Administrators of employee benefit plans (EBP) rely on routine and rigorous third-party audits to help them maintain compliance with applicable federal regulations, so it is critical to ensure that the audit reports themselves meet high quality standards and offer relevant, actionable information. Recent reviews by the U.S. Department of Labor (DOL) and the Accounting Standards Board (ASB) produced several changes and recommended action items to strengthen the EBP auditor’s report.
Given the integral role played by the auditor’s report, the DOL set out to assess its quality by reviewing financial statement audits of employee benefit plans for the 2011 plan year. In its May 2015 report, Assessing the Quality of Employee Benefit Plan Audits, DOL found that 17 percent of the auditor’s reports from 2011 failed to comply with one or more of the reporting and disclosure requirements of the Employee Retirement Income Security Act (ERISA). These deficiencies led the DOL to suggest ways to rethink the auditor’s report and improve the final product relied upon by plan administrators.
Clarified auditor responsibilities and greater transparency
In response to the DOL’s detected shortcomings and suggested improvements, the ASB issued the April 2017 proposed Statement on Auditing Standards (SAS), Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. This proposed SAS addresses the reporting for audits of financial statements in ERISA plans, including when management imposes a limitation on the scope of the audit as permitted by 29 CFR 2520.103-5 (ERISA-permitted audit scope limitation). In this situation, the proposed SAS would require a new form of report to include, among other things:
- Expanded management and auditor responsibilities sections;
- A special form of opinion stating that, based on use of the certification of investment information, the financial statements are fairly stated in all material respects in accordance with the applicable financial reporting framework;
- Expanded communications on the ERISA supplemental schedules; and
- A by-product report, entitled Report on Specific Plan Provisions Relating to the Financial Statements, that includes findings from procedures performed on specific plan provisions relating to the financial statements. This new by-product report should be provided either in a separate section in the auditor’s report or in a separate report entirely. If provided in a separate report, it must be included with the auditor’s report that is attached to the Form 5500 filing.
It is possible that, because procedures to be performed on specific plan provisions would be required irrespective of the risk of material misstatement, additional audit work will be necessary. The proposed SAS is effective for audits of financial statements for periods ending on or after December 15, 2018.
EBP administrators with questions regarding how these changes to the auditor’s report will improve the quality of their annual audits and ongoing compliance efforts can contact me at email@example.com or 610.376.1595.
Contributed by Francis J. Donnelly, CPA, Partner in RKL’s Audit Services Group. Frank specializes in accounting and consulting services for employee benefit plans and the credit union industry.