibited.Subsequent to SSARS 1, many lead-

ers in the profession lobbied for stan-dards that would allow the preparationof financial statement services that didnot require even the application of com-pilation procedures. This was needed,they argued, to serve small entities thatdid not have the internal capability toprepare their own financial statements,and it could be accomplished if certainsafeguards were in place.In October 2000, SSARS 8,

Amendment to Statement on Standardsfor Accounting and Review Services No.1, Compilation and Review of FinancialStatements, was issued. It addressed theperformance and communication require-ments for financial statements of nonpub-lic entities that were not intended forthird-party use, but rather for sole distri-bution to individuals in management withsufficient knowledge to understand thestatements in their proper context. Therewas a requirement that each page of thefinancial statements contain a legend indi-cating that they were “Restricted forManagement’s Use Only” or similar lan-guage. This change to the SSARS did notcompletely resolve the issue, since somein the profession believed that there stillexisted a need to help smaller clients pre-

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Reprinted from The CPA Journal, May, 2017, copyright 2017, with permission from the New York State Society of Certified Public Accountants.

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pare their financial statements for distri-bution outside of management.

SSARS 21SSARS 21, Statements on Standards

for Accounting and Review Services:Clarification and Recodification, allowedCPAs to prepare financial statementsfrom the unaudited financial books andrecords. Section 70 of SSARS 21 “applieswhen an accountant in public practice isengaged to prepare financial statements.”It also states that the procedures may beused and adapted to the specific engage-ment circumstances in the preparation ofother prospective or historical financialdata. (SSARS 26, Statements onStandards for Accounting and ReviewServices: Omnibus Statement, did not sig-nificantly change SSARS 21; it clarifiedit and added prospective financial state-ments to the list of information that canbe prepared without applying any audit,review or compilation procedures.) Thisessentially allowed a CPA to perform thesame nonattest services on financial datathat were a part of many practices duringthe early days of the profession. Thereare, however, some important concernsand issues that CPAs should considerbefore providing such services.Times have changed. What was avail-

able to the profession and its clients inthe industrial age is far different thanwhat is available in the information age.In addition, the legal climate is drasti-cally different. Finally, the public per-ception of, and expectation concerningthe work-product delivered by, CPAshas changed drastically.SSARS 21, while ostensibly requiring

no verification similar to that requiredin an audit or review, does require someprocedures similar to those for a com-pilation, and failure to follow them canlead to allegations of insufficient perfor-mance. The standard also sets the stagefor third parties to profess that they

placed greater reliance on the financialstatements because a CPA was involvedin their preparation.Section 70.04 states that “an engage-

ment to prepare financial statementsdoes not require the accountant to verifythe accuracy or completeness of theinformation provided by management orotherwise gather evidence to express anopinion or a conclusion on the financialstatements or otherwise report on thefinancial statements.” In the followingsections, however, SSARS 21 addressesthe need for an engagement letter,including management’s agreement thateither each page of the financial state-ments will include a statement that noassurances are given on those statements

or the CPA will be required to issue adisclaimer that makes the lack of suchassurances clear. Moreover, section 70requires the accountant to comply withsection 60, “General Principles forEngagements Performed in AccordanceWith Statements on Standards forAccounting and Review Services.”A reading of sections 60 and 70 leads

one to realize that several matters arecritical to consider when performing afinancial statement preparation serviceunder SSARS 21. The most importantbusiness consideration when decidingwhether to offer financial statementpreparation services is the risk involved.

This is more than simply labeling theservice as “high risk.” The risk cannotbe mitigated by extending procedures,because a preparation engagement doesnot require any verification procedures.Consequently, if verification proceduresare used, they may significantly increasea CPA’s exposure to liability. The CPAor the firm will be associated with thefinancial statements, no matter what leg-end or report is used to disclose the lackof any verification of the underlyingtransactions and balances displayed onthe face of the statements or the suffi-ciency of any note disclosures. CPAsmust also consider whether the level ofwork is so far below the expertiseattached to the CPA designation that it

lowers the professional image of theCPA or firm providing the service.Client acceptance and continuance is

another factor. As stated above, the infor-mation given to the CPA will not be ver-ified. Furthermore, clients desiring thisservice will tend to be smaller and lesssophisticated, which presumably meansthat the data is more susceptible to error(and manipulation). CPAs should there-fore exercise greater scrutiny of the char-acter and integrity of the prospective orcontinuing client before a preparationengagement is accepted. The client’sbehavior should be considered throughoutthe relationship, and if there is any doubt

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.



