Employee Benefit Plan Audits Get New Set of Rules

by David A. Torrillo, CPA, ABV, CVA | Nov 25, 2019

In July 2019, the AICPA Auditing Standards Board (ASB) issued AICPA Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA (new EBP SAS). This EBP SAS prescribes new performance requirements for Employee Retirement Income Security Act (ERISA) plan financial statement audits and changes the form and content of the related auditor’s report to improve audit quality and enhance the communicative value and transparency of the report. It includes new requirements in all phases of an audit of ERISA plan financial statements, including engagement acceptance, risk assessment and response, communication with those charged with governance, performance procedures, and reporting.

Significantly, audits performed pursuant to ERISA Section 103(a)(3)(C) will no longer be referred to as a “limited scope audit.” Going forward, they will be referred to as “ERISA Section 103(a)(3)(C) audits.” The new EBP SAS notes that ERISA Section 103(a)(3)(C) audits are unique to EBPs and not considered a scope limitation. Therefore, the auditor would no longer issue a modified opinion (typically a disclaimer of opinion) due to information certified by a qualified institution. Instead, the report provides a two-pronged opinion based on the audit and on the procedures performed relating to the certified investment information that includes the following:

  • An opinion on whether the information not covered by the certification is presented fairly
  • An opinion on whether the certified investment information in the financial statements agrees to or is derived from the certification

The new EBP SAS requires the auditor to perform certain procedures when planning and performing the audit that were not expressly required in the past. Most of the now-required procedures had been suggested audit procedures in the AICPA Employee Benefit Plans: Audit and Accounting Guide.

The new EBP SAS significantly changes the form and content of the auditor’s report, too. For the first time, generally accepted auditing standards require an ordering of certain report elements for all audit engagements, including ERISA audits. The EBP SAS also requires the use of specific headings. The “Opinion” section is required to be placed first, followed by “Basis for Opinion.” Basis for Opinion is new for all entities for which an opinion is issued, which includes a statement that the auditor is required to be independent. For ERISA Section 103(a)(3)(C) reports, the “Scope and Nature of the ERISA Section 103(a)(3)(C) Audit” section is required to be placed before the Opinion and Basis for Opinion sections.

For an audit not subject to ERISA Section 103(a)(3)(C), the new EBP SAS requires the auditor, in situations when the auditor’s report on the audited financial statements contains an unmodified or qualified opinion, to include a statement about whether, in the auditor’s opinion, the form and content of the information in the accompanying schedules are presented in conformity with the Department of Labor’s Rules and Regulations for Reporting and Disclosure under ERISA.

The new EBP SAS requires the auditor to make appropriate arrangements with management to obtain and read the draft Form 5500 to identify material inconsistencies, if any, with the audited financial statements prior to dating the auditor’s report. If a material inconsistency is identified, the auditor should determine whether the audited financial statements or the draft Form 5500 needs to be revised.

The new EBP SAS also requires the auditor to obtain certain management representations in writing at the conclusion of the engagement, including new acknowledgements related to management’s responsibilities with respect to the investment certification when management elects to have an ERISA Section 103(a)(3)(C) audit.

The auditor is now required to make EBP-specific communications with management and/or those charged with governance that includes the timely communication of reportable findings (as defined in the new EBP SAS). For an ERISA Section 103(a)(3)(C) audit, if the auditor has concerns about whether the entity preparing and certifying the investment information is a qualified institution, the auditor is required to discuss those concerns with management.

The new EBP standard will be effective for audits of ERISA plan financial statements for periods ending on or after Dec. 15, 2020. This means that 2020 year-end audits being performed in 2021 will be required to follow the performance and reporting requirements of this SAS, including using the new form of the auditor’s report. The new EBP SAS prohibits early adoption.

The AICPA has published At a Glance: New Auditing Standard for Employee Benefit Plans, which gives a summary of the changes coming for benefit plan audits, as well as the audit advisory EBP SAS No. 136: Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA

David and JulieAnn Verrekia, CPA, will address new AICPA standards at PICPA's 2020 Employee Benefit Plans Conference on May 19 at Penn State Great Valley in Malvern.

David A. Torrillo, CPA, ABV, CVA, is managing member of Torrillo & Associates LLC in Glen Mills. He can be reached at david@torrillocpa.com.

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