To our peer review clients:
Annually 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. Implementing new standards is always a challenge.
PRIMA
Effective right now, the AICPA Peer Review Program has converted to an electronic paperless system. All firms undergoing peer review, not just the AICPA member firms, will use the new system. For the past several years AICPA had a system you are familiar with if you are an AICPA member that was called PRISM, which was limited to electronic Matters for Further Consideration (MFC) forms. The new system, named Peer Review Integrated Management Application (PRIMA), covers all phases of the peer review process, starting with the initial correspondence, moving on to the scheduling process, followed by MFC forms, and adding the Finding for Further Consideration (FFC) forms. For example, when you schedule your peer review, you will now have to log on to PRIMA and enter a summary of your engagements by level of service.
New Peer Review Standards
New peer review standards are effective for peer reviews commencing on or after January 1, 2017. The procedures performed by the peer reviewer are expanded, including more compliance testing, and the language for the peer review report changes significantly. One major change that impacts firms directly is the new language for the firm representation letter. Work closely with your peer reviewer to ensure your representation letter language is correct. The representation letter will now be prepared at the conclusion of the peer review on both engagement and system peer reviews, and tailored based on the outcome of the peer review. Another change involves the FFC form. Previously, the FFC form included a recommendation from the peer reviewer, and the firm’s response followed the guidance in the recommendation. The new FFC form will describe the finding but will not include a recommendation. The firm will have to write a response without the guidance of a recommendation from the peer reviewer. Because the firm needs time to respond to MFC forms, FFC forms and deficiencies, if any, identified in the peer review, the exit conference will no longer take place at the conclusion of fieldwork. Instead the team captain will conduct a closing meeting to discuss the preliminary results of the peer review. The exit conference will be held, usually via teleconference, within 30 days of the closing meeting, after the team captain has had time to evaluate the firm’s responses to the matters, findings and deficiencies. The AICPA will no longer maintain the Quality Control Policies and Procedures Documentation Questionnaires that some firms have relied on to document their quality control policies and procedures. Those firms will need to prepare a written quality control document if they have not already done so. The AICPA has sample QC documents on its website that you can use even if you are not an AICPA member.
Compilation and Review Standards
Performing peer reviews over the past year, we have noted areas where firms are having difficulty implementing SSARS No. 21.
Most firms understand the accountant’s reports now have different language but there are nuances involved in the preparation of the engagement letters they may not be aware of.
Under the new ethics standards that became effective in December 2014, the compilation and review services are separate and distinct from the financial statement preparation service. Your engagement letters have to cover both the attest service (compilation or review) and the financial statement preparation service (non-attest). In addition, your engagement letters ideally cover other non-attest services you provide the client, such as income tax preparation.
Unfortunately, PPC’s guidance in this area is confusing. Until recently PPC had sample engagement letters for five types of service: 1) review only, 2) review and financial statement preparation, 3) compilation only, 4) compilation, bookkeeping and financial statement preparation, and 5) preparation only. Starting with the 2016 edition, PPC has added sample engagement letters to use when you provide tax preparation services to the client in addition to compiling or reviewing and preparing the financial statements.
If you are compiling or reviewing a financial statement, usually you are also preparing the financial statement, and providing tax preparation services to the client. Therefore, we recommend you use the sample engagement letters that PPC added to the 2016 edition. These sample letters are intended for situations where you prepare financial statements for tax clients and apply either the compilation or the review service to them.
Under SSARS No. 21, a legend on each page of the financial statements is no longer required on review or compilation engagements. On the other hand, the legend is mandatory on financial statements prepared under the preparation standard, and the legend must include all of the required components or the engagement may be deemed nonconforming.
In our peer reviews, we see that although firms are noting in the legend that no assurance is offered as required under the standard, other components are frequently overlooked. If the financial statements are nondisclosure, the legend should note the omission of substantially all disclosures. If the financial statements are on a GAAP basis, and the statement of cash flows is omitted, the legend must note this. If there is any GAAP departure whatsoever, the legend must describe the departure. If the financial statements are presented on a basis of accounting other than GAAP, this should be disclosed on the face of the financial statements either in the legend or in a tailored financial statement title.
