PwC believes that the revision of extant ISRS 4410, and adoption of the clarity drafting guidelines, will serve to enhance understanding, of both users and practitioners, of the nature and scope of compilation engagements and of the distinguishing features of such engagements, as compared to other assurance type engagements. PwC supports the objective and overall work effort described in the proposed standard. The Firm also agrees with the principles on which the requirements, that describe the practitioner's work effort, are based.
For the attention of Mr James Gunn
International Auditing and Assurance Standards Board
545 Fifth Avenue, 14th Floor
New York, New York, 10017
31 March 2011
IAASB Exposure Draft – International Standard on Related Services (ISRS) 4410 (Revised), ‘Compilation Engagements’
We appreciate the opportunity to comment on the IAASB’s proposed International Standard on Related Services (ISRS) 4410 (Revised), ‘Compilation Engagements’.
Following extensive consultation with members of the PwC network of firms, this response summarises the views of member firms who commented on this Exposure Draft. “PwC” refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legal entity.
We support the proposed revision of the ISRS, recognising there is a demand for compilation services, in particular amongst the small and medium sized entity market. Revision of extant ISRS 4410, and adoption of the Clarity drafting guidelines, will serve to enhance understanding, of both users and practitioners, of the nature and scope of compilation engagements and of the distinguishing features of such engagements, as compared to other assurance type engagements.
We support the objective and overall work effort described in the proposed standard. We also agree with the principles on which the requirements, that describe the practitioner’s work effort, are based. However, we believe that elements of the requirements are drafted in a manner that seems over-engineered and cumbersome. We have set out below our primary reasons in reaching this conclusion and have further expanded on our views in response to the specific requests for comment set out in the exposure draft.
Unnecessary emphasis on the applicable financial reporting framework
The Explanatory Memorandum explains the underlying premise that the practitioner cannot use the compilation report to communicate about instances where the compiled financial information departs from the applicable financial reporting framework. The reasons given are that the identification of departures could be perceived as implying a level of assurance, and the practitioner could be associated with information that is possibly materially false or misleading.
The solution in the Exposure Draft revolves around consideration of the applicable financial reporting framework and, in particular, the ability to redefine it in circumstances when modification to a recognised framework still results in financial information that is acceptable in the circumstances. Although the proposed approach applies engagement acceptance and reporting principles regarding applicable financial reporting frameworks consistent to those in the ISAs, this solution seems contrived in the context of compilation engagements.
We feel there is unnecessary over-emphasis on the implications and consequences of selecting an applicable financial reporting framework in the context of:
Further, the proposed approach does not achieve the aim of having no qualifications in the report because the proposed wording of the ‘Alert to Reader’ could be interpreted by some as, in effect, a form of qualificatio. i.e., it is being used to describe how the framework that has been used departs from a recognised framework.
In our view, basing the approach to the requirements for a compilation engagement on the requirements of the reporting ISAs, with respect to reporting frameworks, does not aid attempts to distinguish compilation engagements from an audit, and is unhelpful for a number of reasons:
We believe that the standard could be made simpler and more understandable to both users and practitioners by focusing on some key basic principles with regard to the ‘basis of preparation’ of the compiled information, as discussed below.
Basic principles in relation to the ‘Basis of preparation’
There will often be scenarios where there is a conscious decision by management not to comply with certain provisions of a reporting framework for understandable and acceptable reasons. This could happen at the engagement acceptance stage or during the compilation process. In such circumstances, we believe that the following two principles are important:
These principles recognise the overall purpose and objective of a compilation engagement, whilst at the same time guarding against practitioners being associated with misleading information. If the standard focussed on these key principles, we believe many of the requirements could be simplified. For example, it would be possible to simplify:
Our detailed comments in response to the specific questions raised in the exposure draft are set out below and explain further our views on how some aspects of the proposed content could be improved. We have also provided some specific suggestions for the Board to consider in the appendix to this letter. We encourage the IAASB to address these comments in finalising proposed ISRS 4410 (Revised).
