23 Jan Income Tax Based Financial Statements
Enrolled Agents generally tend to avoid preparing financial statements for their business clients due to the regulation of the CPA profession where preparation of these statements has been associated with services enrolled agents were not permitted to perform. However I believe it is not a violation of US Treasury Circular 230 for Enrolled Agents to prepare income tax-based financial statements when they are considered under the category of Other Comprehensive Basis of Accounting (OCBOA), and they are prepared based on the compilation level of service with no expression of professional opinion given.
There are essentially three basic levels of financial statement preparation — compilation, review, and audit. Each state in the United States has its own provisions governing the production of these statements. Audited financial statements are reserved for licensed CPAs, PAs, registered PAs, etc. Reviews are a mix between an audit and a compilation. Both audits and reviews provide assurance of reliability of the financial statements.
Compiling a financial statement is subtly different. In compiling a financial statements you must adhere to the AICPA’s – Standards for Accounting and Review Services (SSARS) that dictate the terms under which an acceptable compilation can be prepared. Currently, SSARS #19, has separate provisions for compilations vs. reviews superseding all prior pronouncements on the subject.
Regardless if it is a compilation, review or audited financial statement, it must be prefaced by what is referred to as an ‘accountant’s report’ addressed to the responsible party of the entity disclosing the:
- level of service provided (compilation, review, or audit),
- period of time covered,
- names of the financial statements,
- lack of expressing an opinion on the financial statements,
- party who is responsible for accuracy of the financial statements,
- what the objective of a compilation is,
- omission of disclosures – if any, and
- disclosure of preparer independence – or lack thereof.