As a CPA firm – which means we are CPA members that have done extra training to be able to run our own business and offer accounting services to the general public – we have to follow a lot of rules, regulations and standards. Some of this is for our protection but a lot is for the client.
These standards are set down by the Accounting Professional & Ethical Standards Board (APES). The standards cover lots of things including ethics, engagement letters (which you can read about here), handling client money, and preparing financial reports to name a few. These standards apply to all members in public practice of the main accounting bodies – CPA Australia, CA ANZ and IPA.
APES 315 is the particular standard about preparing financial statements – it’s actually called Compilation of Financial Information. This basically means taking the info you give us, classifying it and putting it into standardized reports including income statement, balance sheet, cashflow statements etc. This is the nice reports you receive from us when we complete your work, usually with nice colours and our logo.
The standard says that when we do this sort of job we have to include what is essentially a disclaimer and that we have to refer to this disclaimer on every report. The disclaimer is the Compilation Report. This is usually one of the first pages in the report after the index or it may be the very last. You can find an example here.
So what exactly does it mean?
The first section has the title, who it applies to – so your entity legal name – and for what period it apples to.
The first paragraph explains what that we have put together your reports and usually lists what reports they are, and explains that this report is for a specific purpose which is set out in the notes to the report, usually Note 1.
If we have a look at Note 1 it talks about how you have asked us to prepare these reports, that you’ve told us the entity isn’t a reporting entity. This means it has no obligation to report to people outside the business. An example of a reporting entity is an ASX listed company or, for a local example, our community bank. It then goes on to say the reports have been prepared for the people who own or run the entity and as part of preparing the tax return. This is the specific purpose – for information for the owners and so we can do the necessary compliance work. It then goes on about what standards have been applied, whether it is on an accrual or cash basis, and when the reports were issued to the entity owners or directors.
Back to the compilation report – we now know what the specific purpose is, for the information of the people who own or control the entity and to do the tax return.
The Responsibility of Directors/Owners
This is pretty straightforward – it says the information in the report is what you’ve given us and you are responsible for it. We just put it in the right place in the report using our accounting expertise.
This is basically saying we’ve put the report together based on the standards that are applicable and on either an accrual or cash basis – depending on what Note 1 says.
Remember I said this is basically a disclaimer – well here is the big bit. When we do financial reports it’s called a compilation engagement. This means we gather the information and put it in order. An assurance engagement would be where we look at the reports that have been put together and check how that information all came to be and make sure that it can be relied on by people external to the entity. An assurance engagement is what you’d typically call an audit. We don’t do this – we just put the information together in a standardised way so you can understand it. This means we don’t take any responsibility for verifying whether it’s complete, reliable or accurate. Sounds a bit ridiculous and like we don’t do anything but what it really means is we don’t drill down and verify what actually happened on each transaction. We interpret the information you give us but we don’t investigate to ensure it’s correct. Our Responsibility says we take all due care and apply relevant standards, it basically means we don’t apply the assurance standards.
The other important bit here is that these are Special Purpose Financial Reports. We don’t audit them so if anyone external to the entity, such as the bank, make decision based on these reports we don’t take any responsibility. Unless we are obligated under law.
Rarely there may also be an Independence clause if the accountant preparing the report is actually connected to the entity in some way.
So in a nutshell the Compilation Report says you are responsible to the information in the report, we don’t audit it, and if someone other than yourself uses the report to make decision about the entity we take no responsibility for any consequences as the report was only prepared for you.
As part of the reports there will be a an Trustee/Owner/Partner Declaration that needs to be signed off by you. This basically says you take responsibility for the reports and the information in it, that you believe they truly represent the entities financial position, and that in your opinion the entity can pay it’s debts.