Engagements to compile Financial Statements
Regulation 27 (1) of the Companies Regulations, 2011 states that a company’s financial statements may be “compiled internally or independently”. Regulation 27 (2) states that a company’s financial statements must be regarded as having been compiled internally, unless they have been "independently compiled and reported". Regulation 26 (1) (e) states that "independently compiled and reported" means that the annual financial statements are prepared:
- by an independent accounting professional;
- on the basis of financial records provided by the company; and
- in accordance with any relevant financial reporting standards.
Regulation 26 (1) (d) states that the independent accounting professional must be:
- A registered Independent Accounting Professional in terms of the Auditing Profession Act; or
- A member in good standing of a professional body that has been accredited in terms of Section 33 of the Auditing Profession Act; or
- A person who is qualified to be appointed as an accounting officer of a close corporation in terms of the Close Corporations Act, 1984 (Act No. 69 of 1984).
- Persons in 1,2 or 3 must:
- Not have a personal financial interest in the company or a related or inter-related company.
Not be involved in the day-to-day management of the company’s business, nor have been so involved at any time during the previous three financial years.
- Not be a prescribed officer or full-time executive employee of the company or another related or inter-related company, or have been such an officer or employee at any time during the previous three financial years.
- Not be related to any person in Persons in a, b or c.
- Not have a personal financial interest in the company or a related or inter-related company.
The impact of Regulation 26 (1) (d) is that the accounting professional when compiling financial statements as contemplated by Regulation 26 (1) (e) must be independent. Ordinarily in conducting a compilation engagement there is no requirement for the accountant to be independent. However the compilation as envisaged by Companies Regulations, 2011 is to replace the statutory audit and statutory independent review if the company is able to satisfy specific exemption criteria. It is important to note that the compilation as required by theCompanies Regulations, 2011 is performed in the exact same manner as a compilation of financial statements not mandatory required except the compiler in respect of the Companies Regulations, 2011 needs to be independent. Hence the term "independently compiled and reported".
Core Concepts: Compilation Engagements
Compilations are the lowest rung on the ladder with regard to an accounting professional’s involvement with information. Compilations offer no assurance other than the involvement by the accountant in the preparation of the information.
In a compilation engagement, the accounting professional receives information from a client and arranges it in the form of financial statements. The accounting professional checks that the assembly of the information is arithmetically correct, but does not provide any form of assurance (audit or independent review) on the financial statements. However, if any matter(s) are identified that would cause the financial statement to be false or misleading, the practitioner would request additional or revised information to complete the statements.
Client Acceptance or Continuance
The Independent Accounting Professional shall not accept the engagement unless the Independent Accounting Professional is able to:
- Identify the intended use by management of the financial information to be compiled, and be satisfied that there is a rational purpose for the engagement.
- Determine whether the financial reporting framework adopted by management for compilation of the financial information, is acceptable in the context of the intended use of the financial information.
- Obtain the agreement of management that it acknowledges and understands that:
- In performing the engagement the Independent Accounting Professional will compile the financial information on behalf of management.
- Management has the following overall responsibilities which are fundamental to undertaking the compilation engagement:
- Adoption of a financial reporting framework that is acceptable in view of the intended use of the financial information and the intended users.
- Preparation of the financial information in accordance with the applicable financial reporting framework, including:
- The fair presentation of the financial information, where relevant.
- Selection of appropriate accounting policies under the financial reporting framework where needed, and responsibility for management judgments needed to develop any accounting estimates required under the framework.
- Providing the Independent Accounting Professional with:
- 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.
- Additional information that the Independent Accounting Professional may request from management for the purpose of the compilation engagement.
- The accuracy and completeness of the records, documents, explanations and other information provided by management for the compilation engagement.
Terms of Engagement
The agreed terms of engagement shall be recorded in an engagement letter or other suitable form of written agreement, and shall include:
- The objective and scope of the compilation engagement, including a statement that the engagement is not an assurance engagement and accordingly the Independent Accounting Professional does not express any audit opinion or review conclusion in respect of the compiled financial information.
- The responsibilities of the Independent Accounting Professional, including the requirement to comply with relevant ethical requirements.
- The responsibilities of management.
- Identification of the applicable financial reporting framework;
- The intended use and distribution of the compiled financial information, and, where applicable, any restrictions on either its use or its distribution.
- The expected form and content of the Independent Accounting Professional’s report.
- Arrangements concerning the involvement of other Independent Accounting Professionals and experts in some aspects of the compilation.
- Arrangements to be made with the predecessor Independent Accounting Professional, if any, in the case of an initial compilation engagement.
- That management may be requested to confirm certain information or explanations conveyed orally to the Independent Accounting Professional during the engagement, in writing.
- The agreement of management to inform the Independent Accounting Professional of facts that may affect the compiled financial information, of which management may become aware in the course of the compilation up to the date of completion of the compilation engagement.
- Ownership of the information used for the compilation, distinguishing between documents and information of the entity provided for the compilation and the Independent Accounting Professional’s engagement documentation, and having regard to applicable law and regulation.
- A request for management to acknowledge receipt of the engagement letter and to agree to the terms of the engagement outlined therein.
