May 25, 1999
To our peer review clients:
Once a year, we make an effort to highlight recent changes in professional standards for our peer review clients. We hope what follows is helpful to you in your accounting and auditing practice.
Year 2000
Due to the risk of litigation relating to the year 2000 issue, firms need to exercise care in this area. Your liability insurance company many be asking you to complete a year 2000 questionnaire with your renewal this year and, depending on your answers, the insurance company may limit or exclude coverage for year 2000. Some insurers are encouraging policyholders to have their clients include disclosures about year 2000 in their financial statements. Such voluntary disclosures should be discouraged, however, particularly if the disclosures include information on the status of the client's year 2000 remediation efforts. If the client wishes to include such disclosure, it should be made outside the basic financial statements as client-prepared supplementary information that is not compiled or reviewed. If the client demands some level of reporting from you on this information, usually the information can be compiled, but that is the highest level of service you should offer. In an audit, you should disclaim an opinion on the supplementary information if it is included in the "auditor-submitted" document.
The year 2000 issue does not create additional responsibilities for the author. You don't have to specifically look for problems caused by year 2000. As an auditor, you need to obtain reasonable assurance about whether the financial statements are free of material misstatements, and you need to evaluate whether there is substantial doubt about the entity's ability to continue as a going concern. Existing auditing standards may be applied to the year 2000 issue. The AICPA has issued several interpretations of the applicable standards to provide guidance relating to the year 2000.
An accountant has no responsibility when compiling or reviewing financial statements to determine if a client's computer systems are year 2000 compliant.
In order to ensure the client understands the limitations of your responsibilities for year 2000, you should include disclaimer language in your engagement letters.
There are several accounting matters, regarding valuation, estimates, and disclosure, that relate to year 2000 any may affect the financial statements your firm issues. For example, the costs associated with modifying existing hardware and software for year 2000 should be expensed as incurred rather than capitalized. You can obtain free publications on this topic at AICPA or Practitioners Publishing Company web sites, www.aicpa.org and www.ppcinfo.com , respectively, or contact us.
Peer Review Standards
On May 17, 1999, the AICPA issued an exposure draft with proposed revisions to the peer review standards. For firms currently undergoing off-site review, these revisions, if implemented, will have a significant impact.
Any firm issuing reviewed financial statements will have to have an "on-site peer review" under the proposed new standards, although the term "on-site peer review" will be replaced with the term "systemic review." Peer reviews for these firms will involve the same steps and procedures that previously applied only to firms with an audit practice.
On the other hand, any firm that performs only compilation engagements will need a new type of peer review called a "report review." A "report review" would work much like the "off-site" review does now as far as the relationship between the firm and its peer reviewer is concerned. However, the process would be streamlined on the administrative side. Under current standards, after the peer reviewer issues a report on an "off-site" review, often the firm has to write a letter in response. The peer review documents then go to a technical reviewer, who may require revisions, and ultimately the documents go to the state peer review committee for approval. Also, the peer review committee may impose corrective actions on the firm under the current system.
If the revised standards are adopted, the peer reviewer would still issue a report, but the firm will only need to sign an acknowledgement at the bottom of the report and submit it to the state society. The state society would keep the report on file but, in most cases, perform no other function. The report would include comments and recommendations as in the past, but it will not express any opinion and will not have any designation as to unmodified, modified, or adverse. As peer reviewers, Read & Bose is pleased that we will not have to issue modified or adverse reports under the new standards, since this removed the adversarial element from the peer review process.
Since there is less administrative involvement in "report reviews" than there has been in "off-site" reviews, the fees charged for this type of review by the state societies administering the peer review program may be reduced.
These changes, if adopted, would be effective for peer reviews that commence on or after January 1, 2001.
Our Peer Review Clients
Many of the off-site peer reviews we perform are through appointment by the peer review committee. If the peer review standards are revised as described above, the peer review committee will no longer be assigning reviewers to conduct reviews of firms whose practice is limited to compilation engagements. We hope you will contact us directly about engaging our firm as your peer reviewer.
New Disclosures
As described in our letter last year, there is a new auditing interpretation, Evaluating the Adequacy of Disclosure in Financial Statements Prepared on the Cash, Modified Cash, or Income Tax Basis of Accounting. What's interesting about this interpretation is that it permits less comprehensive disclosure on OCBOA financial statements than is necessary in GAAP financial statements. Although this is an auditing interpretation, it will likely also be used as a reference for accountants preparing compiled and reviewed financial statements. According to this interpretation, narrative may be substituted in OCBOA financial statements for some of the quantitative information required in a GAAP presentation. Also, GAAP disclosure requirements not relevant to OCBOA basis need not be considered. The interpretation gives as an example of a disclosure not relevant to cash or tax basis the disclosure of the use of management estimates.
SAS No. 130, Reporting Comprehensive Income, is effective for fiscal years beginning after December 15, 1997, and establishes standards for reporting and display of comprehensive income in a full set of financial statements. SFAS No. 130 doesn't apply to an enterprise that has no items of "other comprehensive income" for the periods presented, nor does it apply to not-for-profit organizations. Also, a separate statement isn't necessary, as the disclosure can be included either on the income statement or in a statement of changes in stockholders' equity. What is "other comprehensive income"? It's income that bypasses the income statement in GAAP financial statements. The only such income your clients are likely to have is unrealized holding gains and losses on available-for-sale marketable securities.
SFAS No. 132, Employer's Disclosures about Pensions and Other Postretirement Benefits, revises employer's disclosures about pension and other postretirement benefit plans. For clients that have only defined contribution plans, there is actually less disclosure than required previously. As before, you need to disclose the cost recognized during the periods reported on and any significant matters affecting comparability between periods, but you no longer are specifically required to disclose the employee groups covered by the plan or the basis for determining the contributions to the plan.
SOP 98-5, Reporting on the Costs of Start-Up activities, provides guidance on the financial reporting of start-up costs and organization costs. It requires cost of start-up activities and organization costs be expensed as incurred. It is effective for fiscal years beginning after December 15, 1998, and initial application should be reported as the cumulative effect of a change in accounting principle.
Firms with Review Clients
Due to a new auditing standard, SAS No. 85 (see below), the AICPA Accounting and Review Services Committee has revised the wording for the management representation letter used in review engagements. The revised illustrative representation letter appears in the most recent edition of the AICPA Professional Standards, as Appendix D to SSARS #1, or you can find it on the AICPA web site at:
www.aicpa.org/members/div/auditstd/replet.htm
Firms with Audit Clients
SAS No. 83, Establishing an Understanding with the Client, requires firms to establish an understanding with its audit clients, and to document the understanding in its working papers, "preferably through a written communication with the client." Practically speaking, this means engagement letters with audit clients will now be virtually unavoidable. The SAS is effective for engagements for periods ending on or after June 15, 1998.
SAS No. 85, Management Representations, changes the wording you use in your management representation letters.
Firms with governmental audit clients should review Governmental Accounting Standards Board Technical Bulleting No. 98-1 and No. 99-1. The GASB is requiring governments to disclose how they are addressing the year 2000 issue. Bulleting No. 98-1 required footnote disclosure. In response to Bulletin No. 98-1, the AICPA recommended auditors issue qualified opinions on such disclosure. Responding to the AICPA, the GASB issued Bulleting No. 99-1, which allows governments to make this disclosure as required supplementary information. If this approach is followed, auditors do not need to qualify their opinions.
This letter will be posted on our award-winning home page, along with additional guidance on peer reviews. Our web site address is www.oregontrail.net/readbose/peer.html
Please do not hesitate to contact us if you have any questions. We appreciate your business.
Very truly yours,
Read & Bose