How to Apply Preparation and Compilation Rules During the Pandemic

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.

Pre-pandemic Fiscal Year-ends: Financial Statements that Omit Disclosures
SSARS discusses financial statements that omit disclosures in AR-C 70, Preparation of Financial Statements, and AR-C 80, Compilation Engagements.  With one critically important condition in each section, these sections permit the preparation and/or compilation of financial statements that omit substantially all disclosures.
  • AR-C 70.21: The accountant should not prepare financial statements that omit substantially all disclosures required by the financial reporting framework if the accountant becomes aware that the omission of substantially all disclosures was undertaken with the intention of misleading users of such financial statements.
  • AR-C 80.26: The accountant should not issue an accountant’s compilation report on financial statements that omit substantially all disclosures required by the applicable financial reporting framework unless the omission of substantially all disclosures is not, to the accountant’s knowledge undertaken with the intention of misleading those who might reasonably be expected to use such financial statements.
At present, some accountants still may be working on pre-pandemic fiscal-year financial statements. For such financial statements, the pandemic is a Type 2 subsequent event that may or may not require disclosures pursuant to ASC 855, but let us assume such disclosure is required.

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. 

SSARS 25, issued February 2020 and effective for engagements covering periods ending on or after Dec. 15, 2021 (with early implementation permissible), addresses this point by modifying AR-C 70.21 and AR-C 80.26 as follows:
  • Amended AR-C 70.21: The accountant should not prepare financial statements that omit substantially all disclosures required by the financial reporting framework if in accountant’s professional judgment, such financial statements would be misleading to users of the financial statements.
  • Amended AR-C 80.26: The accountant should not issue an accountant’s compilation report on financial statements that omit substantially all disclosures required by the applicable financial reporting framework if, in the accountant’s professional judgment, such financial statements would be misleading to users of the financial statements.
Accountants should be applying their professional judgment in making the determination whether pre-pandemic fiscal-year financial statements omitting disclosure would be misleading.

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.

Post-pandemic Fiscal-year Ends: Financial Statements that Omit Disclosures
For post-pandemic fiscal-year ends, the pandemic is not a subsequent event. Of course, the pandemic raises a significant range of issues to be considered when the financial statements are prepared, including the possibly of the liquidation basis of accounting being the appropriate framework, going concern, impairments, and fair value determinations to name a few. These, and many other ASC topics and sub-topics have associated disclosure requirements.

ASC topics to consider pandemic impact:
  • Subtopic 205-20 Discontinued Operations
  • Subtopic 205-30 Liquidation Basis of Accounting
  • Subtopic 205-40 Going Concern
  • Topic 235 Notes to the Financial Statements
  • Topic 275 Risks and Uncertainties
  • Topic 310 Receivables – impairment
  • Topic 326 Credit Losses – adequacy of allowance
  • Topic 350 Intangibles - Goodwill and Other – impairment
  • Topic 360 Property, Plant and Equipment – impairment
  • Topic 420 Exit or Disposal Cost Obligations
  • Topic 460 Guarantees
  • Topic 470 Debt
  • Covenant violations
  • Subtopic 470-60 Troubled Debt Restructuring
  • Topic 606 Revenue From Contracts with Customers 
  • Evaluating collectability at contract inception
  • Topic 820 Fair Value Measurement
  • Topic 840/842 Leases
  • Topic 855 Subsequent Events
In our view, financial statements for post-pandemic fiscal year-ends that omit disclosures are most likely misleading.