Compilations are still risky

Don’t get lulled into the mindset of  ‘don’t worry, it’s only a compilation’.  Plenty can still go wrong.  Compilations are not zero-risk. 

John Hufnagle has a post discussing the concept of risk in a comp – Compilations – Still Scary After All These Years.

He refers to an article in The CPA Journal discussing the idea of risk at length. Since the article is about 6 pages long, I won’t link to it, even though it is a great discussion.  The link is in the post above.

The largest risk exposure to third parties suggested in the article is when the accountant is aware of fraud or illegal acts that lead to material misstatements in the financial statements.  In such situations the accountant should either insist the misstatements be corrected or resign the engagement. 

Yes, we are talking about a compilation.  When you read the financial statements in a compilation, your knowledge of the industry and your knowledge of the client may show that there is a material error in the financials.  Or, the knowledge you have gained suggests there may be an illegal act or possible fraud.  You have to deal with that knowledge you have.

In short, if management can’t give a really good explanation for the situation, then they need to revised the financial statements. If they don’t do that, you should resign the engagement.  An again, yes, that is for a compilation.

I commend Mr. Hufnagle’s article to you.  He has a great discussion and summary.

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