Request for specific comments
1. Proposed ISRS 4410 is designed to apply when the practitioner is engaged to compile financial information in accordance with an applicable financial reporting framework and to provide a compilation report for the engagement performed in accordance with this ISRS. Do respondents believe this scope is appropriate, and is it clear when practitioners undertaking the compilation of financial information are required to apply the standard? What practical challenges, if any, might arise from the proposed scope of the standard?
We support the scope of the revised standard being applicable to those engagements where the practitioner issues a report on the compiled financial information. We agree that the standard should only apply when the practitioner issues a report on the compiled financial information. The standard, with the scope as drafted, will apply to a broad range of engagements – and to those for which having the work effort established in a standard is in the public interest. There are, however, many other circumstances in which professional accountants provide accounting support to clients that are not, in our view, compilation engagements. Focussing on those in which there is a report and, therefore, clear association of the professional accountant with that financial information, will ensure that such engagements are distinguishable from the provision of accounting ‘advice’ to clients.
Paragraph 2, in the Scope section, states that the ISRS may be applied, adapted as necessary, to compilation engagements for non-financial information. We believe that challenges may arise in the consistent application of the standard to non-financial information. While it may be reasonably straightforward to adapt the ISRS for engagements to compile financial information other than historical financial information, we feel it is less clear how the standard would be adapted for engagements to compile non-financial information, given the diverse range of engagements that this may comprise. We feel that references to non-financial information in paragraphs 2 and A3 are ambiguous and do not give the practitioner any real direction as to how the ISRS may be adapted. It is our view that, unless the Board wishes to invest significant time and effort to appropriately scope the guidance necessary to adequately address the issue of non-financial information, this be removed from the scope of the standard.
The exposure draft does not explain whether the revised ISRS 4410 is intended to apply to engagements which involve the use of XBRL technology to tag specific pieces of financial information included within financial statements. Specifically we are thinking of engagements to:
We do not believe that such engagements should be within the scope of ISRS 4410 and, therefore, suggest that the IAASB make this clear in the introductory material. If these engagements are intended to be within the scope of ISRS 4410, then more specific guidance would be welcome.
2. Do respondents believe the compilation engagement performed under the proposed ISRS is clearly distinguishable from assurance services (audits and reviews of financial statements) to users of compiled financial information and the practitioner’s report, to those who engage practitioners to prepare and present financial information of an entity, and to practitioners undertaking these engagements?
We believe that it is sufficiently clear from the proposed content that engagements to compile financial information are different from an audit or review engagement. Specifically, the content of the engagement letter, and the proposed wording of the practitioner’s report, make this, in our view, as clear as possible to users.
3. Is the requirement for the practitioner to obtain management’s acknowledgement of its responsibilities as specified under the proposed ISRS an acceptable premise for the practitioner undertaking a compilation engagement under the standard?
We agree the importance of management understanding respective responsibilities and what we, as practitioners, expect of them before accepting the engagement. However, the approach taken in the exposure draft is, in our view, unnecessarily over-engineered in the context of these engagements.
Compilation engagements are often performed for clients whose management does not hav. a sophisticated understanding of accounting and finance and, therefore, are unlikely to be able t. understand and acknowledge the detailed responsibilities set out in paragraph 23 (c). This is one of the key drivers that lead to the practitioner being engaged to assist management - to provide the necessary financial reporting expertise.
For these reasons, we believe that acknowledgement can be best achieved by a simple, straightforward requirement that management accept its overall responsibility for, and to approve, the compiled information and for the underlying information and judgements therein. It is not necessary to explicitly set out a detailed breakdown of the elements of that overall responsibility, such as the selection of the framework and of accounting policies and estimates required under that framework, as described in paragraph 23 (c). In our view, this may serve only to confuse management.
We have proposed a revised form of wording for requirement 23 in the appendix to this letter.
4. Do respondents believe the proposed requirements dealing with the responses and actions by the practitioner when the practitioner believes the compiled financial statements contain a material misstatement, or are misleading, are appropriate?
