An end to the plain-paper debate?

Author:Young, George R.
Position:American Institute of Certified Public Accountants standards for financial statements

The AICPA accounting and review services committee (ARSC) has made the most substantive change to compilation requirements since it issued SSARS no. 1 in 1978. In October 2000 it issued Statement on Standards for Accounting and Review Services no. 8, Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements. The new statement, effective for financial statements submitted after December 31, 2000, expands the communication options available to accountants who submit unaudited financial statements of nonpublic entities and modifies the definition of submission of financial statements.

By issuing SSARS no. 8, ARSC may finally have brought more than two decades of debate on "plain-paper" financial statements to an end. Rather than make the wholesale changes once under consideration, ARSC added options that would let accountants use their professional judgment when deciding how best to meet client needs. (For more on the aim of the new statement see "A New Approach to Compilations,"JofA, April00, page 36.)


SSARS no. 8 brings about two significant changes. The first relates to the submission of unaudited financial statements not expected to be used by third parties, allowing an accountant to document limitations on the statements' use by means of an engagement letter. The second change involves a redefinition of the term "submission" in an effort to clarify the applicability of SSARS no. 1.

Expansion of communication options. For years, clients have asked accountants to prepare (or help prepare) management-use financial statements in a format that does not necessarily follow GAAP but is nevertheless beneficial to management (financial forecasts, projections and information contained in tax returns are not considered financial statements for purposes of SSARS no. 1). SSARS no. 8 meets the needs of these clients by allowing an abbreviated communication to replace the compilation report.

Under SSARS no. 8, accountants can submit financial statements not intended for third parties to members of client management who "have knowledge" of the company and the limitations of the financial information. Such knowledge of the company lets users consider the statement's impact in the context of other necessary information about the entity. Because third parties usually do not have such knowledge, management-use financial statements are not meant for their eyes.

SSARS no. 1 defines a third party as anyone other than someone in management who knows the type of procedures the accountant applied and the basis of accounting and assumptions he or she used to prepare the statements. Note that this is a definition by exception. ARSC chose not to define "third parties," but instead to define who is not a third party.

The starting point is to assume everyone is a third party. To not be considered a third party, a person must meet two requirements. He or she must

* Be a member of management.

* Have sufficient knowledge about the business to put the financial statement information in the proper context.

For guidance on determining whether a person is a member of management, CPAs should refer to FASB Statement no. 57, Related Parties. It defines members of management as those "responsible for achieving the objectives of the enterprise and who have the authority to establish policies and make decisions by which those objectives are to be pursued." Management normally includes members of the board of directors, the chief executive officer, chief operating officer, vice-presidents in charge of principal business functions (such as sales, administration or finance), and others with similar policymaking duties. The statement adds that "persons without formal titles also may be members of management."

In the graphic on page 45, circle C represents all potential users of an entity's financial statements (company management, employees, banks, bonding companies, creditors, shareholders, vendors and customers). Circle B represents all members of management. All parties in circle C, other than those in circle A, are considered third-party users. These parties, including the members of management in circle B who are not in circle A, are third-parties because they lack the requisite knowledge of the business to adequately use the statements. Use of compiled financial statements not accompanied by a compilation report should be restricted to knowledgeable members of management represented by circle A.

Does this mean accountants must make judgments about management's knowledge...

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