Private Companies Accounting Standards

The AICPA, the Financial Accounting Foundation (FAF), FASB’s parent organization, and the National Association of State Boards of Accountancy (NASBA) are sponsoring a blue–ribbon panel that is charged with making recommendations on the future of standard setting for private companies. They will take on the issue of whether separate accounting standards are needed for private companies

This is not a new issue for the accounting profession. In the past other groups have wrestled with questions about accounting standards for U.S. private companies, but they mostly focused on technical issues. This panel is unique in that it has support from standard setters, the CPA profession, and state regulators.

The chairman and members of the panel will be named in January. Members of the panel will include individuals representing a variety of financial reporting constituencies, including lenders, investors and owners as well as preparers, auditors, and regulators.

While no deadline has been set for the panel’s work, recommendations are likely to come in 2010.

Let us know what you think. Should there be a separate set of accounting standards for private companies?

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New SSARS Approved - Non-Independent Review Not In It

The AICPA Accounting and Review Services Committee (ARSC) approved a new compilation and review standard in November 2009. We have previously discussed the exposure draft that resulted in this new standard. The effective date of the new standard is for periods ending on or after December 15, 2010. However paragraph 2.21 may be implemented early. This is the paragraph that that allows CPAs to explain in their compilation reports the reasons why they are not independent.

There are two differences in the exposure draft and the final standard. The ARSC retained the concept of limited assurance rather than moderate assurance and the non-independent review is not part of the final standard. Because of the number of comments on this proposal, for and against, the ARSC decided to defer this issue so the Committee could hold additional meetings with key stakeholders.

The new SSARS contains a number of changes. One change of interest to small firms is that compilation guidance is separated from review guidance. Other significant changes include:

• A discussion of how the accountant obtains limited assurance through the performance of review procedures.
• The introduction of the term review evidence to the review literature.
• A discussion of tailoring the review procedures based on the accountant’s understanding of the client’s industry, knowledge of the client, and awareness of the risk that he or she may unknowingly fail to modify the accountant’s review report on financial statements that are materially misstated.
• A discussion of materiality in the context of a review engagement.
• A requirement that an accountant document the establishment of an understanding with management through an engagement letter regarding the services to be performed.
• Enhanced documentation requirements for compilation and review engagements.

The AICPA has issued a white paper, Significant Change for Compilation Reporting Requirements When Independence is Impaired. It is available from the AICPA at http://www.aicpa.org/.

Let us know what you think about the ability to issue a non-independent review report.

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Thinking Outside the Box--An Auditor's Greatest Gift!

For all audit engagements, documentation must evidence compliance with the requirements of applicable SASs. Because SASs are written to be applicable to audit engagements of all sizes, compliance for a small audit engagement will likely be different than for a large audit. Audit documentation of compliance, therefore, is also likely to be different.

As we begin to think outside the box in planning, performing and documenting small audits, a CPA firm's quality control document must give the engagement executive the authority to make modifications that are tailored to the nature, size and complexity of a small entity. Our next step is to develop alternative documentation for use on our small audits.

In a December, 2009 article in the Journal of Accountancy entitled "Risk-Based Audit Best Practices" by Michael Ramos, CPA (a must read for all auditors!), this statement stands out:

"Once thought to be the purview of only the largest firms, growing numbers of audit firms are developing a more customized, firm-specific set of audit practice aids by creating their own forms or checklists for highly judgmental areas such as the documentation of internal controls."

Particularly on small audits, auditors can no longer afford to simply use all the practice aids of a major publisher! There are many ways to comply with quality control and auditing standards. Common sense and analytical thinking has always been a key to performing high-quality, highly-efficient audits and it still is today! With the increasing standards overload, CPA firms must begin to plan and use key audit documentation relative to the nature, size and complexity of an entity.

On December 23, 2009 I'm presenting a webcast on CPE Link, co-sponsored by AccountingWEB, entitled "Using Only Key Forms and the Most Efficient Documentation." In this webcast, I'll present an illustrative small audits alternative documentation plan which can be integrated with practice aids of major publishers. Participants in this webcast will receive beta copies of forms under development for my Small Audits Handbook along with written suggestions for their use. This webcast could be an auditor's greatest gift this holiday season! You can register on my instructor's page at www.cpelink.com. I hope to see you there!

Tax Practice Standards Effective Jan. 1, 2010

A reminder that, with tax season upon us, the AICPA Statements on Standards for Tax Services (SSTS) Nos. 1-7 are effective January 1, 2010. SSTSs 1-7 supersede SSTSs No. 1-8. The SSTSs are:

• No. 1, Tax Return Positions
• No. 2, Answers to Questions on Returns
• No. 3, Certain Procedural Aspects of Preparing Returns
• No. 4, Use of Estimates
• No. 5, Departure From a Position Previously Concluded in an Administrative Proceeding or Court Decision
• No. 6, Knowledge of Error: Return Preparation and Administrative Proceedings
• No. 7, Form and Content of Advice to Taxpayers
  

SSTSs are enforceable tax practice standards for members of the AICPA and apply to all members providing tax services regardless of the jurisdictions in which they practice. They are intended to complement other standards of tax practice, Treasury Department Circular No. 230, Regulations Governing the Practice of Attorneys, Certified Public Accountants, Enrolled Agents, Enrolled Actuaries, Enrolled Retirement Plan Agents, and Appraisers before the Internal Revenue Service; penalty provisions of the Internal Revenue Code; and state boards of accountancy rules.

You may download SSTSs from the AIPCA at http://www.aicpa.org/.

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Fin 48 Reminder

Fin 48, Uncertainty in Income Taxes, is effective for nonpublic and nonprofit entities for the first time for calendar year 2009. Determination of tax positions which may require a provision for unsustainable portions of more-likely-than-not tax return deductions, as well as penalties and interest for failure to file required tax returns for all open tax years in all applicable jurisdictions, must be made by all entities preparing financial statements on a GAAP basis. According to a recent amendment, Fin 48-3, pass-through entities and non-profit organizations must also be considered.

Both the AICPA and PPC have guides with checklists available to assist in applying Fin 48. Some practitioners are considering the use of an OCBOA to avoid application of this pronouncement. Others are determining the materiality of not applying the pronouncement in GAAP financial statements and either disclosing immaterial effects or discussing a possible departure from GAAP report paragraph with the client and the user of its financial statements.

In any event, consideration of this pronouncement should not be left until the last minute. In some cases, it may require extensive work for the client or the auditor which could delay report issuance. You can download the original pronouncement and its updates from www.fasb.org or find them in FASB's Accounting Standards Codification, Topic 740. Post a comment and tell us about your experiences in applying this pronouncement.