When I first came across the term “Carbon Accounting,” I had no idea what they were talking about, so I looked it up. According to Wikipedia, “Carbon Accounting is the accounting process undertaken to measure the amount of carbon dioxide equivalents that will not be released into the atmosphere as a result of Flexible Mechanisms projects under the Kyota Protocol.” The Kyota Protocol identifies six greenhouse gases that are to be accounted for: carbon dioxide, methane, nitrous oxide, HFCs, PFCs, and sulfur hexafluoride. Carbon accounting consists of the process of using software programs and actual observations to account for the six greenhouse gases noted above. A quick search of the Internet produced some thirty-eight software programs called enterprise carbon accounting (ECA).
So, who sets the standards for the carbon accountant? The American Carbon Registry (ACR) is the standard setter for carbon accounting. They publish standards, methodologies, protocols, and tools for greenhouse gas (GHG) accounting; which are all based on ISO 14064. The process for development and approval of the standards and methodologies is very similar to the process followed by the FASB for setting financial accounting standards.
There are a number of Fortune 500 companies including Coca Cola, Google, and Wal-Mart who already voluntarily track and report their yearly greenhouse gas emissions. Wal-Mart has announced that they also want all of the products they sell to have an eco-label. So, when Wal-Mart’s 100,000 plus vendors start monitoring their CO-2 emissions they will all need carbon accountants and auditors. According to the Greenhouse Gas Management Institute, “The world faces a shortage of greenhouse gas professionals with the skills needed to meet current measurement, reporting and, verification needs. Some industry experts believe that a substantial majority of all U.S. public companies will need at least a part-time GHG accountant or consultant in the near future.
Measuring, accounting, and auditing greenhouse gas emissions potentially have opened up a whole new line of work for accountants. What do you think?
Friday, April 29, 2011
Friday, January 14, 2011
CAN YOU DEFINE “CHURCH” – NEITHER CAN THE IRS
Can You Define “Church” – Neither can the IRS. A church has several tax advantages over other types of publicly supported Section 501(c)(3) organizations. It is automatically tax-exempt without applying for exempt status on Form 1023 and is also exempt from filing any annual information return. In addition, a church can be audited by the IRS only in limited circumstance and only in accordance with specific procedures (IRC Sec. 7611). Finally, a church has 15 years, instead of 10 years for other organizations, to use debt-financed real property for expansion purposes before income is taxable under IRC Sec. 514.
Neither the Internal Revenue Code nor the regulations formally define church. Therefore, the IRS developed and uses a list of 14 criteria to determine whether a religious organization is a church. Those criteria are as follows:
1. Distinct legal existence
2. Recognized creed and form of worship
3. Definite and distinct ecclesiastical government
4. Formal Code of doctrine and discipline
5. Distinct religious history
6. Membership not associated with any other church or denomination
7. Organization of ordained ministers
8. Ordained ministers selected after completing prescribed course of study
9. Literature of its own
10. Established places of worship
11. Regular congregations
12. Regular religious services
13. Sunday schools for the religious instruction of the youth
14. Schools for the preparation of its members
The IRS generally uses a combination of these characteristics, together with other facts and circumstances, to determine whether an organization is considered a church for federal tax purposes. Moreover, the 14 criteria are not of equal importance and all of them need not be met for an organization to be deemed a church. According to the IRS there is not a bright-line test for determining whether a religious organization is a church or simply a religious organization. Rather the determination is made based upon the facts and circumstances in each case. So you might say that trying to define church for tax purposes is similar to trying to define “pass interference.” It’s difficult to describe but the IRS knows it when they see it.
For exempt organization purposes, the term church is applied generically as a place of worship that includes, for example, mosques and synagogues. One thing is clear, an organization’s religious beliefs have no bearing on whether it is a church – any inquiry into those beliefs could run afoul of First Amendment religious protections.
Neither the Internal Revenue Code nor the regulations formally define church. Therefore, the IRS developed and uses a list of 14 criteria to determine whether a religious organization is a church. Those criteria are as follows:
1. Distinct legal existence
2. Recognized creed and form of worship
3. Definite and distinct ecclesiastical government
4. Formal Code of doctrine and discipline
5. Distinct religious history
6. Membership not associated with any other church or denomination
7. Organization of ordained ministers
8. Ordained ministers selected after completing prescribed course of study
9. Literature of its own
10. Established places of worship
11. Regular congregations
12. Regular religious services
13. Sunday schools for the religious instruction of the youth
14. Schools for the preparation of its members
The IRS generally uses a combination of these characteristics, together with other facts and circumstances, to determine whether an organization is considered a church for federal tax purposes. Moreover, the 14 criteria are not of equal importance and all of them need not be met for an organization to be deemed a church. According to the IRS there is not a bright-line test for determining whether a religious organization is a church or simply a religious organization. Rather the determination is made based upon the facts and circumstances in each case. So you might say that trying to define church for tax purposes is similar to trying to define “pass interference.” It’s difficult to describe but the IRS knows it when they see it.
