Appendix B

History of the ARSC’s Consideration of a Fourth Level of Service

In 1967, the AICPA’s Committee on Auditing Procedures issued Statement on Auditing Procedure (SAP) No. 38, Unaudited Financial Statements, to address the reporting requirements and other responsibilities of CPAs in connection with unaudited financial statements. SAP No. 38 was later incorporated in Statement on Auditing Standards No. 1 as section 516. Section 516.02 contained the following definition of "unaudited financial statements."

When a CPA was associated with unaudited financial statements, the CPA would mark each page of the financial statements "Unaudited" and issue the following report

If the financial statements contained departures from GAAP that came to the CPA’s attention, the CPA was required to disclose his or her reservations about the financial statements in the report. The standard also permitted a CPA to prepare internal-use only financial statements for a client for which disclosures could be omitted.

In the years prior to the issuance of SSARS No. 1, litigation related to unaudited financial statements arose. Courts and jurors frequently were confused by the responsibilities of CPAs, if any, in engagements involving the preparation of unaudited financial statements, and had difficulty distinguishing between an accountant’s responsibility for audited financial statements and unaudited financial statements. Also, clients frequently submitted internal-use only financial statements to their banks. When banks were harmed because they relied on these financial statements in extending credit, the bankers sought and sometimes obtained redress against the CPAs who had prepared the statements. Because of the problems associated with unaudited financial statements, in 1978, SSARS No. 1 was issued. It established procedural and reporting standards for compilation and review engagements that appeared to clarify for courts and fact-finders a CPA’s responsibility in the various financial statement engagements.

In 1980, the AICPA’s Accounting and Review Services Committee (ARSC) considered whether there should be an exemption from SSARS No. 1, for financial statements issued in connection with interim bookkeeping services. In June 1982, the ARSC issued an exposure draft of a proposed amendment to SSARS No. 1, titled Computer-Prepared Interim Financial Statements, that would have provided an exemption from SSARS for data processing services provided by a CPA that resulted in interim financial statements. The ARSC received over 850 comment letters on the proposal with only 31.5% favoring the exemption. In December 1982, ARSC unanimously decided to withdraw the proposed amendment primarily because (1) a large number of practitioners characterized the service as unprofessional work that CPAs should not provide, (2) practitioners stated that they did not have problems complying with SSARS No. 1, and (3) there were alternative means of providing clients with useful information.

In 1984, ARSC mailed a comprehensive questionnaire to 5000 practice units to identify practice problems in performing compilation and review engagements. In 1985, the ARSC developed a proposed amendment of SSARS No. 1 that would permit practitioners to submit financial statements to clients for management use only without complying with SSARS No. 1, provided there was written communication indicating the restriction on distribution of the statements and the report. ARSC subsequently unanimously agreed not to expose the proposed amendment because the ARSC concluded that the proposal was not operational.

In December 1985, the ARSC exposed a proposed standard that would permit an exemption from SSARS No. 1 when personal financial statements were included in written personal financial plans. That proposal became SSARS No. 6, Reporting on Personal Financial Statements Included in Written Personal Financial Plans. The reason ARSC gave for allowing the exemption was that it believed that personal financial statements included in personal financial plans are incidental to the engagement; whereas, stand-alone financial statements of business entities are the only information users generally receive.

In 1989 at the request of the Chair of the AICPA Private Companies Practice Section (PCPS) Executive Committee and the PCPS Technical Issues Committee, ARSC discussed issues related to a proposed new level of service that would allow practitioners to submit interim financial statements to clients without reporting on them. In September 1989, the ARSC conducted a public hearing to identify all issues related to a proposed level of service below a compilation. After discussing each of the issues presented at the hearing, the ARSC unanimously concluded not to develop the proposed service. Instead the ARSC concluded that "how to" guidance that explained the applicability of SSARS No. 1 should be developed.

In September 1995, the ARSC issued an exposure draft of a proposed SSARS, titled Assembly of Financial Statements for Internal Use Only, that would have permitted CPAs to prepare financial statements for non-public clients without having to compile them. The ARSC received over 500 comment letters on the exposure draft and sought additional information about the kinds of problems that CPAs encounter when performing compilation engagements. Approximately fifty percent of the respondents supported the introduction of this new service.

In August 1997, after extensive discussion and fact-finding, the ARSC conducted a two-day public hearing to solicit views on (1) the applicability of SSARS, (2) additional exemptions from SSARS, and (3) the acceptability of plain-paper financial statements (statements that do not disclose the identity of the CPA who has prepared them). Nineteen speakers participated in the public hearing. There were divergent views on the first two issues; however, seventeen of the nineteen participants were opposed to plain-paper financial statements. In October 1997, the ARSC met to discuss the public hearing, voted to withdraw the assembly exposure draft, and concluded that plain-paper financial statements should not be permitted.