When issuing an accountant’s report, exercise a great deal of care. The AICPA guidance to peer reviewers on what is deemed an acceptable review or compilation report is strict. You have to get the report language exactly right or risk a non-conforming engagement. For example, under SSARS No. 21 review reports must have sub-headings above each paragraph. If those sub-headings are omitted, the AICPA considers that a non-conforming report, even if the language in each paragraph of the report is correct. Be very careful when composing your compilation and review reports under SSARS No. 21.
SSARS No. 23 became effective October 2016 and changed the language in review reports for reporting on supplementary information. The key change is substituting the word “responsibility” for the word “representation” in the paragraph on supplementary information, which as an “other matters” paragraph usually appears as the final paragraph in the report. Although the language changes for review reports, the guidance in SSARS No. 21 for reporting on supplementary information in a compilation report does not change. The word “representation” will continue to appear in the paragraph on supplementary information for compilation reports.
SSARS No. 23 incorporates prospective financial statements into the SSARS, when the guidance for prospective presentations previously appeared exclusively in the attest standards. This change is effective for reports issued after May 1, 2017. The AICPA Guide Prospective Financial Information has been updated to reflect the new standard. Although you will be able to prepare or compile forecasts and projections under SSARS now, you will not be able to provide the SSARS review service on prospective financial statements. Standards for examinations of, or application of agreed-upon procedures to, prospective financial statements remain in the attestation standards as established by SSAE No. 18. A review engagement is not possible for prospective financial statements under the attest standards either.
Take care to update your firm’s Quality Control Document to incorporate the new concepts in SSARS No. 21 and 23.
New Attestation Standard
SSAE No 18 revises the guidance for engagements performed under the attestation standards. It is effective for reports issued after May 1, 2017. The most commonly performed engagement under the attestation standards is the agreed-upon procedures engagement. There are several changes to the agreed-upon procedures service, converting steps that were formerly optional to mandatory. For example, SSAE 18 requires a written assertion from the client. Also, both the responsible party and the engaging party must supply a representation letter. On the positive side, the changes to the report language are relatively minor.
New Accounting Standards
Some of the new FASB standards are as follows:
- ASU 2015-17 eliminates the requirement to classify deferred income tax assets and liabilities between current and noncurrent – all will be deemed noncurrent. Although the effective date is for periods beginning after December 15, 2017, early implementation is allowed.
- ASU 2015-05 changes the accounting for fees paid in a cloud computing arrangement. You don’t have a software contract anymore; therefore, you don’t capitalize and amortize the cost. You expense the cloud computing agreement as you go, which is also true of related consultant costs. This standard is effective for periods beginning after December 15, 2015 (i.e., 2016 calendar year).
- Under ASU 2016-01, the change in the fair value of marketable securities will be included in net income rather than in Other Comprehensive Income. This change will result in a timing difference that will require the recording of deferred taxes. For nonpublic companies, this standard is not effective until 2019.
- Under ASU 2016-18 on the statement of cash flows, the approach to recording changes in restricted cash is simplified. The standard is effective for fiscal years beginning after December 15, 2017.
Other significant upcoming changes to the accounting standards include the following:
- ASU 2016-02 makes multiple changes to the accounting for leases. The main change is the treatment of operating leases, which now will be reported on the balance sheet. The standard is effective for fiscal years beginning after December 15, 2019.
- ASU 2014-09 on revenue recognition is the most significant accounting standard of recent years. The effective date is for fiscal years beginning after December 15, 2018.
A recent AICPA interpretation has removed the requirement to disclose years open to examination by major taxing jurisdictions. Unless your client has a material unrealized tax benefit, this disclosure is now optional. This had been a common finding in peer review because this disclosure was featured on the peer review engagement checklists.
