Two situations change the wording of a compilation report more than any others: management chooses to leave out the notes, or the accountant is not independent. Both are allowed under AR-C 80. Both have required language, and both are easy to get wrong in the drafting. This post sets out the rules as amended by SSARS 25 and the report text that follows from them.
The full engagement flow is in the AR-C 80 compilation guide. The surrounding preparation rules are in AR-C 70 preparation engagements. For the timeline of amendments, see SSARS in force for 2026.
Omitting substantially all disclosures
A compilation exists to help management present financial information in the form of financial statements without obtaining or providing any assurance. Management can elect to omit the notes and the other disclosures the framework requires. AR-C 80 permits a compilation report on those statements when the report says so.
The test for issuing the report
Before SSARS 25, the accountant was barred from issuing the report if the omission was undertaken with the intention of misleading users. SSARS 25 replaced that test, for periods ending on or after December 15, 2021, with an effects test: the accountant does not issue the report if the omission of substantially all disclosures would be misleading to users. The same change was made to AR-C 70. The new test turns on the effect on users, not on proving what management intended.
Apply it to the facts. Statements for an entity with a material related party loan, a covenant violation or a going concern problem are misleading without disclosure of those matters, whatever management says about its motive. Record the conclusion and the facts behind it in the file.
The required report paragraph
When substantially all disclosures are omitted, the report includes a separate paragraph with three elements:
- a statement that management has elected to omit substantially all the disclosures, and the statement of cash flows if it is also omitted, required by the applicable framework;
- a statement on the effect the omitted disclosures would have on the user's conclusions about financial position, results of operations and cash flows;
- a statement that, accordingly, the financial statements are not designed for those who are not informed about such matters.
Built from those three elements, the paragraph for a GAAP presentation reads, for example:
Management has elected to omit substantially all the disclosures (and the statement of cash flows, if applicable) required by accounting principles generally accepted in the United States of America. If the omitted disclosures (and the statement of cash flows, if applicable) were included in the financial statements, they might influence the user's conclusions about the company's financial position, results of operations, and cash flows. Accordingly, the financial statements are not designed for those who are not informed about such matters.
Because there are no notes, the first paragraph of the report drops the reference to "the related notes to the financial statements."
"Substantially all" is not "all"
The standard permits a few disclosures to remain. A client can keep a few notes, for example a summary of the basis of accounting and a note on debt. When management does, the report still carries the omission paragraph, and the retained notes are labeled as selected information, with wording that makes clear the disclosures the framework requires are not all included.
The line is crossed the other way too. If substantially all disclosures are presented and one or more notes are left out, that is not an election to omit substantially all disclosures. It is a departure from the framework, handled as described below.
Special purpose frameworks
For statements on the cash, tax, regulatory or contractual basis, the compilation report is modified when the statements lack a description of the framework, a summary of significant accounting policies, a description of how the framework differs from GAAP (the effects need not be quantified), or informative disclosures similar to GAAP's where items are the same or similar. When management elects to omit substantially all disclosures, AR-C 80 does not require the summary of significant accounting policies or the description of how the framework differs from GAAP, and the omission paragraph applies. The report still identifies the framework, states that it is a basis other than GAAP, and, for contractual or regulatory bases, describes the purpose of the statements.
Known departures from the framework
When the accountant becomes aware of a material departure, including inadequate disclosure, and the statements are not corrected, the accountant decides whether modifying the report is adequate to disclose it.
- If it is adequate, the report describes the departure in a separate paragraph, with its effects when management has determined them or the accountant knows them from the procedures performed. When the effects have not been determined, the report says so. The accountant is not required to compute them.
- If modification is not adequate to convey the deficiencies in the statements as a whole, the accountant withdraws and provides no further services on those statements.
- The report never states that the statements are not in conformity with the framework. That statement is an adverse conclusion, available in a review under SSARS 25 and in an audit, but not in a compilation.
Lack of independence
A compilation is not an assurance engagement, so independence is not a precondition. The accountant still determines whether the firm is independent of the entity and reports the answer when it is no.
What the report says
When the accountant is not independent, the final paragraph of the report says so. The standard sentence is:
I am (We are) not independent with respect to XYZ Company.
The accountant can add the reason. If the accountant chooses to describe reasons, the description includes all of them. A report that cites a direct financial interest but omits that the firm also prepared the statements is incomplete. Examples of descriptions the standard supports:
I am (We are) not independent with respect to XYZ Company as of and for the year ended December 31, 20XX, because I (we) performed certain accounting services that impaired my (our) independence.
Stating no reason satisfies the standard. Stating reasons requires stating them all.
The nonattest services trap
Most small-firm compilations involve the accountant also preparing the statements or keeping the books. AR-C 80 treats preparing the statements as a nonattest service subject to the nonattest services subtopic of the Independence Rule (ET 1.295). Independence is impaired unless that subtopic's requirements are met, including that the client assumes management responsibility for the service, the accountant does not, and the understanding is documented.
If the firm cannot meet those requirements, for example because the accountant effectively approves entries the client does not review, the report carries the lack-of-independence statement. Decide this at acceptance, not at report drafting. The engagement letter should already state which outcome applies.
For the broader treatment of nonattest services and small-firm independence, see independence and nonattest services.
Combining the two
A report can carry both. The omission paragraph is a separate paragraph in the body of the report. The lack-of-independence statement is the final paragraph, so it sits last, ahead of the signature, city and state, and date.
File checklist
- Engagement letter states whether disclosures will be omitted and whether the firm is independent.
- Documented conclusion on whether the omission would be misleading to users.
- Retained notes labeled as selected information if a few notes remain.
- Independence conclusion with the ET 1.295 analysis for any nonattest service.
- Report wording matched to the facts: omission paragraph, departure paragraph, independence statement.
Sources
- AICPA, SSARS No. 25, Materiality in a Review of Financial Statements and Adverse Conclusions (February 2020), amendments to AR-C 70 and AR-C 80: https://assets.ctfassets.net/rb9cdnjh59cm/5BMOcgkNedJtTs90b7cnrs/b6d98fb77d96db625e9154050be92e2e/92317096_ssars-25.pdf
- AICPA, SSARS No. 25 At a Glance: https://assets.ctfassets.net/rb9cdnjh59cm/37wTF1wRjO6Gg0XZmCAfg5/3eb4c95d450c4c45a693b25690e10ab5/ssars-25-at-a-glance.pdf
- Journal of Accountancy, Handling nondisclosure compilations (June 2020): https://www.journalofaccountancy.com/news/2020/jun/handling-nondisclosure-compilations-coronavirus-pandemic/
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