For exempt organization purposes, the term church is applied generically as a place of worship that includes, for example, mosques and synagogues. One thing is clear, an organization’s religious beliefs have no bearing on whether it is a church – any inquiry into those beliefs could run afoul of First Amendment religious protections.
Friday, January 7, 2011
NEW YEAR’S RESOLUTIONS FOR AUDITORS
New Year’s resolutions can be a great way to start off the New Year, but if you are like so many people you may have already broken one or more of your 2011 resolution by now. Even so, with busy season rapidly approaching, I thought that it would be good to give you some things you might want to use to update or revise your list of New Year’s resolutions if you are an auditor. The items listed are frequently found in AICPA peer reviews and PCAOB inspections. I hope they serve as a gentle reminder of things to do, or not do, in your audit, compilation, and review engagements in 2011.
GAAP Departures
• Improperly classifying certain liabilities as long-term rather than current.
• Failing to properly identify a loan as a loan to a related party.
• Improperly classifying a legal settlement as an extraordinary item.
• Failing to properly eliminate intra-entity revenues and the related costs of sales in consolidations.
• Improperly presenting investments in marketable securities at cost rather than fair value.
• Improperly accounting for asset retirement obligations.
Audit Deficiencies
• Failing to adequately test the existence, completeness, and valuation of revenue, including cutoff of revenue transactions.
• Improperly relying only on management representations when testing corroborating information was possible.
• When using substantive analytical procedures, failing to develop appropriate expectations and investigate significant unexpected differences.
• Failing to adequately test the valuation of goodwill and other long-lived assets.
• Failing to identify and evaluate conditions indicating that an entity may not be able to continue as a going concern.
• For entities that use a service organization, failing to consider the effects of the service organization on the entity’s internal control.
Reporting Deficiencies
• No dating of reports or dating them incorrectly.
• Inappropriately referring to GAAP in the accountant’s report when the financial statements were prepared on an OCBOA.
• Failing to disclose a lack of independence in a compilation report.
• Issuing an audit or review report when the accountant was not independent.
Financial Statement Presentation Items
• Failing to disclose all applicable accounting policies, such as significant advertising costs and revenue recognition.
• Misclassifying items on the cash flows statement.
• Failing to clearly segregate supplementary information or to mark it as supplementary.
HAPPY NEW YEAR and here’s to a successful and prosperous busy season.
GAAP Departures
• Improperly classifying certain liabilities as long-term rather than current.
• Failing to properly identify a loan as a loan to a related party.
• Improperly classifying a legal settlement as an extraordinary item.
• Failing to properly eliminate intra-entity revenues and the related costs of sales in consolidations.
• Improperly presenting investments in marketable securities at cost rather than fair value.
• Improperly accounting for asset retirement obligations.
Audit Deficiencies
• Failing to adequately test the existence, completeness, and valuation of revenue, including cutoff of revenue transactions.
• Improperly relying only on management representations when testing corroborating information was possible.
• When using substantive analytical procedures, failing to develop appropriate expectations and investigate significant unexpected differences.
• Failing to adequately test the valuation of goodwill and other long-lived assets.
• Failing to identify and evaluate conditions indicating that an entity may not be able to continue as a going concern.
• For entities that use a service organization, failing to consider the effects of the service organization on the entity’s internal control.
Reporting Deficiencies
• No dating of reports or dating them incorrectly.
• Inappropriately referring to GAAP in the accountant’s report when the financial statements were prepared on an OCBOA.
• Failing to disclose a lack of independence in a compilation report.
• Issuing an audit or review report when the accountant was not independent.
Financial Statement Presentation Items
• Failing to disclose all applicable accounting policies, such as significant advertising costs and revenue recognition.
• Misclassifying items on the cash flows statement.
• Failing to clearly segregate supplementary information or to mark it as supplementary.
HAPPY NEW YEAR and here’s to a successful and prosperous busy season.
