New Standards Add More Weight to Reviews

New Standards Add More Weight to Reviews

The American Institute of CPAs has issued two new standards for accounting and review services, including one with new requirements regarding fraud, that are intended to make the reviews of nonpublic companies much more significant.
Earlier this summer, the AICPA’s Accounting and Review Services Committee (ARSC) issued SSARS No. 10, Performance of Review Engagements, and SSARS No. 11, Standards for Accounting and Review Services. SSARS No. 11 currently is in effect, while SSARS No. 10 will take effect for periods ending on or after Dec. 15 of this year.

“We were at a point in time where we felt there needed to be some clarification to make the review more meaningful,” said Andrew Cohen, chair of the AICPA’s Accounting and Review Services Committee. “That’s really the gist of this.”

Among its provisions, SSARS No. 10, which amends SSARS No. 1, Compilation and Review of Financial Statements, expands guidance on analytical procedures, including guidance on developing expectations; expands guidance on inquiries; and clarifies guidance regarding documentation in a review engagement, including a requirement to document the expectation developed in performing analytical procedures in a review engagement.

Though, as Cohen points out, the consideration of fraud has always been a part of the review engagement, the standard also includes two specific provisions on fraud. SSARS No. 10 requires inquiries regarding fraud in a review engagement; and it requires representations regarding fraud in the management representation letter.

“We are asking management if they have knowledge of any fraud or suspected fraud involving management or others, where fraud could have a material effect on the financial statements,” Cohen, an NYSSCPA board member, said of the standard. “We are required to ask that question in the inquiries and then put it in the representation letter so management signs off on it. That’s what the difference is, that was not there in the past.”

Prior to issuing SSARS No. 10 and No. 11, ARSC received and reviewed a number of comment letters, including a comprehensive one from the NYSSCPA. From those letters, Cohen said, one constant theme emerged: a request for guidance on developing expectations as part of the analytical procedures and comparing those expectations to actual results. As a result, the committee drafted an “Issues Paper” that provides further guidance on the matter and includes examples. The paper can be found by going to www.aicpa.org, clicking on the “Audit & Attest Standards” link on the left-hand side of the page, and then clicking on “Technical Activities and Publications-ARSC” in the middle column.

According to Cohen, partner-in-charge of the Long Island practice of Weiser LLP, SSARS No. 11 establishes a hierarchy for the accounting and review services technical literature. In terms of guidance, SSARS No. 11 ranks SSARS standards most important, followed by interpretative publications, and other compilation and review publications, respectively.