In our view, the requirements in relation to actions by the practitioner when there “are” material misstatements appear overly process oriented and are not reflective of the circumstances that are likely to arise in practice, in the majority of engagements of this type.
In many circumstances, we anticipate that the practitioner will be compiling the financial information from underlying transaction and accounting records. In such circumstances, the likelihood that a material misstatement or misleading information would result is remote. The practitioner is not going to prepare information that contains a material misstatement, or that is misleading, and then proceed to propose that management make the necessary amendments. The practitioner would simply compile the financial information in an appropriate manner and include such disclosures as considered necessary for the compiled financial information not to be misleading.
If compilation of financial information that is required to comply with the applicable financial reporting framework agreed during engagement acceptance proves impractical in the circumstances (if, for example, the necessary information is not readily available, or because the costs of preparing the information in the circumstances is considered to outweigh the benefits), the practitioner will need to decide whether the resulting basis of preparation will result in financial information that could be misleading in the circumstances, even if the basis of preparation is fully disclosed. If it could be, then the practitioner ought not to be associated with the financial information prepared on that basis. Otherwise, the focus should be on ensuring that the basis of preparation is appropriately described in both the financial information and in the compilation report.
We acknowledge that there may be circumstances when the practitioner simply completes the financial information, either from a trial balance or from a preliminary, but incomplete, set of financial statements. In these circumstances, it could be possible that the practitioner identifies a misstatement and proposes an amendment to management.
In both cases, however, the desired outcome is to have compiled financial information prepared in accordance with a final agreed basis of preparation that is suitable in the circumstances and transparently disclosed. The focus in the requirements on misstatements and amendments, with reference in the application material to possibly proposing an alternative acceptable framework, seems both process orientated and contrived.
We suggest that the IAASB re-redraft these requirements to make them less process oriented. If focussed on the principles above, they should be applicable in any of the likely scenarios of how and when materially misstated or misleading information is likely to arise.
5. When the practitioner identifies the need to amend the compiled financial information so that it will not be materially misstated or misleading, do respondents agree that the practitioner may, in appropriate circumstances, propose the use of another financial reporting framework as long as the proposed alternative framework is acceptable in the circumstances of the engagement and is adequately described in the financial information?
We believe that the manner in which paragraph A49 is written could be considered misleading. Reference to a “proposal to change the applicable financial reporting framework” implies that an entirely different framework may be adopted. In our view, the reality is that the basis on which the information has been compiled will likely be as initially agreed with management but with one or more departures from that originally envisaged. Taking into consideration our previous comments, on replacing the focus on appropriate applicable frameworks with consideration of the acceptability of the basis of preparation, we suggest that this paragraph would be more appropriately worded by discussing ‘changes to the description of the basis of preparation’, as opposed to a change in framework. As long as the practitioner is satisfied that the underlying principles, as set out in the ‘overall comments’ section of this letter, have been met, then the resulting compiled information will not be misleading. As previously explained, we also believe this approach is more readily understandable, for both users and practitioners, than complex analysis of the acceptability of different types of reporting framework.
In the event that the practitioner believes any amended description of the basis of preparation could not overcome the risk of being associated with information that is misleading, then we support the requirement in paragraph 34 for the practitioner to withdraw from the engagement.
We support the intended purpose of the ‘Alert to reader’ paragraph proposed in the Exposure Draft, as it ensures there is full transparency over the basis of preparation and, therefore, serves to ensure that the reader is not misled by the financial information. The user can clearly see that the financial information has not been prepared in full compliance with the specific recognised framework: the departure is clearly highlighted in the compilation report. Importantly, the user is not required to compare the stated accounting policies with the recognised framework to determine the differences.
However, we recommend that the paragraph be re-named as ‘Basis of preparation’. This will avoid a reader possibly interpreting the “Alert to reader”, and the wording in it, to be a “qualification”.