Thursday, December 30, 2010
OUT WITH THE OLD AND IN WITH THE NEW
There is a saying in Texas that, “when the Legislature is in session no one is safe.” I think that statement may also apply to the 111th. U.S. Congress. With the flurry of tax legislation passed this year (some of it very late in the year) and the Democrats and Republicans engaged in guerilla warfare it looks like both the IRS and tax practitioners are going to be facing a very challenging tax season. For example, two bills in particular created some unfortunate consequences:
1. Affordable Health Care for America Act
2. Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 –better known as the 2010 Tax Relief Act.
Hidden deep in the 2,409-page Affordable Health Care for America Act was an onerous provision that will require businesses to significantly expand the number of 1099 tax forms they must file each year. Almost everyone agrees that this is bad legislation but congress has been unable to agree on a bill to repeal the provision.
The 2010 Tax Relief Act was passed so late in the year that the IRS is now saying that some final 2010 tax forms may not be available until as late as February.
Add to the two items mentioned above the IRS’s Unenrolled Tax Preparers initiative and the new Preparer Tax Identification Number (PTIN) registration regulations and I am sure that you will agree that 2011 is going to be interesting. I think what both tax practitioners and the IRS are facing in 2011 can be summed up in a quote from actress Mae West; “Hang on boys, it’s going to be a bumpy ride.”
HAPPY NEW YEAR
1. Affordable Health Care for America Act
2. Tax Relief, Unemployment Insurance Reauthorization and Jobs Creation Act of 2010 –better known as the 2010 Tax Relief Act.
Hidden deep in the 2,409-page Affordable Health Care for America Act was an onerous provision that will require businesses to significantly expand the number of 1099 tax forms they must file each year. Almost everyone agrees that this is bad legislation but congress has been unable to agree on a bill to repeal the provision.
The 2010 Tax Relief Act was passed so late in the year that the IRS is now saying that some final 2010 tax forms may not be available until as late as February.
Add to the two items mentioned above the IRS’s Unenrolled Tax Preparers initiative and the new Preparer Tax Identification Number (PTIN) registration regulations and I am sure that you will agree that 2011 is going to be interesting. I think what both tax practitioners and the IRS are facing in 2011 can be summed up in a quote from actress Mae West; “Hang on boys, it’s going to be a bumpy ride.”
HAPPY NEW YEAR
Wednesday, December 8, 2010
12 Common Nonprofit Financial Statement Disclosure Omissions
The holiday season is upon us and with it thoughts often turn to the local charity or nonprofit organization. When I think about nonprofit organizations I am reminded of the financial statement disclosure omissions I see in their financial statements. Following is list of the 12 common disclosure omissions in nonprofit organization financial statements:
1. Organization’s capitalization policy.
The failure to disclose the organization’s capitalization policy— basically, the minimum dollar amount for capitalizing and depreciating an asset—is a common financial statement omission. In addition, the financial statements should include the organization’s policy on implying time restrictions on gifts of long-lived assets.
2. Subsequent events review.
Sometimes nonprofit organizations fail to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. It doesn’t matter if there weren’t any subsequent events disclosed in the financial statements; the financials still need to disclose the information about the review.
3. Uncertain tax positions.
ASU 2009-06 provides guidance on uncertainty in income taxes for tax-exempt organizations. FASB ASC 740-10 requires certain disclosures of those positions that are often overlooked:
a. Policy for classifying interest and penalties recognized in the financial statements that are associated with its tax positions.
b. Total amount of interest and penalties recognized in the statement of activities and the statement of financial position.
c. Information about positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date,
d. The tax years that remain subject to examination by major tax jurisdictions.
4. Long-term promises to give.
If a nonprofit organization has long-term promises to give that are measured at present value, then the resulting discount should be disclosed either on the face of the statement of financial position or in the notes to the financial statements. A related disclosure that is often missed is the amounts of promises receivable in less than one year, in one to five years, and in more than five years.
5. Interest paid.
FASB ASC 230-10-50-2 requires the financial statements to disclose interest paid (net of amounts capitalized). This disclosure is often omitted.
6. Summarized financial information.
Summarized prior period financial information does not always include all the detail required by GAAP. FASB ASC 958-205-45-8 and FASB ASC 958-205-50-4 require the financial statement titles to indicate that the prior year information is summarized and to see the financial statement notes that describe the nature of the summarized financial information.
