Due to newly released accounting standards, expect significant changes in both the audit process and the financial statement and management communication deliverables.
The American Institute of Certified Public Accountants (AICPA) has issued a new standard that will apply to all audits of ERISA plan financial statements covering periods ending after December 15, 2020. (In other words, it applies to year-end audits being performed in early 2021.) Most changes stemming from the new accounting standard are on the auditor side, but plan administrators also have new requirements to meet.
This update came about after a report from the Department of Labor stated that it found major deficiencies in 39% of the ERISA audits it reviewed. Alarmed by this high deficiency rate, the department asked the AICPA for help in formulating solutions to enhance the overall quality of audits and augment the value of audit reports.
The AICPA’s Standards Board came up with improvements and codified the ideas in Statement on Auditing Standards (SAS) 136: Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. Though the full name of SAS 136 is quite a mouthful, it is intended to simplify both the process and the reporting of employee benefit plan audits.
What Plan Administrators Can Expect
Plan administrators face new obligations as part of the audit process. They must give auditors written acknowledgment of their responsibility to:
- Maintain current documentation governing the plan
- Administer the plan
- Maintain adequate records of participants and activities under the plan
- Confirm that transactions reported in financial statements comply with plan provisions
In addition to these representations, plan managers must provide auditors with a “substantially complete” draft of Form 5500 before auditors date the final audit report. The draft should include relevant documentation and supplemental schedules that substantially impact the information reported in Form 5500, either quantitatively or qualitatively. Pre-engagement written acknowledgments must also note this responsibility.
Limited Scope Audits
For plans that elect a limited scope audit (now known as an ERISA Section 103(a)(3)(C) audit), plan adminstrators must acknowledge their responsibilities regarding investment certifications and the certifying institutions before work commences. The engagement letter for these limited scope audits must include language specifying plan administrator’s obligations to seek and review certification; confirm that the certifying institution is qualified to make such certification; and notify auditors that management has determined the certification is, in fact, proper.
When the limited scope audit is complete, the report will no longer include a disclaimer of opinion for certified investment information as it does under the current standards. Instead, auditors will offer an opinion that addresses the fair presentation of information not covered by the certification and spells out the relationship between certified investment information and financial statements. In other words, the report must answer the question: Do the plan’s financial statements confirm and support certified investment information, or is the information in plan financial statements about certified investments based on the certified investment statements themselves?
New Audit Report Requirements
Audit reports are expanding, as well, along with auditors’ review responsibilities. Plan administrators can look forward to reading longer, more detailed financial statement opinions that clearly specify what the engagement team did and did not include in their analysis.
Any findings that auditors must report will come with additional detail, too, which should help those responsible for plan governance understand necessary steps and proceed with corrective actions.
Maintaining and properly administering a benefit plan in compliance with ERISA regulations is a complex undertaking under any accounting standard. For help understanding and following the many rules that govern your company’s employee benefit plan, ask the experienced audit professionals at CRI.