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Financial Review - Is Independence Impaired?

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#1
dsocpa  
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My question concerns reviewer independence. Specifically, is independence impaired when a reviewer exports financial statements to templates used for presentation purposes And does not write the footnotes? I am currently serving my first year as Treasurer of an association. A board member believes the current reviewer is not independent because "The reviewer had prepared the statement of cash flow and some of the footnotes, statement of financial position and the statement of activities.”
This is not the case, the reviewer received the QuickBooks file and exported to his own template for presentation. In my opinion, and based on my research independence could be impaired if the reviewer had done any kind entry to the accounting system, used source documents, or basically had direct contact with transactions which comprised the balance of accounts on the statements. As long as those activities had not happened AND the engagement letter specifically states management is responsible, using a template doesn't mean the reviewer "prepared the statements. Of those who do reviews how many issue a report formatted from directly from QuickBooks with no adjustments? How many clients write their own footnotes? Almost no one that I know of.
I apologize for the long-winded description. Any thoughts?
 

#2
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Rockville Centre, NY 11570
I would consider this to be a "Prepared Financial Statement", as defined below

This certainly covers any independent issues!

Let me know your thoughts.

AR-C Section 70, Preparation of Financial Statements

The new section applies when a CPA is engaged to prepare financial statements, but not engaged to perform an audit, review, or compilation. Like the compilation, the preparation of financial statements is a nonassurance service, it requires an engagement letter, can omit notes, and can be used outside of management. Unlike the compilation, however, there is no disclosure requirement regarding the CPA's independence, and the financial statements do not have to be accompanied by a report.


In terms of disclosures, the preparation engagement only requires a legend on each page stating that no assurance is provided. The name of the CPA firm is not required. If the financial statements were prepared according to a special-purpose financial reporting framework (such as modified cash basis), a description of the framework should be added on the face of the financial statements or as a note. If the CPA is aware of a departure from GAAP or other chosen financial reporting framework, a disclosure should be added on the face of the financial statements or as a note. If the departure was intended to mislead users, the CPA should not prepare the financial statements.

It is important to note that AR-C Section 70 does not apply if the CPA is only engaged as a consultant to merely assist in preparing the financial statements or if the CPA prepares the financial statements as a by-product of another engagement, such as preparing tax returns or a personal financial plan. In addition, it does not apply when the CPA is an employee of the company.

Regarding whether or not the preparation engagement is subject to peer review, the AICPA clarified in early 2015 that it is subject to peer review if the CPA firm is already subject to peer review because of other engagements (compilation, review, or audit) or if the CPA firm elects to enroll. The preparation engagement is not subject to peer review if the firm only performs preparation engagements. The Pennsylvania CPA Statute only requires peer review if a firm perform audits, examinations, or reviews. So, firms that only prepare financial statements using the preparation standard will not be required to enroll and undergo peer review for Pennsylvania licensing purposes. If firms have any questions or are unsure, or are accounting practices outside Pennsylvania, they should consult their state board of accountancy to determine if enrollment in peer review is required.

The impact of SSARS 21 – and AR-C Section 70, in particular – is twofold. First, it creates a level of service that is better adapted to today's business environment and needs. Second, it makes CPA firms more competitive in the outsourcing market.

Better Fit for Today's Business Environment
AR-C Section 70 brings a level of service that was not codified until now. With these CPA-prepared financial statements, the standards are more in line with the needs of users who do not require a report, particularly among privately held companies.
 

#3
dsocpa  
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Thank you mdubincpa. I have to apologize I do not think I was specific enough regarding the circumstances. The association is required to have a financial review, no more no less. The basis for the board members assertion is the reviewer is not independent because he prepared the statements. I disagree based on the fact he did not "prepare the statements", they were generated from QuickBooks which is maintained by the client. The reviewer did no bookkeeping, entered no source documents. All numbers on his statements have been agreed to the QB file statements. In fact I my self prepared the Statement of Functional Expenses. I do not see anywhere that says a reviewer fails to be independent if he/she writes the footnotes. In fact I've never heard of a client who wrote their own footnotes (I shudder at the thought) my research

Below is from the AICPA Guide to Independence_2017
Are Preparing Financial Statements, Cash-to-Accrual Conversions, and Reconciliations
Considered Nonattest Services?
The AICPA independence rules consider the preparation of financial statements, cash-to-accrual
conversions, and reconciliations outside the scope of the attest engagement and, therefore, constitute
a nonattest service. Such activities would not impair independence if the requirements of the
interpretations of the “Nonattest Services” subtopic are met.
What Are the Rules Concerning Performing Bookkeeping Services for an Attest Client?
The AICPA independence rules prohibit members from assuming management responsibilities in all
circumstances. Accordingly, a member may provide bookkeeping services if the attest client oversees
the services and, among other things, performs all management responsibilities in connection with the
services. For example, if a member is engaged to provide bookkeeping services that will result in a
set of financial statements, the attest client must
• approve all account classifications

• provide source documents to the member so that the member can prepare journal entries.
• take responsibility for the results of the member’s services (for example, financial
statements).

Note: Proposing adjusting entries to an attest client’s financial statements as part of the
member’s audit, review, or compilation services is considered a normal part of those engagements
and would not be considered performance of a nonattest service subject to the provisions of the
“Nonattest Services” subtopic, provided the attest client reviews these entries and understands the
effect on its financial statements and
records any adjustments identified by the member that the attest client believes
appropriate.
 

#4
Doug M  
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The association is required to have a financial review, no more no less.


Do you mean that the association is required to have a reviewed financial statement? Or a person who acts as a consultant to review the financial affairs of the association?
 

#5
dsocpa  
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A complete set of GAAP compliant reviewed financial statements conducted by a CPA in accordance with SSARS promulgated by the Accounting and Review Services Committee of the AICPA.
 

#6
Doug M  
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You cannot prepare a reviewed financial statement unless you are independent. Doing a crappy job is different than independence. Failure to provide full disclosures, perform analytical review, make inquiries, etc is another issue.

A board member believes the current reviewer is not independent........


To a layman, independence would not mean the same thing as it does to you.
 

#7
dsocpa  
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Thank you DougM. Neither are "laymen". Both are CPA's and both do review's and should be aware of the rules regarding independence. Since I posted this the organization obtained a legal opinion which basically affirmed my position on independence. Too bad they had to spend almost $4k to confirm.
 

#8
Doug M  
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Oregon
My guess is that these other CPA's have never done any financials, or they would know this stuff.
 

#9
dsocpa  
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One is the reviewer - whose position on independence I concurred with. The other is a board member who actually does reviews and teaches accounting at a local community college. Some let their egos get in the way of reasoning...
 

#10
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I've never done a review where I didn't prepare the financial statements.

Preparation is a threat to independence but is easily overcome by proper safeguards.
 


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