7. Contributed services not properly disclosed.
FASB ASC 958-605-50-1 requires the disclosure of the following items that are sometimes omitted:
a. The activities or programs for which contributed services were used.
b. The nature and extend of those services.
c. The amount recognized as revenue during the period.
d. If practical, the fair value of contributed services received but not recognized in the financial statements.
8. Fund raising expenses.
Any nonprofit organization that has fund raising expenses is required to disclose the following items that are often over looked:
a. Total cost of all fund-raising activities.
b. The method used to compute the ratio of fund-raising expenses to funds raised, if such ratios is disclosed in the organization’s financial statements.
9. Concentrations of risk.
FASB ASC 275-10-50 includes the disclosure requirements related to risks and uncertainties. One that is often overlooked is the requirement to consider whether to disclose concentrations in the market or geographic area in which the nonprofit organization operates.
10. Endowment funds.
All nonprofit organizations that have endowment funds are subject to the disclosure requirements of FASB ASC 958-205-50-1B. The disclosures include organization policies related to endowments, a reconciliation of beginning and ending balances, and information about deficiencies in individual endowments. These are often missed.
11. Trade receivables.
For nonprofit organizations that have trade receivables, FASB ASC 310-10-50-2 through 50-8 includes disclosures related to these receivables. (They do not apply to promises to give.) These disclosures are sometimes overlooked when preparing year-end statements.
12. Restrictions on net assets.
Nonprofit organizations must disclose the total of temporarily and permanently restricted net assets either on the face of the statement of financial position or in the notes to the financial statements. Where the disclosures can sometimes fall short is FASB ASC 958-210-50-3’s requirement to also disclose information about the amount and types of the different restrictions.
In order to prepare nonprofit financial statements in accordance with GAAP and not inadvertently leave out a required disclosure, consider using a disclosure checklist such as the one included in PPC’s Guide to Preparing Nonprofit Financial Statements.
1. Organization’s capitalization policy.
The failure to disclose the organization’s capitalization policy— basically, the minimum dollar amount for capitalizing and depreciating an asset—is a common financial statement omission. In addition, the financial statements should include the organization’s policy on implying time restrictions on gifts of long-lived assets.
2. Subsequent events review.
Sometimes nonprofit organizations fail to disclose the date through which subsequent events have been evaluated and whether that date is the date the financial statements were issued or were available to be issued. It doesn’t matter if there weren’t any subsequent events disclosed in the financial statements; the financials still need to disclose the information about the review.
3. Uncertain tax positions.
ASU 2009-06 provides guidance on uncertainty in income taxes for tax-exempt organizations. FASB ASC 740-10 requires certain disclosures of those positions that are often overlooked:
a. Policy for classifying interest and penalties recognized in the financial statements that are associated with its tax positions.
b. Total amount of interest and penalties recognized in the statement of activities and the statement of financial position.
c. Information about positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly increase or decrease within 12 months of the reporting date,
d. The tax years that remain subject to examination by major tax jurisdictions.
4. Long-term promises to give.
If a nonprofit organization has long-term promises to give that are measured at present value, then the resulting discount should be disclosed either on the face of the statement of financial position or in the notes to the financial statements. A related disclosure that is often missed is the amounts of promises receivable in less than one year, in one to five years, and in more than five years.
5. Interest paid.
FASB ASC 230-10-50-2 requires the financial statements to disclose interest paid (net of amounts capitalized). This disclosure is often omitted.
6. Summarized financial information.
Summarized prior period financial information does not always include all the detail required by GAAP. FASB ASC 958-205-45-8 and FASB ASC 958-205-50-4 require the financial statement titles to indicate that the prior year information is summarized and to see the financial statement notes that describe the nature of the summarized financial information.
7. Contributed services not properly disclosed.
FASB ASC 958-605-50-1 requires the disclosure of the following items that are sometimes omitted:
a. The activities or programs for which contributed services were used.
b. The nature and extend of those services.
c. The amount recognized as revenue during the period.
d. If practical, the fair value of contributed services received but not recognized in the financial statements.
8. Fund raising expenses.
Any nonprofit organization that has fund raising expenses is required to disclose the following items that are often over looked:
a. Total cost of all fund-raising activities.
b. The method used to compute the ratio of fund-raising expenses to funds raised, if such ratios is disclosed in the organization’s financial statements.
9. Concentrations of risk.
FASB ASC 275-10-50 includes the disclosure requirements related to risks and uncertainties. One that is often overlooked is the requirement to consider whether to disclose concentrations in the market or geographic area in which the nonprofit organization operates.