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about management’s integrity, seriousconsideration should be given to with-drawing from the engagement.CPAs also need to have an under-

standing of the client’s business, struc-ture, its accounting system, environment,and the financial reporting frameworkbeing used, including the acceptabilityof that framework. Because clients maynot have the ability to prepare their ownfinancial statements, CPAs should con-sider whether the necessary informationand data will be available and reliable.If additional data is needed, this couldbe construed as evidence that the CPAwas aware that a higher-level servicethan preparation was needed. This couldexpose a CPA to greater exposure if thefinancial statements turn out to be fraud-ulent or contain material errors. Certain representations are needed to

prepare financial statements. In other ser-vices, these are contained in a “repre-sentation letter.” Here, they need to beincluded in a client-signed engagementletter. The letter should state that theclient is responsible for— n the selection of the reporting frame-work used, n the internal controls related to thepreparation and presentation of the finan-cial statements,n the prevention and detection of fraud,n compliance with relevant laws andregulations,n the accuracy and completeness of theunderlying financial records and docu-ments and the significant judgmentsrequired for the preparation of the finan-cial statements,n providing the CPA with access toinformation needed to prepare the finan-cial statements, and n unrestricted access to client personnel. In essence, the engagement letter

becomes a representation letter, andCPAs must remember that all of theserepresentations are coming from a client

who may be unable internally to prepareits own financial statements.Finally, CPAs are expected to exercise

professional judgment throughout thepreparation engagement, and the basisof that judgment should be appropriatelydocumented in the working papers.SSARS 21 also requires CPAs to discussthe judgments reflected in the financialstatements with management so thatmanagement understands the significantones and accepts responsibility for thejudgments used. This may not absolvethe CPA from any liability, however, asthose judgments are made by manage-ment that might not even have the finan-cial knowledge necessary to prepare itsown financial statements.SSARS 21 further states that if the

CPA “becomes aware that the records,documents, explanations, or other infor-mation, including significant judgments”are not complete or accurate, she shouldbring that to management’s attention andrequest additional or corrected informa-tion. This requirement does place someburden on CPAs, even while they do nothave to verify the data. With hindsight,a case could sometimes be made that aCPA should have known of the problemand asked for additional or corrected data.There is also the question of whether thefact that the necessary information isincomplete or inaccurate reflects on thecharacter and integrity of the client.

The Profession and What It RepresentsCPAs are required to adhere to one or

more of the AICPA, state society, or reg-ulatory codes of conduct and their generalstandards or provisions when performingany service, such as professional compe-tence, due professional care, planning andsupervision, and obtaining sufficient rel-evant data. The vast majority of state soci-eties use the AICPA Code of ProfessionalConduct or one with essentially the sameprovisions. All of them recognize the

need to place integrity and the publicgood above commercial considerations.The CPA designation is earned only

after education and experience criteria aremet and a difficult examination is passed.It is a license to practice using the title ofCertified Public Accountant. There arecontinuing education requirements thatmust be met to remain licensed, as well asrequirements to comply with regulatoryand self-regulatory organizations’ ethicsand performance criteria. These require-ments, which center on the CPA’s exclu-sive right to report on financial statements,have raised the public’s image of the finan-cial competency of the CPA to a very highlevel. Unlike other organization-conferreddesignations, which ostensibly onlydemonstrate a special skill, the CPA des-ignation is an exclusive, government reg-ulatory authority–granted license topractice and perform certain services.Given the high esteem in which the

profession is held, why should CPAs per-form services that could be performedextremely well, and at lower cost, by agood bookkeeper or even a computer pro-gram? As mentioned above, a legend stat-ing that the financial statements were notaudited may still put a third-party readeron notice that a CPA was involved in thepreparation of the financial statements,even if the CPA’s name is not includedin the legend. SSARS 21 does not pre-clude a CPA from including his name inthe legend, but this offers a greater riskof liability and could imply that the pre-parer is trading on the trust the public hasin the CPA designation. It is far moresensible for a CPA to serve as a consul-tant, setting up the computer system andcontrols necessary for the client to achieveits internal reporting objectives. Forreporting to third parties, the compilationengagement should, in the authors’ view,be the lowest level of reporting, especiallysince its limitations are already recognizedby the legal system. What is the differ-

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ence in cost between the two services,even considering a lack of independencedisclosure in the compilation report?