For the reasons set out above, we do not believe that a basis of preparation that is not full compliance with a recognised general purpose framework necessarily becomes a “special purpose framework”. We think it is best to avoid the ISA terminology in this respect. For this reason, we would recommend not including the last sentence in the paragraph (as required by paragraph 37 (g)(ii)) unless the financial information has been prepared for a special purpose, in which case it would be appropriate to identify it as such. We have reflected this recommendation in our appendix comments, along with further suggested changes designed to clarify when and how the requirement is to be applied.
Emphases of matter
In relation to paragraph A45, we believe that there are circumstances where the practitioner may believe it is appropriate to refer in their report to disclosures within the compiled financial information that describe factors that may cast doubt over the ability of the entity to continue as a going concern. The IAASB is asked to consider how such a reference could best be incorporated into the report. This could, for example, be included in the description of the basis of preparation, or in a separate statement similar in nature to an emphasis of matter paragraph. In the case of the latter, we also feel it would assist practitioners if the standard were to address the wider question of whether inclusion of an emphasis of matter is ever appropriate, in the context of a compilation engagement. For example, the practitioner may identify a matter, other than going concern, that they considered to be of such importance to the users understanding of the compiled financial information that they believe they should draw this to the users attention. While potentially beneficial for users, such statements may give rise to the impression that assurance is being provided on the compiled financial information. Such situations, although likely to be infrequent, may arise, and to ensure consistency in practice between practitioners, we suggest that the IAASB either explicitly preclude the use of emphasis of matter paragraphs or provide guidance on when their use may be appropriate.
6. Appendix 3 of the proposed ISRS sets out several illustrative practitioners’ compilation reports. Do respondents agree these reports provide useful additional material to illustrate some different scenarios for compilation engagements? Do respondents believe the communications contained in these illustrative reports are clear and appropriate?
In our view, the number of illustrative reports is appropriate, in that they address a number of different scenarios reflecting alternative bases of preparation and intended users.
As explained in our response to Q5 above, we have concerns over references to the applicable financial reporting framework and the description of the ‘Alert to Reader’ paragraph. In our view, reference to a recognised framework, such as IFRS, in the opening paragraph of the report, can only be made where that framework has been applied in full without modification. In all other circumstances we would expect the ‘Basis of preparation’ (Alert to reader) paragraph to describe the basis of preparation, which could either identify a recognised framework and departures from it or, in more complicated situations, refer to the note within the compiled financial information that sets out transparently the applied basis of preparation. Refer also to our comments in the appendix.
7. Proposed ISRS 4410 is premised on the basis that a firm providing compilation engagements under the standard is required to apply, or has applied, ISQC 1 or requirements that are at least as demanding. In light of this, are the requirements concerning quality control at the engagement level sufficient? Does this approach to specifying quality control provisions in proposed ISRS 4410 create difficulty at a national or firm level? If so, please explain.
We believe that the nature and extent of the requirements and guidance in relation to engagement level quality control is appropriate, and support the underlying premise on which they are based. We recommend, however, that if it is the IAASB’s intention that firms not applying ISQC1 (or an equivalent that is at least as demanding) are not permitted to report in accordance with this ISRS, then this needs to be stated explicitly.
We consider the proposed effective date to be acceptable, on the assumption that the IAASB continues its normal practice of permitting early adoption.
We would be happy to discuss our views further with you. If you have any questions regarding this letter, please contact Deian Tecwyn (+44 207 212 3695) or Jamie Shannon (+44 141 355 4225).
We encourage the IAASB to address the following matters in finalising proposed ISRS 4410.
|Para 2 & A3||
As explained in our overall comments, we believe that the references to non-financial information should be removed unless further guidance is provided on how the requirements would need to be adapted to compile non-financial information.
|Para 5, A10 & A16||
We believe it would be beneficial to acknowledge in paragraph 5, or its associated application material (A10), that in many cases the practitioner will be requested to assist management in selecting appropriate accounting policies, or in the development of accounting estimates, that are needed for the financial information to be compiled. These matters are already discussed in relation to the application of the practitioner’s professional judgment in paragraph A21, and we believe reference to these additional potential roles, in the introductory paragraphs dealing with the scope of a compilation engagement, would be helpful. For example, the following wording could be added to the end of paragraph 5:
“While management may seek the professional accountant’s assistance in some of these matters, responsibility for the judgments remains with management and are an integral part of their approval of the compiled financial information.”