10. Endowment funds.
All nonprofit organizations that have endowment funds are subject to the disclosure requirements of FASB ASC 958-205-50-1B. The disclosures include organization policies related to endowments, a reconciliation of beginning and ending balances, and information about deficiencies in individual endowments. These are often missed.
11. Trade receivables.
For nonprofit organizations that have trade receivables, FASB ASC 310-10-50-2 through 50-8 includes disclosures related to these receivables. (They do not apply to promises to give.) These disclosures are sometimes overlooked when preparing year-end statements.
12. Restrictions on net assets.
Nonprofit organizations must disclose the total of temporarily and permanently restricted net assets either on the face of the statement of financial position or in the notes to the financial statements. Where the disclosures can sometimes fall short is FASB ASC 958-210-50-3’s requirement to also disclose information about the amount and types of the different restrictions.
In order to prepare nonprofit financial statements in accordance with GAAP and not inadvertently leave out a required disclosure, consider using a disclosure checklist such as the one included in PPC’s Guide to Preparing Nonprofit Financial Statements.
Thursday, November 11, 2010
Blue Light Special
Blue Light Special
When you think of: Faster than a speeding bullet, do you think of Clark Kent, aka Superman? Well, if so, you are not keeping up with tax law. The Internal Revenue Code is now faster than a speeding bullet. I am not referring to the fact that tax law changes more quickly than fashion styles. I am referring to the fact that some new tax laws are only effective for less than 100 days.
Seriously!
Code Section 1202, which has been around since 1993, provides for an exclusion of a portion of the gain from the sale of C corporation stock, meeting specific requirements, held for more than 5 years. The exclusion rate, prior to the most recent legislative change, was either 50% or 75%. Under the Small Business Jobs Act of 2010, the exclusion is 100%. Now, that is a full exclusion. In other words, the gain on the sale of the stock is completely and totally tax free. This is a wonderful benefit and all practitioners should be sure to fully review the statute in full.
However!
But, the statute is effective only for stock acquired after September 27, 2010 and before January 1, 2011. That means September 28-30, all of October, all of November, and all of December 2010 but not a day later. That is less than 100 days! The time is short.
I find it remarkable that Congress can pass a law which virtually expires before the general public knows about it. I attribute this law to the new world of social media. It used to be we obtained our news by reading a printed newspaper, a fine magazine, or a book. Now the news comes to us via Facebook, MySpace, and Twitter. And Congress knows it.
Is the day too far off when tax law will change this way? You'll look at your iphone and read the following tweet: For the next 15 hours, if you buy a new ipad, you can take 120% depreciation. But, remember, this offer is only good for the next 15 hours. 16 hours, and you are toast. Act now!
Internal Revenue Code meet the Kmart Blue Light Special!
When you think of: Faster than a speeding bullet, do you think of Clark Kent, aka Superman? Well, if so, you are not keeping up with tax law. The Internal Revenue Code is now faster than a speeding bullet. I am not referring to the fact that tax law changes more quickly than fashion styles. I am referring to the fact that some new tax laws are only effective for less than 100 days.
Seriously!
Code Section 1202, which has been around since 1993, provides for an exclusion of a portion of the gain from the sale of C corporation stock, meeting specific requirements, held for more than 5 years. The exclusion rate, prior to the most recent legislative change, was either 50% or 75%. Under the Small Business Jobs Act of 2010, the exclusion is 100%. Now, that is a full exclusion. In other words, the gain on the sale of the stock is completely and totally tax free. This is a wonderful benefit and all practitioners should be sure to fully review the statute in full.
However!
But, the statute is effective only for stock acquired after September 27, 2010 and before January 1, 2011. That means September 28-30, all of October, all of November, and all of December 2010 but not a day later. That is less than 100 days! The time is short.
I find it remarkable that Congress can pass a law which virtually expires before the general public knows about it. I attribute this law to the new world of social media. It used to be we obtained our news by reading a printed newspaper, a fine magazine, or a book. Now the news comes to us via Facebook, MySpace, and Twitter. And Congress knows it.
Is the day too far off when tax law will change this way? You'll look at your iphone and read the following tweet: For the next 15 hours, if you buy a new ipad, you can take 120% depreciation. But, remember, this offer is only good for the next 15 hours. 16 hours, and you are toast. Act now!
Internal Revenue Code meet the Kmart Blue Light Special!
SSARS NO. 19 IMPLEMENTATION DATE IMMINENT
The Accounting and Review Services Committee approved SSARS 19, Compilation and Review Engagements, on December 30, 2009. This standard becomes effective in 35 days; are you ready?