The high regard the public has for theprofession is best protected by keepingthe CPA’s name off of plain paper finan-cial statements. Eli Mason, an active crit-ic of his profession when he believed itwas going astray, said in a letter to theAICPA Accounting and ReviewServices Committee in 1997:

I have heard that your committee mayreconsider “plain paper financial state-ments.” As a long-time practitioner, Ihave had a negative feeling about suchso called financial statements, as Ibelieve they demean the professional-ity [sic] of certified public accountants.These statements are intended to avoidresponsibility by those who prepareand are associated with said financialstatements, but to the contrary, clientshave historically submitted such state-ments to banks and credit grantorsdespite caveats, footnotes, and “poisonwarnings” appended thereto. (“NoPlain Paper Please,” The CPA Journal,May 1997, http://bit.ly/2pyW2Q8.)

Legal ConsiderationsThe legal liability of CPAs who purport

to perform SSARS 21 services could turnon whether those CPAs actually per-formed procedures beyond what the stan-dard contemplates—in which case theywill be beyond the legal protection thatthe standard attempts to create. This is pre-cisely what occurred in 1136 Tenants’Corp. In that case, the accountant’s testi-mony that certain services performed wentbeyond the scope of “write-up” work andthe time records revealing that the accoun-tants examined bank statements were suf-ficient to create an issue of fact as to thescope of services actually performed, withthe accountants ultimately being held tothe standard of having been engaged toperform an audit.

By SSARS 21’s own terms, CPAswho undertake to do more in terms ofverification or analysis could find them-selves being measured against the higherstandards applicable to compilation orreview engagements. This is particularlya concern in jurisdictions where privityrules allow negligence suits to be broughtagainst CPAs by non-clients, as thosenon-clients would not be subject to theargument that their signatures on theengagement letters prevents them fromarguing that a higher level of service wasactually intended. It is entirely foreseeablethat an opportunistic creditor or bankrupt-cy trustee would advance such an argu-ment to establish a CPA’s liability.

As was the case in 1136 Tenants’Corp., a CPA’s own billing and engage-ment documentation is likely to be the keyevidence militating against the argumentthat he only performed limited-scope cler-ical services. If a CPA undertakes to pro-vide such services, extra care must betaken not to create the appearance that ahigher level of service was actually per-formed. In the past, similar argumentshave been made by litigants trying toestablish that a CPA did more than wasrequired for a compilation.

Another factor that will weigh againstany CPA is the “expectations gap.” Thepublic expectation that CPAs arelearned, careful, and thorough profes-sionals is challenged by the notion thata CPA can assemble a client’s financialstatements without some level of profes-sional analysis or responsibility. Asexperience has proven, juries and judgesharbor these expectations.

In SummationSSARS 21 once again gives CPAs the

authority to issue plain paper financialstatements. In this regard, the professionhas come full circle—but have CPAslearned from history? Hopefully, CPAswill take the steps necessary to reduce

engagement risk to an acceptable leveland to protect the profession’s publicimage.

CPAs who decide to proceed with afinancial statement preparation engage-ment should consider the followingsteps to reduce the engagement riskand comply with the standards:n Perform and document client accep-tance and retention proceduresn Adhere to engagement quality con-trol standardsn Obtain a written engagement letterclearly setting forth the client’s and theCPA’s responsibilities n Meet with management to be surethat the representations are clearlyunderstood, and document the meetingn Follow up on any unusual or suspi-cious balances, activity, or unavailabledata encounteredn Avoid including the name of theCPA in the legend required on eachpage of the prepared “plain paper”financial statements.

Financial statement preparation engage-ments are risky and can be performed ade-quately, effectively, and at a lower cost bynon-CPA bookkeeping firms or comput-erized accounting systems for many small-er clients. CPAs who decide to performfinancial statement preparation engage-ments should ask themselves if it is in theclient’s best interest, if they want to acceptthe engagement risk, whether they havecomplied with all of the proceduresrequired by the standards, and whether theengagement will increase or decrease theirand the profession’s public image. q

Vincent J. Love, CPA/CFF, CFE, is thechairman of VJL Consulting, LLC and amember of The CPA Journal EditorialBoard. Thomas R. Manisero, JD, is apartner at Wilson Elser Moskowitz &Dicker LLP, White Plains, N.Y., special-izing in the representation of accountantsand accounting organizations.



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‘Plain Paper’ Financial Statements Made Not So Plain: An ... · SSARS 21 SSARS 21,Statements on Standards for Accounting and Review Services: Clarification and Recodification,allowed