According to Statements on Standards for Accounting and Review Services (SSARSs) No.19.05, compilation services are when accountants help management prepare their financial statements without providing any assurances that the financial information is in accordance with Generally Accepted Accounting Principles (GAAP). For example, companies hire Certified Public Accountant (CPA) firms to compile their financial statements. The CPAs transfer financial data provided by the clients into financial statements without providing any assurances.
CPAs need to create an understanding with their clients through an engagement letter. The purpose of the engagement letter is to state the terms of engagements which include classifying the compilation as an engagement that differs from other attestation services (Auditing Assurance Service, 2015, p. 560). During the services, CPAs should familiarize themselves with the client’s industry, organization, and the accounting principles and standards. Then, CPAs should provide the limitations on the use of the financial statements, which must be documented through written communications. The compiled financial statements may be used for management and third-parties, depending on specified arrangements. If the statements are for management, the financial statements should include a heading “Restricted for management’s use only” and the accountants do not need to provide the compilation report (Auditing and Assurance Service, 2016, p. 856).
Meanwhile, CPAs are not required to be independent of the client company that they are performing for, but lack of independence requires disclosure. There are two aspects under the definition of independence: independent in fact and independent in appearance (Auditing and Assurance Service, 2016, p. 46). The first required CPAs to keep independent in their mental attitude (Auditing and Assurance Service, 2016, p. 46). The second required CPAs to “appear” to be neutral (Auditing and Assurance Service, 2016, p. 47). For example, CPAs owning the client’s stock destroy the appearance requirement, whether or not that stock is material to the CPAs net worth or investment portfolio.
A CPA may perform compilation services under three scenarios. First, the management conceals its financial information from the CPA firm that GAAP requires to be disclosed, and the financial information may influence the financial statement users’ decision. Second, the CPAs are not independent while conducting the services. Lastly, the CPAs complete financial statements with all disclosures in accordance with GAAP. However, if the CPAs find misleading, incorrect, erroneous or incomplete information in the financial statements they should obtain additional information to confirm or deny or clarify this from management. If the CPAs are unable to obtain this information from management, they should withdraw from the engagement. In summary, the CPAs do not guarantee the validity of the amounts because they do not audit the amounts provided by the client (Accounting Coach, 2017a).
Accounting Coach. (2017a). Compiled Financial Statements. Retrieved March 02, 2017, from
Accounting Coach. (2017b). Retrieved February 16, 2017, from https://www.accountingcoach.com/accounting-principles/explanation
Hooks, K. L. (2015). Auditing and assurance services: understanding the integrated audit.
Hoboken, New Jersey: John Wiley & Sons, Inc.
Maohong Wang-Master's Degree in Accounting Student at Naveen Jindal School of Management
and is in the 2017 mentoring program at IAA CPA FIRM PLLC
This information is for educational purposes, its not a substitute for consultation with a tax practitioner.If you have any questions please contact IAA CPA FIRM PLLC