January 2000

"Management Use Only" Statements Move Closer to Reality

AICPA Proposes Allowing Internal Statements Without a Report

By Tom Morris

CPAs may soon be permitted to issue "management use only" statements--statements prepared for clients' own use, not intended for use by third parties--as a result of recent AICPA exposure drafts that address changes in compilation standards to allow CPAs to issue such statements without a financial report.

Changes in Compilation Standards

The first ED supersedes SSARS No. 1 (on compilation engagements) and addresses communication and performance requirements of unaudited financial statements of a nonpublic entity submitted to a client and not expected to be used by a third party. If implemented as written, the proposal will affect financial statements submitted on or after September 1, 2000.

The ED defines "third party" as all parties, except for members of management who are knowledgeable about the nature of the procedures applied and the basis of accounting or assumptions used in preparing the financial statements. Management or absentee owners could fall into the category of third parties if they are not knowledgeable about the financial statements.

This proposal also changes the definition of "submission" to presenting to a client or third parties financial statements that the accountant has generated either manually or through the use of computer software. For instance, a CPA can give a client a financial report generated using the client's computerized ledger files.

Importantly, the ED permits an accountant to submit financial statements without a report when the financial statements are not expected to be used by third parties. The accountant must follow the performance requirements of a compilation, as well as either obtain an engagement letter signed by management or issue a letter to management documenting an understanding regarding the services to be performed and the limitation on the use of those financial statements. The proposal describes and gives examples of what the documentation of the understanding should include.

The accountant should also include on each page of the financial statements a statement about the restrictions and limitations on use of the statements and the information provided, such as "Restricted for Management Use Only."

If the accountant reasonably expects the financial statements to be used by third parties, he or she must report on those statements in accordance with SSARS No. 1. In addition, the accountant is not precluded from reporting on financial statements, even when the financial statements are not expected to be used by third parties.

Valuations Exempt

The second exposure draft proposes that historical and normalized financial statements included in a written business valuation be exempt from SSARS No. 1. The rationale is that departures from GAAP or OCBOA are acceptable when the sole purpose of the financial statements is to assist in developing and presenting a business valuation and the users of the statements don't need the statements to conform with GAAP or OCBOA. This ED would take effect upon its issuance.

Proposals Bring Closure

If finalized, the proposals would bring closure to an ongoing issue in the profession championed by former NYSSCPA President Robert L. Israeloff when became AICPA chair in 1994 and raised plain paper statements to a top priority at the AICPA. As a result, ARSC issued an exposure draft in 1995 on the assembly of financial statements, but dropped it in early 1998.

The current proposals represent another attempt by ARSC to modify SSARS to eliminate what some consider onerous reporting responsibilities when submitting financial information to clients that is intended for internal use only. Previous attempts to change SSARS have included a proposed exemption for computer-prepared interim statements and the introduction of a fourth level of service called an assembly.

Last year, because of the initial failure of ARSC to act, the NYSSCPA board of directors directed language similar to the recent proposed changes to be included in draft accountancy act reform legislation supported by the Society. Legislation presently is pending before the New York State Legislature and was the subject of a hearing covered extensively in the December 1999 issue of The Trusted Professional.

The Society's board, however, voted to delete the section of the legislation dealing with management use only statements based on assurances from the AICPA that the appropriate technical committees would pursue the matter.

David A. Lifson, chair of the AICPA Tax Executive Committee and a past vice president and director of the NYSSCPA, was involved in the Society's deliberations.

"With this exposure draft, we finally recognize that accountants can serve two masters: delivering CPA services in cases where we're serving third parties, and providing financial information to interested and involved managers and owners in an appropriate and informal way," Lifson said.

Member Input Encouraged

See http://www.aicpa.org for complete copies of the proposals, which both have June 9 comment deadlines. Because of the importance of these EDs, the Society encourages all CPAs to join the debate on this issue and submit their comments. For more on the proposals, see the February issue of The CPA Journal for an article by NYSSCPA member Andrew Cohen, who also is a member of ARSC. *

From left: NYSSCPA Executive Director Louis Grumet with MDP team members Frank Trotti and Arthur Hoffman