AR 400: Communications between Predecessor and Successor Accountants

EFFECTIVE DATE AND APPLICABILITY

Original Pronouncement Statements on Standards for Accounting and Review Services (SSARSs) 4, 7, 9, 15, and 17.
Effective Date These statements currently are effective.
Applicability Compilation and review engagements when a successor accountant decides (not mandatory) to communicate with the predecessor accountant about acceptance of an engagement. The successor accountant must request the client to communicate with the predecessor when the successor believes that the financial statements reported on by the predecessor are materially misstated.

DEFINITIONS OF TERMS

Predecessor accountant. An accountant who has reported on the most recent financial statements or was engaged to do so but did not complete the engagement and has resigned, declined to stand for reappointment, or been terminated.

Successor accountant. An accountant who has been invited to propose on a new engagement and is considering accepting the engagement or who has accepted an engagement to compile or review financial statements.

OBJECTIVES OF AR SECTION 400

This section discusses the circumstances when communications between predecessor and successor accountants may be desirable and the types of inquiries a successor may decide to make. The section was initially based on Statement on Auditing Standards (SAS) 7, Communications between Predecessor and Successor Accountants (superseded by SAS 84; see Section 315, Communications between Predecessor and Successor Auditors). However, unlike the auditor-to-auditor communications in SAS 84, communications are not required in a compilation or review engagement (with the exception noted when the financial statements are believed to be materially misleading).

FUNDAMENTAL REQUIREMENTS

General

A successor accountant may decide to communicate with a predecessor accountant when:

1. The information obtained about the prospective client is limited or requires special attention.
2. The change in accountants occurs substantially after the end of the accounting period for which financial statements are to be compiled or reviewed.
3. There have been frequent changes in accountants.

The successor accountant should (1) obtain the client’s permission before communicating with the predecessor, and (2) ask the client to authorize the predecessor to respond fully to inquiries. The successor’s inquiries may be either oral or written.

Inquiries about Engagement Acceptance

Ordinarily, inquiries would include questions that might assist a successor in deciding whether to accept the engagement. Inquiries may cover:

1. Management’s integrity
2. Disagreements about accounting principles or about the need to perform certain procedures
3. Management’s cooperation in providing information
4. The predecessor’s understanding of the reasons for the change in accountants

The predecessor should respond promptly and completely to the inquiries noted above. If the predecessor limits his or her response because of unusual circumstances, such as litigation, that should be disclosed. The successor should evaluate the reasons and implications of a limited response in deciding whether to accept the engagement.

Access to Working Papers

A successor may also wish, after the client obtains authorization from the predecessor, to review the predecessor’s working papers. The predecessor and successor should agree on those working papers that are available and those that may be copied. Valid business reasons (e.g., unpaid fees) may cause the predecessor not to allow access to working papers.

Materially Misleading Financial Statements

If during the engagement, the successor accountant becomes aware of information that causes him or her to believe that the financial statements reported on by the predecessor may need to be revised, the successor should ask the client to communicate the matter to the predecessor. If the client refuses to do so or if the predecessor’s response is inadequate, the successor should evaluate the implications for the engagement and consider whether to resign. The accountant may also wish to consult with legal counsel.

INTERPRETATION

Reports on the Application of Accounting Principles (Issued August 1987; Revised November 2002)

An accountant who has been asked to provide written or oral advice on the application of accounting principles to a client whose financial statements are compiled or reviewed by another accountant is obligated to follow SAS 50, Reports on the Application of Accounting Principles (see Section 625, Reports on the Application of Accounting Principles).

TECHNIQUES FOR APPLICATION

Applicability of SAS 84

SAS 84 does not apply to engagements governed by SSARS 4. Furthermore, no standards apply to situations where the prior years’ financial statements were compiled or reviewed and the current year is to be audited, or vice versa. Footnote 3 of SAS 84 indicates that a successor auditor may find the guidance in Section 315 useful in communicating with the predecessor accountant who compiled or reviewed the prior financial statements. Similarly, a successor accountant may find the guidance in SSARS 4 useful in communicating with a predecessor auditor.

Facilitating Access to Working Papers of the Predecessor Accountant

Before permitting access to the working papers, the predecessor accountant may wish to obtain a consent letter and an acknowledgement letter from the successor accountant. An example consent letter and an acknowledgement letter is presented in Illustrations.

ILLUSTRATION

Illustration 1. Illustrative Successor Accountant Acknowledgment Letter
Paragraph .08, footnote 7, states, “Before permitting access to the documentation, the predecessor accountant may wish to obtain a written communication from the successor accountant regarding the use of the documentation.” The following letter is presented for illustrative purposes only and is not required by professional standards.
[Date]
[Successor Accountant]
[Address]
We have previously [reviewed or compiled] in accordance with Statements on Standards for Accounting and Review Services the December 31, 20X1, financial statements of ABC Enterprises (ABC). In connection with your [review or compilation] of ABC’s 20X2 financial statements, you have requested access to our documentation prepared in connection with that engagement. ABC has authorized our firm to allow you to review that documentation.
Our [review or compilation], and the documentation prepared in connection therewith, of ABC’s financial statements was not planned or conducted in contemplation of your [review or compilation]. Therefore, items of possible interest to you may not have been specifically addressed. Our use of professional judgment for the purpose of this engagement means that matters may have existed that would have been assessed differently by you. We make no representation about the sufficiency or appropriateness of the information in our documentation for your purposes.
We understand that the purpose of your review of our documentation is to obtain information about ABC and our 20X1 [compilation or review] procedures to assist you in planning your 20X2 [compilation or review] of the financial statements of ABC. For that purpose only, we will provide you access to our documentation that relate to that objective.
Upon request, we will provide copies of the documentation that provide factual information about ABC. You agree to subject any such copies, or information otherwise derived from our documentation, to your normal policy for retention of documentation and protection of confidential client information. Furthermore, in the event of a third-party request for access to your documentation prepared in connection with your [reviews or compilations] of ABC, you agree to obtain our permission before voluntarily allowing any such access to our documentation or information otherwise derived from our documentation, and to obtain on our behalf any releases that you obtain from such third party. You agree to advise us promptly and provide us a copy of any subpoena, summons, or other court order for access to your documentation that include copies of our documentation or information otherwise derived therefrom.
Please confirm your agreement with the foregoing by signing and dating a copy of this letter and returning it to us.
Very truly yours,
[Predecessor Accountant]
By: ___________________________
Accepted:
[Successor Accountant]
By: ___________________________ Date: __________________

Even with the client’s consent, access to the predecessor accountant’s documentation may still be limited. Experience has shown that the predecessor accountant may be willing to grant broader access if given additional assurance concerning the use of the documentation. Accordingly, the successor accountant might consider agreeing to the following limitations on the review of the predecessor accountant’s documentation in order to obtain broader access:

  • The successor accountant will not comment, orally or in writing, to anyone as a result of the review about whether the predecessor accountant’s engagement was performed in accordance with SSARS.
  • The successor accountant will not provide expert testimony or litigation services or otherwise accept an engagement to comment on issues relating to the quality of the predecessor accountant’s engagement.

The following paragraph illustrates the above:

Because your review of our documentation is undertaken solely for the purpose described above and may not entail a review of all our documentation, you agree that (1) the information obtained from the review will not be used by you for any other purpose, (2) you will not comment, orally or in writing, to anyone as a result of that review about whether our engagement was performed in accordance with Statements on Standards for Accounting and Review Services, (3) you will not provide expert testimony or litigation services or otherwise accept an engagement to comment on issues relating to the quality of our engagement.

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