Compilation engagement letter under AR-C 80

Clients often ask for “compiled statements” when they mean something else. A compilation is an engagement in which the accountant applies accounting expertise to help management present financial statements and issues a report, without obtaining or giving assurance. The table shows how it sits between the other two SSARS services (AICPA SSARSs, AR-C 60, 70, 80 and 90).

Lenders, sureties and landlords often name the level they want in the loan or lease terms. Read that clause before you draft the letter, and match the service to it. A bank covenant that asks for reviewed statements is not met by a compilation, however clean the numbers are.

A compilation report is the short report the accountant attaches to compiled statements. It says what management is responsible for, that the accountant compiled the statements under SSARS, and that no assurance is given. It is what separates a compilation from a preparation engagement, where no report is issued at all.

AR-C 80 asks for a short, specific list of terms in the engagement letter (AICPA SSARSs, AR-C 60, 70, 80 and 90). Write them in this order and the letter reads like the illustrative one in the standard.

1. The objectives of the engagement: to help management present financial information as statements, with no assurance.
2. Management’s responsibilities, from AR-C 60 and AR-C 80: preparing and fairly presenting the statements with their disclosures, the framework, internal control, fraud, compliance with laws, complete records and access to people. Management also agrees to include your report in any document that says you compiled the statements (AICPA SSARSs, AR-C 60, 70, 80 and 90).
3. The accountant’s responsibilities: perform the compilation under SSARS and read the statements for obvious material errors.
4. The limitations: no audit or review procedures, no opinion or conclusion, and no promise to find fraud or errors.
5. The applicable financial reporting framework, by name.
6. The expected form and content of the compilation report, and a warning that it may differ.

The first option is disclosures. Omitted disclosures are the notes the framework would require but that management chooses to leave out. Management may choose to omit substantially all the disclosures the framework requires, which keeps the statements short for a lender who only wants the numbers. The letter should record that choice, and the compilation report will say the disclosures are omitted.

The second option is independence. A compilation does not require it, but if the accountant is not independent, AR-C 80 requires a final paragraph in the report that says so (AICPA SSARSs, AR-C 60, 70, 80 and 90). Reasons are optional; if you give any, you must give all of them (AICPA SSARSs, AR-C 60, 70, 80 and 90). A common cause is bookkeeping done by the same firm. In that case the AICPA code also wants a named client overseer for the bookkeeping, agreed in writing (AICPA Code of Professional Conduct, ET 1.295).

A small-business compilation can use the tax basis rather than GAAP. The income tax basis is a special purpose framework: the statements follow the method the company uses on its tax return, such as the cash method or an accrual method. If the statements follow the income tax basis, the framework follows the client’s tax accounting method. Under the cash method, income is generally reported in the year it is received and expenses in the year they are paid (IRS Publication 538, Accounting Periods and Methods). Name the method in the letter, so the reader of the statements knows which one applies.

A compilation is only as good as the records behind it. List them in a schedule with a date per item, such as bank statements, loan statements and the receivable list. Say that the compilation report date moves when records arrive late, and that cleanup work on messy books is billed on top of the compilation fee.

Monthly or quarterly compilations need the same list on a cycle. Write the cycle into the letter: records by the tenth business day after month end, statements a set number of days later. That keeps the letter useful after the first period.

• Trial balance or the closed bookkeeping file for the period.
• Bank and credit card statements, with reconciliations, for each month of the period.
• Customer receivable and vendor payable listings at period end.
• Fixed asset additions and disposals, with invoices, and the depreciation schedule.
• Loan and mortgage statements showing the balance at period end.
• Payroll summaries that tie to the quarterly returns.

• AICPA SSARSs, AR-C 60, 70, 80 and 90: AR-C 80 lists the terms a compilation engagement letter must include, requires signatures from both sides, and requires a lack of independence to be disclosed in the report.
• AICPA Code of Professional Conduct, ET 1.295: Nonattest services for an attest client need a client-designated overseer and a written understanding before the work starts.
• IRS Publication 538, Accounting Periods and Methods: Under the cash method, income is generally reported when received and expenses deducted when paid; under an accrual method, when earned and incurred.