In addition we question whether paragraph A16 is required in addition to paragraph A10. The content of paragraph A16 appears repetitive of elements of paragraph A10 and could be absorbed into the earlier paragraph.
We suggest that part (a) of the objective be amended as follows, taking into account our comments on the applicable reporting framework versus basis of preparation:
“(a) To apply accounting and financial reporting expertise to assist management in preparing and presenting financial information in accordance with an
Consistent with our comments on basic principles in relation to the basis of preparation, we recommend that the definition of “Applicable financial reporting framework” in part (a) be deleted and replaced with a definition for “Basis of preparation”. The definition could explain that it is the basis on which the compiled financial information is prepared and that this could be a recognised financial reporting framework, based on, but with identified departures from, a recognised framework, or specified accounting policies.
|Para 23 (c)||
Taking into consideration our comments on management’s responsibilities, discussed in our ‘overall comments’ to this letter, we suggest that this requirement be re-drafted as follows:
“(c) Obtain the agreement of management that it acknowledges and understands that:
(i) In performing the engagement the practitioner will compile the financial information on management’s behalf,
(ii) Management has the following overall responsibilities which are fundamental to undertaking the compilation engagement:
i. All information of which management is aware that is relevant to the compilation of the financial information, such as records, documents, explanations and other information; and
ii. Additional information that the practitioner may request from management for the purpose of the compilation engagement;
e. c. Adoption, and approval, of
Refer also to our comments on related paragraph A37 below.
|Para 25 (d)||
We suggest that “applicable financial reporting framework” be replaced with “basis of preparation”.
|Para 27 (b)||
We suggest the following amended wording:
“(b) An understanding of the basis of preparation, including any recognised
|Para 32 & 33||
Refer to our comments in response to question 4.
|Para 34 (b)||
We suggest the following amended wording:
“(b) The basis of preparation
|Para 35 & 36||
We believe that the use of the term ‘significant matters’ may require additional application guidance to further explain what is intended to be included within both communications to management and the engagement documentation. For example, is there an expectation that all significant judgments of management are to be included?
Furthermore, we question whether there could be a perceived conflict between the requirement in paragraph 36 and the related application material in paragraphs A54 and A55. The requirement states that the practitioner "shall include in the engagement documentation a brief description of significant matters". However, the application material then goes on to state that the practitioner "may consider" documenting other matters in the engagement documentation, in addition to those significant matters. We find this unhelpful, as a number of the items given as examples that may be considered by the practitioner for inclusion in the engagement documentation would often, in our view, be considered to represent significant matters, and therefore must be included. In particular, the repeated use of the word ‘significant’ in these examples contributes to this perceived conflict.
Specifically, we consider that consultations on difficult or contentious areas, matters that required “significant professional judgment”, and explanations provided by management in relation to “significant judgments” and “significant accounting estimates” would all likely be considered as significant matters and therefore require to be included in the engagement documentation.
We suggest it may be helpful to define more explicitly those matters that ordinarily would be considered significant matters.
|Para 37 (c) (ii)||
Consistent with our response to question 6, we suggest the following amended wording:
“(ii) Identifies the
|Para 37 (c) (iii)||
We suggest the following amended wording, consistent with our suggestion for paragraph 23 (c):
“(iii) States that the financial information has been compiled by the practitioner based on information and representations provided by management, in accordance with the agreed terms of engagement.”
|Para 37 (g) & A59||
We recommend that this element of the requirement be re-drafted and split into the following elements:
We believe that the bullet points, designed to identify the elements that national quality control requirements are required to address, are not sufficiently descriptive. We suggest that additional guidance may be necessary in assisting practitioners in determining how the phrase “at least as demanding” is to be assessed in relation to these areas.