Illustrative Engagement Letter
To the Directors of ABC Company:
[The objective and scope of the compilation engagement] You have requested that we provide the following services:
On the basis of information that management will provide, we will compile the following financial information for ABC Company: the balance sheet of ABC Company as at December 31, 20X1 and the income statement for the year then ended, on the historical cost basis, reflecting all cash transactions with the addition of trade accounts payable, trade accounts receivable, inventory accounted for on an average cost basis, income taxes payable as at the reporting date, and capitalization of significant long-lived assets amortized over their estimated useful lives. These compiled financial statements will not include explanatory notes.
The purpose for which the compiled financial statements will be used is to provide full year financial information showing the entity’s financial position and financial performance at the financial reporting date of 31 December 20X1. The compiled financial statements will be for the sole use of the directors, and will not be distributed to other parties.
We will perform the compilation engagement in accordance with the International Standard on Related Services (ISRS) 4410 (Revised), Compilation Engagements, and comply with the International Ethics Standards Board for Professional Accountants Code of Ethics for Professional Accountants (IESBA Code). This Standard requires that we comply with quality control standards and relevant ethical requirements, including ethical principles of integrity, objectivity, professional competence and due care.
A compilation engagement involves applying expertise in accounting and financial reporting to assist management in preparing and presenting financial information. A compilation does not include gathering evidence for the purpose of expressing an audit opinion or a review conclusion. Accordingly, we will not express an audit opinion or a review conclusion on the compiled financial statements.
Responsibilities of Management
The compilation engagement to be performed is conducted on the basis that management acknowledges and understands that our role is to assist management in preparing and presenting the financial statements in accordance with the financial reporting framework adopted by management for the financial statements. Accordingly, management has the following overall responsibilities that are fundamental to undertaking the compilation engagement in accordance with ISRS 4410:
- Adoption of the financial reporting framework to be used (that is, as described above) that is acceptable in view of the purpose for which the compiled financial information will be used, and selection of appropriate accounting policies under the applicable financial reporting framework that are to be applied in compiling the financial statements; and
- Preparation and presentation of the financial statements in accordance with the applicable financial reporting framework (that is, as described above) and the selected accounting policies; including management judgments needed to develop any accounting estimates required for the compiled financial information; and
- Providing to us all relevant records, documents, explanations and other information needed to compile the financial information, and any additional information or explanations we may require to complete the compilation engagement; including responsibility for the accuracy and completeness of those records, documents, explanations and other information; and
- Acceptance of responsibility for the financial statements that we compile.
As part of our compilation of the financial information, we may request from management and, where appropriate, from the directors, written confirmation of information and explanations conveyed to us orally in connection with the compilation engagement.
We look forward to full cooperation from management and staff during our engagement.
As part of our engagement we will issue our report attached to the compiled financial statements, which will describe the compiled financial statements and the work we performed for this compilation engagement. The report will also note that the use of the financial statements is restricted to the purpose set out in this engagement letter, and that use and distribution of our report provided for the compiled financial statements is restricted to you, as the company directors.
Please sign and return the attached copy of this letter to indicate your acknowledgement of, and agreement with, the arrangements for our engagement to compile the financial statements described herein, and our respective responsibilities.
[Other relevant information]
[Insert other information, such as fee arrangements, billings and other specific terms, as appropriate.]
XYZ & Co.
Acknowledged and agreed on behalf of ABC Company by (signed)
Name and Title Director
Performing the Engagement
To perform the compilation engagement the Independent Accounting Professional shall obtain:
- Knowledge and understanding of the entity’s business and operations, including the entity’s accounting system and accounting records.
- An understanding of the applicable financial reporting framework, including its application in the entity’s industry, sufficient to be able to compile the financial information.
- Relevant factors the Independent Accounting Professional may consider in developing a knowledge and understanding of the entity’s business and operations include:
- The size and complexity of the entity and its operations.
- The complexity of the applicable financial reporting framework.
- The entity’s financial reporting obligations or requirements, whether they exist under applicable laws and regulation or in the context of voluntary financial reporting arrangements, for example with third parties.
- The level of development of the entity’s management and governance structure regarding management and oversight of the entity’s accounting records and financial reporting systems that underpin the preparation of financial information for financial reporting purposes.
- The degree of complexity or otherwise of the entity’s financial accounting and reporting systems.
- The level of development and proper design or relative sophistication of the entity’s accounting systems and related controls through which the entity’s accounting records and related information is maintained.
- The Independent Accounting Professional is not able to complete the compilation because management has failed to provide records, documents, explanations or other information that are complete and accurate, or which are otherwise unsatisfactory for the purposes of the compilation, or management has failed to provide additional information as requested by the Independent Accounting Professional; or
- The applicable financial reporting framework used to compile the financial information is not adequately referred to, or described, in the compiled financial information, and management declines the amendments proposed by the Independent Accounting Professional; or
- The compiled financial information is materially misstated or misleading, and management declines the amendments to the compiled financial information proposed by the Independent Accounting Professional,
- The Independent Accounting Professional shall withdraw from the engagement, unless prohibited by law or regulation, and inform management and those charged with governance of the reasons for withdrawing. If withdrawal from the engagement is not possible the Independent Accounting Professional shall determine the professional and legal responsibilities applicable in the circumstances.
- In recording how the compiled financial information reconciles to the underlying records, documents, explanations and other information, the Independent Accounting Professional may keep a schedule showing the reconciliation of the entity’s general ledger account balances to the compiled financial information, including management’s adjusting journal entries made in the course of the engagement.