Businesses and lenders accustomed to requesting or reviewing Notice to Reader financial statements will want to take note of an important change coming into effect later this year. Starting for periods ending on or after December 14, 2021, Notice to Reader engagements will now be known as Compilation Engagements. But the changes don’t end with the new name. The new Compilation Engagements will include a more thorough discussion with management at the outset, require a more detailed review of the financials, and include more informative documentation for the reader on the specifics of the engagement.
Compilation Engagement Reports are produced by accountants at the request of management and all information contained in the financial statements is still provided by management. The finished report presents a summary of the company’s financial statements but does NOT express an opinion or assurance on the accuracy of the information.
Why the change? In recent years, Notice to Readers were increasingly being shared with, and relied on, by lenders and other third parties despite them providing no level of assurance regarding the accuracy of the information in the financial statements. To address this issue, all accountants asked to undertake a Compilation Engagement will now start the process by seeking clarity from management on the intended use of the compiled financial information, including whether it will be shared with third parties, such as lenders or investors. If the compiled financial information is intended to be used by a third party, a Compilation Engagement is only appropriate if the third party is in a position to request and obtain further information from management, or if the third party has agreed with management on the basis of accounting to be used.
In addition to providing the financial information used in the Compilation Report, management must also select the basis of accounting to be used in preparing the financial statements. The accountant can advise on the most appropriate basis for accounting to be used to ensure it is appropriate for the intended readers.
Only when these two issues have been addressed can an accountant accept the Compilation Engagement. In some instances, if the compiled financial information is intended to be more than a management tool, management may find that a different engagement offering assurance to third parties may be more appropriate.
The information contained in the new Compilation Engagement Reports is also changing and will now provide greater clarity to third party readers. Information that will now form part of the report includes:
- Reference to the note in the compiled financial information that describes the basis of accounting;
- Details clarifying management and the accountant’s respective responsibilities in preparing the report;
- Confirmation that no procedures are used by the accountant to verify the accuracy of the information provided by them by management; and
- A reminder to the reader that the report does not provide any audit opinion or assurance.
The accountant is required to ask management about any information that appears to be misleading and to point-out and discuss areas where a judgment call has been made about information in the compiled financial information. However, management is ultimately responsible for the final version of the compiled financial information.
The changes to Notice to Reader reports are being made by the Auditing and Assurance Standards Board (AASB) of CPA Canada. The changes aim to better communicate the level of work involved in preparing the report and to reiterate to readers that there is no level of assurance associated with the Compilation Engagement Report. It is hoped that these efforts will close the expectation/perception gap that currently exists.
It is important that business leaders share with their accountant/practitioner what the intended use of the compiled financial information is, and whether it will be shared with any third party users. A more thorough Review or Audit assurance engagement may be required to satisfy the needs of lenders and other third parties in the future.