SSARS No. 19 is effective for compilations and reviews of financial statements for periods ending on or after December 15, 2010—that is, for 2010 calendar year-ends and later. Following is how the statement will affect your compilation and review engagements.
What SSARS No. 19 Does
Some of the more significant provisions of SSARS No. 19 include the following:
• Allows, but does not require, accountants to explain why they’re not independent in a compilation report.
• Separates the compilation requirements from the review requirements.
• Introduces the term review evidence into the review literature. Review evidence is defined as information the accountant uses to provide a reasonable basis for obtaining limited assurance.
• Provides guidance on how the accountant obtains limited assurance when performing review procedures.
• Requires tailoring review procedures for a particular engagement based on the accountant’s knowledge of the client, understanding of the client’s industry, and awareness of the risk that the accountant may knowingly fail to modify his or her report on materially misstated financial statements.
• Discuses the concept of materiality in the context of review engagements.
• Requires a written communication, (i.e. an engagement letter) documenting the understanding with the client regarding the services to be performed.
Documentation Requirements
In addition to the engagement letter, SSARS No. 19 requires the accountant to document the following items:
• Significant, unusual matters considered by the accountant during the performance of the compilation procedures, including their resolution.
• Analytical procedures performed, for review engagements, including management’s response to the accountant’s inquiries regarding fluctuations or relationships that are inconsistent with other information or that differ from expectations by a significant amount; additional review procedures performed and the results of those procedures; significant matters covered in the accountant’s inquiry procedures; significant findings or issues or unusual matters and their disposition; and the client representation letter.
• Communications regarding fraud or illegal acts that came to the accountant’s attention while performing the compilation or review engagement.
Reporting Changes
SSARS No.19 changes the language in standard compilation and review reports and provides illustrations of both types of reports. As previously noted, an accountant may now choose to include language in the accountant’s compilation report describing the reason the accountant is not independent. This disclosure would be added to the final paragraph of the report. There is no prescribed language the accountant must use in the report. Although accountants aren’t required to include the reason(s) for independence impairment, if disclosure is made, it must include all reasons independence is impaired.
Be sure that you and your staff are familiar with the new requirements of SSARS No.19 so you will be ready when the standard is effective.
SSARS No. 19 is effective for compilations and reviews of financial statements for periods ending on or after December 15, 2010—that is, for 2010 calendar year-ends and later. Following is how the statement will affect your compilation and review engagements.
What SSARS No. 19 Does
Some of the more significant provisions of SSARS No. 19 include the following:
• Allows, but does not require, accountants to explain why they’re not independent in a compilation report.
• Separates the compilation requirements from the review requirements.
• Introduces the term review evidence into the review literature. Review evidence is defined as information the accountant uses to provide a reasonable basis for obtaining limited assurance.
• Provides guidance on how the accountant obtains limited assurance when performing review procedures.
• Requires tailoring review procedures for a particular engagement based on the accountant’s knowledge of the client, understanding of the client’s industry, and awareness of the risk that the accountant may knowingly fail to modify his or her report on materially misstated financial statements.
• Discuses the concept of materiality in the context of review engagements.
• Requires a written communication, (i.e. an engagement letter) documenting the understanding with the client regarding the services to be performed.
Documentation Requirements
In addition to the engagement letter, SSARS No. 19 requires the accountant to document the following items:
• Significant, unusual matters considered by the accountant during the performance of the compilation procedures, including their resolution.
• Analytical procedures performed, for review engagements, including management’s response to the accountant’s inquiries regarding fluctuations or relationships that are inconsistent with other information or that differ from expectations by a significant amount; additional review procedures performed and the results of those procedures; significant matters covered in the accountant’s inquiry procedures; significant findings or issues or unusual matters and their disposition; and the client representation letter.
• Communications regarding fraud or illegal acts that came to the accountant’s attention while performing the compilation or review engagement.
Reporting Changes
SSARS No.19 changes the language in standard compilation and review reports and provides illustrations of both types of reports. As previously noted, an accountant may now choose to include language in the accountant’s compilation report describing the reason the accountant is not independent. This disclosure would be added to the final paragraph of the report. There is no prescribed language the accountant must use in the report. Although accountants aren’t required to include the reason(s) for independence impairment, if disclosure is made, it must include all reasons independence is impaired.
Be sure that you and your staff are familiar with the new requirements of SSARS No.19 so you will be ready when the standard is effective.
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