During an agreed-upon procedures engagement an accountant will discuss and agree with the client a set of procedures, which will cover an agreed aspect of the business’s information rather than the whole of its financial statements. The results of these procedures are reported on a purely factual basis – the practitioner’s report does not express a conclusion, so it is not an assurance engagement in the technical sense, and it does not provide recommendations based on the findings. To avoid misinterpretation, the report is restricted to those parties that have agreed to the procedures to be performed.
What is it good for?
An agreed-upon procedures engagement may be commissioned by an entity acquiring another business to report on specific aspects of the business it is buying. If a client is concerned about bad debts, the accountant may agree to check that trade debtors have been received after the year-end and report what work it has done to verify this.
A business with a complicated stock system may want to gain peace of mind that its procedures are accurate and present no risks to the organisation while ensuring that controls are working as they should. Similarly, a company concerned about occupational fraud might ask its accountant to check the level of inventory adjustments or discrepancies in bank reconciliation against an agreed threshold.
Many lease agreements for retail property include both a fixed rental payment and a variable rental payment derived from sales generated on the leased site. An agreed-upon procedures engagement can assure the landlord that the latter has been accurately calculated from the retailer’s sales recorded in their accounting system, although it cannot assure them that those sales figures are accurate.
Agreed-upon procedures engagements can also be used where an independent third party requires verification due to clauses within a legal agreement such as a grant claim, where the recipient of the grant may be obliged to use the funds to invest in creating employment in certain areas or regions where its business is located.
They are also used by many business owners as a proactive way to check certain internal or external areas of the business. Unlike advice-based services, such engagements are purely factual and no interpretation or opinion is provided regarding the findings, explains Janice Matthews, director and audit and assurance specialist at Menzies. “Companies that have no external audit requirement can seek comfort on specific risk areas from either a financial or non-financial perspective,” she says. “Agreed-upon procedures engagements are most commonly used by smaller businesses that fall below the regulated audit requirement threshold in terms of turnover, gross assets and number of employees.”
Corrigan Associates founder Edward Corrigan says his firm creates agreed-upon procedures engagements for clients to obtain assurance comfort on a specified accounting process, and has used them in a variety of situations from checking the correct preparation of completed accounts to validating grant audit claims and checking internal accounting systems.
“If we provide an opinion, the risk associated with obtaining the correct level of assurance rests with us, whereas in an agreed-upon procedures engagement the risk rests with the user of the report,” he continues.
“They have to assess whether the factual findings provide the assurance they require. It follows that the user requires sufficient financial acumen to interpret the report to meet their requirements. The engagement is more affordable because the client can tailor the risk according to needs.”
Is it understood?
“There is a lack of understanding and awareness of the limitations of agreed-upon procedures engagements in the UK, even among those who commission these reports,” says Sophie Campkin, technical manager in ICAEW’s Audit and Assurance Faculty.
Corrigan agrees. “Accountants have signed vague assurance statements as a result of their work and relationship generally with a client without the evidence of separate, properly constituted engagement,” he says. “This creates ambiguity and exposes the accountant to risk.”
Carrying out due diligence on who is going to conduct agreed-upon procedures is no different to any other type of service. Having trusted advisers is crucial, says Matthews.
Agreed-upon procedures for year-end accounts are much more widely used in North America than they are in the UK, explains Alex Peal, partner at James Cowper Kreston and technical advisor to the UK member of the IFAC small and medium-sized practices committee.
In respect of more formal engagements such as a grant claim, accountants in the UK understand their obligations, says Peal. “For engagements that relate to year-end accounts there is little formal guidance for accountants and I suspect little awareness of where to look for guidance. ISRS 440 is not well known in the UK.”
He suggests many practitioners performing an agreed-upon procedures engagement would simply put together an engagement letter, scope and report based on their understanding of risk.
Is revision necessary?
In November 2016 the IAASB’s agreed-upon procedures working group published a discussion paper on the International Standard on Related Services (ISRS) 4400 Engagements to Perform Agreed-Upon Procedures Regarding Financial Information as part of a project to revise the standard.
The purpose of the paper was to highlight the key features of agreed-upon procedures engagements performed in accordance with ISRS 4400, highlight the findings from IAASB research and obtain views from stakeholders. It explored areas such as the role of professional judgement and scepticism in an agreed-upon procedures engagement, the independence of the accountant, expanding the scope of the standard to address non-financial information and the format of reporting.
ICAEW has worked with a number of regulators and government bodies to support the development of appropriate reporting frameworks and has issued both generic and specific guidance to members on performing these types of engagements.
“It would be helpful to have some guidance in the standard about unclear and misleading terminology to provide practitioners with the ammunition to rebut some of the procedures or report wording being requested by third parties, for example, guidance which firmly discouraged the use of words such as audit, review and assurance,” says Campkin.
However, she also recognises that overly strict guidance could lead to practitioners being prohibited from accepting certain engagements, with the result that the client would be unable to comply with the requirements imposed on them.
Matthews suggests that implementing strict regulatory frameworks could be counterintuitive and ultimately penalise proactive business owners by either forcing them to have something they don’t need or increasing the cost burden of the process.
“As agreed-upon procedures engagements are flexible and variable in terms of what is carried out, regulating them would be much more difficult,” she continues. “The simplicity and ease of use of agreed-upon procedures is what makes them popular among the business community and regulating them more heavily could deter companies from using them at all.”
According to Rakesh Shaunak, managing partner and group chairman of MHA MacIntyre Hudson, as the audit threshold continues to increase and businesses look for alternative or specific means of assurance, it is inevitable that more guidance will be issued in order to achieve consistency.
“This must be balanced against the need to allow flexibility of scope and a bespoke service delivered by a suitably qualified professional,” he adds.
There are situations where governing bodies ask members to provide certain accounting assurances, which should really be done under some form of pre-defined agreed-upon procedures engagement in collaboration with the accounting bodies, concludes Corrigan. “For reasons of resource that collaboration may not happen, leaving individual accountants to create their own engagement with varying degrees of success.”