[Sarah1421]

All my materials agree that an auditor can only examine or review pro forma financials – what gives? Conceptually, this doesn’t make sense to me.

Then, I made the mistake of googling it and found this link from the AICPA explaining the rules on pro forma financial compilation: https://www.aicpa.org/Research/Standards/CompilationReview/DownloadableDocuments/AR-00120.pdf

I know I should just move on, I’m just hoping someone can shed some light on this situation.

FAR - 90
AUD - 91
BEC - 86
REG - 87

[M.O.D.]

Preparing pro-forma statements is a managerial activity, and auditors are prohibited from undertaking managerial actions (in companies they audit).

Pro-forma statements are basically management advertising the strengths of the company.

Also, auditors are also prohibited from preparing all financial statements they audit, an even broader category.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Anonymous]

I think that that preparing pro forma statements would require using significant assumptions which has to be undertaken by management. Compiling FS doesn't require any assumptions.

[Sarah1421]

Whew, thank you – the fact that it's a managerial activity perfectly categorizes it for me… it's like management's discussion and analysis (which can only be reviewed or examined as well).

I still have a little bit of a problem in that prospective financials can be compiled, but I suppose that's why it's so important to get a summary of management's significant assumptions.

FAR - 90
AUD - 91
BEC - 86
REG - 87

[M.O.D.]

The theory is that there has to be difference between the auditor and the “auditee”, ie the management. Otherwise, there is a conflict of interest (and of independence). Think about you auditing your own work (or grading your own papers). As conscientious as you might be, you are prone to think you did it right, ie would not have professional skepticism.

This is also true for internal auditors. They cannot have produced the work they are assigned to audit (or even worked in same department they audit).

So a CPA can never audit his own work. Although he can produce a variety of statements including pro-forma statements, he cannot also audit them.

This is important to know because the number one reason for CPAs losing their license is precisely this: “auditing” and certifying their own companies, or their own investments. And when those companies fail the first question is who was the CPA? If they find out the auditor is the same as the CEO, he is likely to lose his CPA license.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Sarah1421]

I appreciate the further explanation – it is helpful for solidifying the concept. I've never had a problem with the concept of “independence,” it was just odd to me that you could compile prospective financials but not pro formas. Compiling is different than every other engagement in that you don't need to be independent…. however, if I consider compilation of a pro forma a management duty, I can handle the rule.

However, I made the mistake of reading the AICPA link again… 🙁

Did you take a look at it in my initial post? (If not, can you? lol). It gives detailed explanation of conditions for compiling pro formas, performance requirements, documentation requirements… and reporting requirements. From everything I see there, it truly looks like you can issue a compilation report for pro formas (and some cases, you should). I also find it odd that my text refers to SSAE for pro formas, yet this information is from SSARs.

I think I'm going overboard on this silly concept. I may just need to memorize the text and move on…

FAR - 90
AUD - 91
BEC - 86
REG - 87

[M.O.D.]

“The accountant should consider the potential of being associated with pro forma financial information and the likelihood that the user may inappropriately infer, through that association, an unintended level of reliance on the information. If the accountant believes that he or she will be associated with the information, the accountant should consider issuing a compilation report so a user will not infer an unintended level of reliance on the information.”

I did read it cursorily, though it is muddled thinking (the guidance).

The reason for this is the history of pro-formas in fiancial reports. Management issued their own “pro-forma”, unaudited statements in the annual report, to supplant the audited statements (which did not look as good). Naturally, the SEC and the AICPA found this practice misleading, thus leading to restrictions and prohibitions.

I don't agree with the ACIPA on not requiring independence for compiled reports, while using the CPA title. One cannot be a “public” accountant while representing, or being part of the management. Granted, the not-independent clause is required, but not sufficient to my thinking.

And likely politics carved out this exception: CPAs becoming managers and still wanting the respect of CPAs. It does not work. It is best to think of this as the exception to the rule, rather than pro-forma statements as compiled statements.

The link makes that clear too:

“By definition, presentations of pro forma financial information are not financial statements.”

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Sarah1421]

Thank you for taking the time to respond to my posts today – if you hadn't responded so thoroughly, I may have fixated on this and as a result, broke down my confidence. The two quotations you pulled from the SSAR were extremely relevant… and I focused on both when I read through (very glad you included them in your response to again, boost my confidence). Especially considering, “By definition, presentations of pro forma financial information are not financial statements.” Would we consider prospective financials, summary financials, and incomplete presentations to be “by definition” financial statements? What's the dividing line? I have a guess, but I'm curious what you think.

Exception, rather than the rule…. moving on. 7 days until my exam, but little details seem to trip me up…

FAR - 90
AUD - 91
BEC - 86
REG - 87

[M.O.D.]

Well “pro-forma” means “according to form”. So they (should) follow the form of financial statements but are not because they generally are for future years. They are widely used in management accounting to analyze various possibilities, budgets, outcomes, etc. The CMA test uses them and tests them widely and expects candidates to prepare them.

So to malign them is uncalled for.

However, when presented as an equivalent to a financial statement they can be (and usually are) misleading to a lay reader of a financial statement. Within the CMA, they are never for public use, only for internal company (and strictly confidential) use.

I don't think of incomplete, prospective or summary statements as true financial statements either.

But I think the dividing line is who prepared them, for what reason, and were they audited. This is where independence plays the key role in defining the statement. If an independent CPA audited and reviewed them, then they become true financial statements, otherwise they are not. (Just a management representation.)

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[005]

we're taking it on same day, good luck !!

BEC - ✔
REG - ✔
AUD - ✔
FAR - 11/29/14

CPAExcel, Ninja MCQs, and a sh*t ton of coffee

[M.O.D.]

From Gleim FAR:

Financial statements are the primary means of communicating financial information to external parties. Additional information is provided by financial statement notes, supplementary information, and other disclosures. Information typically disclosed in notes is essential to understanding the financial statements.

BA Mathematics, UC Berkeley
Certificates in CPA and EA preparation, College of San Mateo
CMA I 420, II 470
FAR 91, AUD Feb 2015 (Gleim self-study)

[Author]

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