Firms with Not-For-Profit Industry Clients
ASU 2016-14 represents a major revision to the standards for accounting for nonprofit organizations and is effective for fiscal years beginning after December 15, 2017 with early implementation permitted. Temporarily and permanently restricted net assets will be combined into an entry captioned “Net Assets with Donor Restrictions.” The accounting for underwater endowments will change. All nonprofit organizations will now have to disclose expenses by both natural classification and function. Nonprofit organizations that elect to use the direct method for the statement of cash flows will no longer have to provide an indirect reconciliation.
Firms with Governmental Clients
GASB 75 on OPEB liabilities will replace GASB 45 effective for fiscal years beginning after June 15, 2017 and will require booking a liability for the implicit health insurance subsidy without the “community rated” exception that previously applied to smaller entities. Your local government clients should be contacting an actuary about determining the liability now. In addition, the liability for the subsidy going to Medicare qualified PERS retirees under the provisions of the Retirement Health Insurance Account (RHIA) will have to be accrued. The 2017 edition of the AICPA Guide on state and local government has an OPEB Chapter that will help in implementing GASB 75.
GASB 77 is effective this year and requires disclosures on tax abatements, including tax abatements entered into by other governments that reduce tax turnovers to your client. Check with the county assessor about property any tax abatements that apply in the county where your client is located. This is a footnote disclosure only.
The reporting model re-examination project continues at GASB, which will eventually result in a replacement for GASB 34.
A revised edition of the Yellow Book is in the pipeline. The comment period on new Yellow Book concludes July 6, 2017.
Oregon Municipal Audit Law was amended in 2015. Over the past two years, Oregon municipal auditors and their clients have been subject to new state requirements. Auditors must submit to the Oregon Division of Audits any client communications regarding significant control deficiencies or material weaknesses in controls. In turn, their clients must submit written corrective action plans. A summary report on the results of these filings may be found at:
http://sos.oregon.gov/audits/Documents/2017-01.pdf
The Oregon Division of Audits Summary of Revenues and Expenditures is undergoing a revision effective this audit season. The form will include questions about the number of control deficiencies identified in the audit. You can find the new format, when it becomes available at:
http://sos.oregon.gov/audits/Pages/muniaudits.aspx#file
Firms with Single Audit Clients
The AICPA Peer Review program has implemented an “Enhanced Oversight” program, which includes Single Audits in its scope. The AICPA hires “Subject Matter Experts” (who are not peer reviewers) to oversight a selection of peer reviews on firms whose practices include Single Audits. In the last year, the Subject Matter Experts have found that 48 percent of the Single Audits they reviewed were nonconforming. By far, the most common deficiency noted was failure to document and test controls over compliance.
Under Uniform Guidance, clients have a grace period to implement new procurement standards. The new procurement standards were to be in effect for fiscal years beginning July 1, 2017, but on May 17, 2017 the grace period was extended another year.
Here is something else to be on the look-out for: OMB is planning to change the CFDA numbering scheme in 2018.
Our Peer Review Clients
When scheduling your peer review with the state society, the scheduling form requests information about the firm you have hired to perform the peer review. Effective January 1, 2017 our firm name changed from Read & Bose, PC to The RBH Group, LLC. This is the information you will need if you select our firm to perform your peer review:
Name of Reviewing Firm: The RBH Group, LLC
AICPA Firm Number: 10083621
Team Captain's Name: Harry Bose
AICPA Member Number: 01153765
When scheduling your review on PRIMA, do not use our firm name. Use “Harry Bose” when you search for a team or review captain within PRIMA.
The search feature on PRIMA does not always work properly. Here are some helpful tips:
- Search by only one of the criteria. For example, enter just the member number or only the team or review captain’s last name.
- When entering the Member Number, do not include a zero at the beginning. Enter as follows: 1153765.
- Include “%” between words to generate more results. For example, when entering in the full reviewer name, type Harry%Bose.
This letter, along with additional guidance on peer reviews, will be posted to our website. Our website address is: www.peer-review.com.
Our email address, if you wish to contact us about peer review, is: hbose@rbhcpas.com.
Please do not hesitate to contact us if you have any questions. We appreciate your business.
Very truly yours,
The RBH Group, LLC