During the Accounting Seminar held in Ocean City on May 20 and 21, 2008, there were a few statements including a source reference in one instance that conflicted with the information that is being taught in the MSA Peer Review Seminars. We have researched these three issues and have the following information.

“I” versus “we”

At the Accounting Seminar, the speaker in the afternoon sessions indicated that the use of “I” versus “we” in the accountant(s)’ reports is optional. The morning speaker indicated that the use of “we” by a Sole Practitioner was inappropriate under the AICPA ethics rules as are the use of terms like “Company”, “Associates” and other terms that would give the public an impression that the accountant is not a Sole Practitioner. The speakers in the Peer Review Seminar indicated that the use of “we” as a Sole Practitioner is inappropriate.

The authoritative standards (SSARS) do not give an explanation of when “I” or “we” should be used in a compilation or review report.

For a peer review report, the peer review standards indicate in the footnote to the sample reports that the plural form “we” should be used unless the peer review is performed by a Sole Practitioner. That may be the source of the confusion.

In the non-authoritative literature, the Technical Practice Aids do address this as described in the class. TPA 9160.25 states— “.25 Use of Singular v. Plural Terminology for Accountants and Auditors

Inquiry—In reporting on audited, reviewed, or compiled financial statements, should accountants use singular or plural terminology when referring to themselves?

Reply—Use of plural or singular terminology is not addressed in the professional standards. Illustrative auditors’ reports in Statements on Auditing Standards use plural terminology, while the illustration accountants’ reports in Statements on Standards for Accounting and Review Services use both singular and plural.

In practice, sole practitioners often use singular terms; firms that have one partner with professional staff use both singular and plural; and firms that have more than one partner most often use plural. However, the use of singular or plural references to the accountant or auditor is purely discretionary. For ease of report preparation, firms should be consistent in their use of singular or plural in all reports.”

Section 203.11 of the PPC Guide to Preparing Financial Statements recommends that accountants with no professional staff use the singular “I”. The authors believe that the use of “we” … might imply that there are partners or shareholders.

The Nature of a Report Peer Review

The afternoon speaker indicated that the nature of a “Report Review” in the Peer Review system was extremely informal. He stated that you send your report to the Peer Reviewer and the Peer Reviewer looks it over, calls you on the phone, discusses it with you and tells the Peer Review Administering Entity that you have been Peer Reviewed. This is not accurate!

There is a written peer review report issued under the current standards when a “report review” is performed. See paragraphs .108-.110 and .156 of the AICPA Standards for Performing and Reporting on Peer Reviews. (This is available on the AICPA web site) Note that although a written report is issued under the Peer Review Standards effective until December 31, 2008, it is not possible to “flunk” a Report Review, although the written Peer Review Report can contain numerous deficiencies which are specifically stated in the written report. Even though you can not “flunk” the Report Review, the number and nature of the deficiencies can lead to the Administering Entity requiring some action such as remedial continuing professional education to provide the accountant with the appropriate skills to avoid the deficiencies.

Please note that the new 2009 standards fold in report reviews into engagement reviews and a written report would also be issued.

Lack of Independence Paragraph in Compilation Reports

On the question of independence for compilations, the answer is very clear in the authoritative standards. SSARS specifically states in AR100.23 the following:

“.23 An accountant is not precluded from issuing a report with respect to a compilation of financial statements for an entity with respect to which the accountant is not independent. footnote 20 If the accountant is not independent, he or she should specifically disclose the lack of independence. However, the reason for the lack of independence should not be described. When the accountant is not independent, the following should be included as the last paragraph of the report:

“I am (we are) not independent with respect to XYZ Company.”

The footnote to this paragraph states “In making a judgment about whether he or she is independent, the accountant should be guided by the AICPA Code of Professional Conduct.”

The AICPA -Code of Professional Conduct addresses the issue of performing non-attest services for clients. Bookkeeping is considered a nonattest service and would be subject to the requirements of Interpretation 101-3. The general requirements in paragraphs under ET 101.05 of the Code would apply. The table provided there illustrates that the CPA could “Record transactions for which management has determined or approved the appropriate account classification, or post coded transactions to a client’s general ledger.” or “Propose standard, adjusting, or correcting journal entries or other changes affecting the financial statements to the client provided the client reviews the entries and the member is satisfied that management understands the nature of the proposed entries and the impact the entries have on the financial statements.”

BUT the “General Requirements for Performing Nonattest Services” detailed in 101-3 must be met. For example, the CPA cannot make management decisions or perform management functions; the client must meet minimum requirements for skills and perform functions as described and the understanding of the services must be documented in writing.

However, the standards state “In cases where the client is unable or unwilling to assume these responsibilities (for example, the client does not have an individual with suitable skill, knowledge, and/or experience to oversee the nonattest services provided, or is unwilling to perform such functions due to lack of time or desire), the member’s provision of these services would impair independence.”

The basic test that an accountant might use is that if a client is asked by the banker where a financial statement number comes from or what it means and the client says “I don’t know ask my accountant”, you are probably not independent.

Aside from the client issue, there are several “general activities” described in the standards that would impair independence regardless of the understanding established with the client, such as “custody of client assets”. See the paragraphs and table under interpretation 101-3 in Section ET 101.05 of AICPA Code of Professional Conduct. That is authoritative.

But there are more strict standards to comply with if the non compilation higher level of engagement is subject to the requirements of the SEC, DOL or GAO.

Just to be clear, a CPA licensed in Maryland is required to comply with Professional standards, which would include the AICPA Code of Professional Conduct, under Maryland Regulation 09.24.01.06 G (4) —

(4) A licensee in the performance of accounting and review services or management advisory services, consulting, financial planning, or tax services shall conform to the professional standards applicable to these services at the time the services are performed.

Other Questions

There were a few other open questions from participants of the Peer Review Seminar. One of the questions had to do with a rumored exception to the system review for small practitioners performing some insignificant number of audits.

Whether or not a firm has 3 or less SAS or GAO engagements would not change the type of review at all— just where it would be performed. Under the current peer review standards a system review could be performed at the office of the reviewer (normally it is done at the firm’s office being reviewed) if certain conditions are met.

Having 3 or less of those engagements is one of the conditions. See Interpretation 1 of the current standards. Anyone performing even just one audit would be required to have a system review. That does not change. The 2009 standards allow more judgment in determining if the firm could have the system review in the reviewer’s office. See interpretation 7 of the 2009 standards.

Please note that the Peer Review speakers have indicated that it is not practical to perform one audit. The overhead burden of the System Peer Review as well as the continuing professional educational requirements necessary to maintain auditing skills and keep up with auditing standards make it necessary to perform at least 3 to 5 audits per year. Remember that a System Peer Review judges the system. Completion of all appropriate work papers and check lists is more significant than correct numbers in the financial statement. The System Peer Review evaluates whether or not you have the appropriate systems in place to reach the proper conclusion not whether or not you did reach the appropriate conclusion.

Another question relates to type of reports or reporting that does not require Peer Review. The main such type of service is the SSARS 8 Compilation. This level of service is appropriate when an accountant submits unaudited financial statements to his or her client that are not expected to be used by a third party. See SSARS 100.24- .27. If no other services requiring reports were issued, the CPA would be exempt from peer review altogether.

The Peer Review speakers have also recommended that “Agreed Upon Procedures” engagements be substituted for audits and reviews whenever possible. Often this level of service is what the client really wants or needs. It is a far less expensive alternative to an audit and provides a better service than a review.