By Allison M. Henry, CPA, CGMA, vice president – professional and technical standards
On April 20, 2017, the AICPA Auditing Standards Board (ASB) issued an exposure draft, Proposed Statement on Auditing Standards, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans subject to ERISA, that would significantly change the reporting model for employee benefit plans (EBP) subject to ERISA. The proposed changes are the result of a collaborative effort by the U.S. Department of Labor (DOL) and the ASB to address audit quality issues. This joint effort began after the results of DOL’s 2014 audit quality study that identified a high percentage of audit deficiencies.
The study further highlighted a trend toward the expanded use of limited-scope audits, now representing over 80 percent of plan audits. For many of the deficient audits, it was clear that practitioners were not aware of the required procedures outlined in the AICPA’s Audit Guide for Employee Benefit Plans. Some practitioners thought that the limited scope meant that they didn’t have to perform audit procedures. As a result of this concern, the joint DOL/ASB working group concluded that some of the procedures unique to EBPs should be highlighted in the auditor’s report. The DOL was asked to provide a list of what they want included in the report. Two of the more significant proposals include the following.
Communicating Findings in the Auditor’s Reports – The auditor’s report would include the reporting of findings on procedures performed on specific plan provisions relating to the financial statements. These could either be included in the auditor’s report on the financial statements or issued as a separate report.
- The proposed standard requires the auditor to test the following areas “irrespective of the risk of material misstatement.”
- Whether eligibility provisions are administered in accordance with the plan instrument
- Whether benefit payments or claim payments are determined in accordance with the plan instrument
- Whether vesting provisions are administered in accordance with the plan instrument
- Whether employer and employee contributions are calculated in accordance with the plan instrument, including that compensation upon which contributions are based is consistent with the definition of compensation in the plan instrument
- Whether prohibited transactions identified by management or as part of the audit have been appropriately reported in the supplemental schedules
- Whether expenses have been allocated between plans in accordance with an allocation formula consistent with applicable DOL class or individual exemptions, when applicable
- Whether assets are fully allocated to the participant accounts in accordance with IRS Revenue Ruling 80-1556 and the plan instrument
- Whether the forfeited nonvested portion of the participants’ accounts (forfeitures) were used in accordance with the plan instrument
- Whether account activity, including employee and employer contributions, distributions, loans, transfers, and other deductions or additions, was recorded in the proper participants’ and beneficiaries’ accounts (active, inactive, or terminated) in accordance with the provisions of the plan instrument
- Whether the plan has performed and passed, corrected, or intends to correct failures of relevant IRC compliance tests within the time provided by the regulations, etc. [Para. 15 and 16]
- Any finding from testing these areas would be required to be reported.
Significantly Changed Reporting for Limited Scope Audits – Currently, auditors issue a disclaimer of opinion on the financial statements and an other-matter paragraph with an opinion on the form and content of the information included in the financial statements and supplemental schedules. The ASB was asked to reconsider the audit evidence obtained from the certification that management provides to the auditor. Based on their deliberations, the ASB is proposing a new basis for limitation on the scope of the audit and a special form of opinion on the ERISA plan financial statements based on the audit and the certification, including the audit procedures performed on the information not covered by the certification, management’s obtaining of the appropriate certification, and the procedures performed on the certified information.
It is important for practitioners to understand the genesis of this proposal and the extent of the proposed revisions. While many auditors would wholeheartedly support actions that would ensure that all auditors perform high-quality audits and complete the required audit work, many are concerned that this proposal is punitive to those firms that are already performing high-quality work and ultimately may not accomplish the objective of removing or remediating auditors who are unwilling or unable to perform audits in accordance with the standards.
The ASB needs to hear from us. The comment period ends Aug. 21, 2017. Alternative suggestions would likely be valued. PICPA’s Employee Benefit Plan Committee is in the process of formulating its response to the proposed standard. If you would like the committee to consider incorporating your feedback into their response, please forward your comments to me at firstname.lastname@example.org. High audit quality is in our best interest. Together we can determine the right path forward to achieve this goal.