Paras A13 – A15, A31 – A36 & Appendix 1
Based on our previous comments we recommend that the IAASB consider whether certain references to “applicable financial reporting framework” in these paragraphs could be replaced with “basis of preparation”.
Applying the basic principles outlined in our overall comments, and consistent with our other suggested changes, we suggest that the IAASB may want to consider whether all of the content included in Appendix 1 relating to applicable financial reporting frameworks is necessary.
Para A16, A21, A22, A43, A45, A48 & A55
We suggest that references to the “applicable financial reporting framework” be replaced with “basis of preparation”.
||This paragraph repeats content that is already described in paragraph A24 and is therefore considered duplicative and could be removed.|
In addition to our comments above, we suggest the following further amendment to the final sentence in paragraph A32:
“If the financial information to be compiled is to be used for a special purpose
In line with our other comments, we believe this paragraph is unnecessary, with the last sentence in particular being cumbersome and confusing. If the IAASB conclude that it should be retained, we suggest the following amended wording:
“The engaging party generally agrees the nature and form of financial information that is intended to be used for a “special purpose. with the intended users of the information, for example under the financial reporting provisions of a contract or a project grant. The relevant contract may require use of a recognized financial reporting framework, such as IFRS
|Para A36||We question whether this paragraph is necessary. We recommend that the relevant requirement relating to engagement letter content would be more appropriately incorporated into paragraph A39 or the underlying requirement paragraph. The requirement in respect of the practitioner’s report is already explicitly stated in requirement paragraph 37.|
|Para A37||Linked to our comment on paragraph 23, we believe that this paragraph can be extended to include reference to management judgements and selection of accounting policies (where relevant) being other information provided by management.|
In addition to replacing references to the “applicable financial reporting framework” with “basis of preparation”, we suggest the last sentence be amended as follows:
|Para A47||Taking into consideration our comments on paragraph 32, above, we believe that it would be beneficial to include some additional guidance on the application of materiality, similar to that in proposed ISRE 2400. Such guidance can make clear that the judgment as to what is material includes both quantitative as well as qualitative considerations and is made by reference to the information the practitioner is reporting on, and the needs of the intended users, not the type of engagement (i.e. what is considered to be material is the same in an audit, review or compilation). We recommend the inclusion of the following two paragraphs, taken from proposed ISRE 2400:|
ISRE 2400, A73:
Determination of materiality is a matter of professional judgment, and is affected by the practitioner’s perception of the financial information needs of users of the financial statements. In this context, it is reasonable for the practitioner to assume that users:
|ISRE 2400, A75:
Financial reporting frameworks often discuss the concept of materiality in the context of the preparation and presentation of financial statements. Although financial reporting frameworks may discuss materiality in different terms, they generally explain that:
|Para A49||Refer to our comments in response to question 5.|
|Para A60||Based on paragraph A59 and our overall comments on the basis of preparation and use of the ‘Alert to reader’ paragraph, we believe this paragraph is not necessary.|
|Appendix 1||Refer to our comment on paragraph A13.|
|Appendix 2||We recommend that the paragraphs in the illustrative engagement letter describing management’s responsibilities be amended to be consistent with our recommendations on paragraph 23 (c).|
We recommend the following change to the paragraph describing management’s responsibilities:
“Management is responsible for the adoption and approval of these financial statements on the basis presented
Refer also to our recommendations for the ‘Alert to reader’ set out in our overall comments section of this letter and with respect to paragraph 37 in this appendix.
In the first bullet of the facts box we suggest the following amended wording:
“Practitioner’s compilation report for an engagement to compile
In the opening paragraph we recommend “financial reporting framework” is replaced with “basis of preparation”.
In the first bullet of the facts box we suggest the following amended wording:
“Practitioner’s compilation report for an engagement to compile financial statements required under the terms of a contract, applying
In the second bullet of the facts box we suggest the following amended wording:
“The financial statements incorporate certain accruals and are compiled with a single note that
In the opening paragraph we recommend “financial reporting framework” is replaced with “basis of preparation”.