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By Howard Sibelman & Mark Wille, CPA
Preparation and compilation services permit non-disclosure financial statements. However, under Statements on Standards for Accounting and Review Services (SSARS), disclosures cannot be omitted if the omission would cause the financial statements to be misleading. This discussion revolves around this conundrum, and how we use our professional judgment to come to the proper conclusion.
This article focuses on entities suffering adverse impacts from the pandemic.
Some clients may request preparation and/or compilation engagements for financial statements omitting disclosures. In the circumstances in which we find ourselves, we believe pre-pandemic fiscal-year financial statements omitting the subsequent event disclosures would be misleading.
The language in AR-C 70.21 and AR-C 80.26 speaks to management’s intent. We believe attempting to ascertain management’s intent does not preclude the accountant from taking appropriate action if, in the accountant’s professional judgment, the financial statements are misleading. Moreover, our Code of Conduct prohibits our association with misleading financial statements.
Most pre-pandemic preparation and compilation non-disclosure financial statements need a “Type 2 subsequent events COVID-19” footnote (selected footnote). The inclusion of such a footnote to the financial statements enables the inclusion of an emphasis of matter in the accountant’s compilation report making reference to such footnote.
Additionally, while a representation letter is not required with a compilation, it is allowed. Many CPA firms are considering requesting a representation letter on all compilations during these uncertain times when visiting a client may not be possible.
For review and audit engagements these issues do not exist as the financial statements are, of course, full disclosure and representation letters are required.
If, in your professional judgment, even full disclosure, pre-pandemic fiscal year-end financial statements are misleading because of the unadjusted financial statement amounts, supplemental pro-forma presentations may be appropriate.