Proposal for “preparation” of financial statements will require signed, written engagement letters. Same requirement will apply to compilations.

The two exposure drafts (ED) to revise the compilation process and to create a new level of service for CPAs, now called preparing, will both require a written understanding with the client that is signed by the accountant and management.

Shall we just call that a signed engagement letter? I’m not quite sure what other characterization would apply.

There is a list of specific items that have to be addressed in the engagement letter.

Presumptively mandatory requirement

The drafts use the word “should.” This means it will be a presumptively mandatory requirement. That is a high level of expectation.

To take another approach requires steps that achieve the objective, are documented in writing in the workpapers, and such documentation explains why the alternative approach was used. It’ll be easier and take less time to just get a signed engagement letter.

This is a change from the current requirement to have a written understanding. The signed part is new.

The preparation ED says this in paragraph 9:

The engagement letter or other suitable form of written agreement should be signed by

a. the accountant or the accountant’s firm and

b. management. (Ref: par. A10)

The same words are used in paragraph 7 of the compilation ED:

The engagement letter or other suitable form of written agreement should be signed by

a. the accountant or the accountant’s firm and

b. management. (Ref: par. A7)

Evergreen letters

The EDs do not require an annual engagement letter. That leaves open the door to preparing a multi-year document, the ‘evergreen’ approach.

In my opinion, that is a foolish approach, but the option is there if you absolutely insist.

Amongst many other dangers of an evergreen letter is the chance of missing a new requirement that needs to be included in the letter for the level of service provided. The risk of misunderstanding grows with each year that passes since the last letter.

Regardless of the frequency, if the exposure drafts are approved, a written understanding with the client will be required with a signature from the accountant and the client.