Reliability Project aims to change the performance and reporting of review engagements
What is the Reliability Project?
This project is about repositioning the independence requirement with respect to a review engagement. The concept is simple: Reliable financial statements should be the end game, not independence.
Background | Status
Any questions on this project may be directed to Chuck Landes, AICPA vice president professional standards team at clandes@aicpa.org or Mike Glynn, AICPA technical manager at mglynn@aicpa.org.
Since issuance of Statement on Standard for Accounting and Review Services No. 1 in December 1978, independence has been a performance requirement for review engagements and a reporting requirement for compilation engagements. However, many users of compiled and reviewed financial statements have asserted that the accountant’s integrity, expertise and objectivity are more important than whether the accountant has maintained his or her independence with respect to a client for whom the accountant performs certain accounting services.
This point of view was buoyed by an influential article in Accounting Horizons (“A Proposed Framework Emphasizing Auditor Reliability over Auditor Independence” by Mark H. Taylor, F. Todd DeZoort, Edward Munn, and Martha Wetterhall Thomas, Accounting Horizons, September 2003) contending that independence is a means to an end. The ultimate goal, the authors point out, is reliability. In their view, reliability comes from objectivity, which in turn comes not only from independence, but also from integrity and expertise.
For more than three decades, the Accounting and Review Services Committee’s (ARSC) compilation and review standards have treated the impairment of independence in the same way. If independence has been impaired for any reason, a CPA may perform a compilation but is required to report his or her lack of independence in the report. A CPA is prohibited from performing a review if independence is impaired.
Recently, financial statement users and other stakeholder groups have suggested that the AICPA’s independence rules are, in some cases, an obstacle to helping smaller entities provide reliable financial statements. This situation happens because CPAs engaged in certain control activities for a company are precluded from performing limited assurance engagements, meaning reviews, for that company. Yet the CPA serves as a trusted adviser to many small businesses. CPAs compiling or reviewing the financial statements of small- and medium-size businesses often also perform other services, such as bookkeeping, payroll or internal control projects. To reconcile the marketplace’s expanded needs for CPAs’ involvement in small companies’ financial reporting with the high ethical standards that embody the CPA profession, the ARSC has begun the Reliability Project.
This project is not about eliminating the need for independence in a compilation or a review. It is about repositioning the independence requirement with respect to a review engagement. The concept is simple: Reliable financial statements should be the end game, not independence.
Because of these accounting complexities, some smaller entities can no longer prepare reliable financial statements without their CPA playing an important role in certain internal control activities. However, CPAs cannot establish or maintain their clients’ system of internal control without it affecting their independence. Once they cross that threshold of control activities, CPAs cannot provide reviews on their clients’ financial statements. Some smaller entities that need a review of their financial statements for bank financing or for other reasons need to hire a second CPA to review their financial statements, even though their long-time CPA is better suited for the job.
ARSC has just begun to study and debate the issues. What is clear so far is that ARSC is committed to making sure that any change continues to serve the public interest. Based on its preliminary discussions, a change in standards would not include family or investment-related independence impairment. For example, if a CPA’s independence is impaired because he or she has an investment in the client’s business or because the CPA has family relationships with the client, the CPA would continue to be precluded from performing a review. But if independence is impaired because a CPA performs control activities that add reliability to the financial statements, the CPA could perform a review provided that the CPA has appropriate evidence to support his or her review report and provided that the CPA disclose the services performed in the report.
Any revised compilation and review standards will still treat independence as an important consideration. But for certain impairments (those that are caused by the performance of services or activities that improve the reliability of the client’s financial statements), the standards would no longer preclude a review engagement but rather require the CPA to report the impairment in his or her report.
Questions/Comments
Like any standard, any proposed revisions for the ARSC Reliability Project will go through full due process and exposure. The ARSC is working towards exposing a new standard in late 2008 or in the spring of 2009. The committee encourages and welcomes comment letters on its exposure drafts. All ARSC meetings are open to the public and the materials discussed at those meetings are posted to the AICPA's Web site.
Any questions on this project may be directed to Chuck Landes, AICPA vice president professional standards team at clandes@aicpa.org or Mike Glynn, AICPA technical manager at mglynn@aicpa.org.
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