Changes to auditing standards for employee benefit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) are on the way. The AICPA recently released its final balloted draft of the Statement on Auditing Standards (SASs) for ERISA plans (EBP SASs). Although the AICPA’s Auditing Standards Board (ASB) approved the EBP SASs draft, it is holding off on issuing the final EBP SAS until the first half of 2019. Certain conforming amendments related to the form and content of the auditor’s reports in the EBP SASs may still be necessary, based on the results of the ASB’s deliberations on proposed SASs, Auditor Reporting.
Conversations around both ERISA plan auditing standards and auditor reporting indicate the challenges the accounting community faces when trying to improve employee benefit plan audit quality. The following provides an overview of why the AICPA is issuing changes, what the changes are, and when they may take effect.
Why the AICPA Is Reforming EBP Auditing Standards and Auditor Reporting?
Results from the Department of Labor’s 2014 audit quality study revealed high rates of deficiencies in the audits of ERISA employee benefit plans. Audit deficiencies are troubling for both auditors and plan sponsors. Auditors may face steep consequences for performing deficient audits, however plan sponsors are ultimately responsible for their plan’s compliance with regulatory standards, and as a result, deficient audits could mean penalties for the plan sponsor as well.
Following the study’s release in 2015, the AICPA began evaluating employee benefit plan (EBP) reporting and auditing processes to address some of the common deficiencies uncovered in the study. Initial proposed changes to EBP auditing standards garnered a lot of pushback from plan auditors and other stakeholders, but after several rounds of revisions, the AICPA voted to issue its EBP SASs, Forming An Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. It did not, however, reach a consensus on changes to auditor reporting. In the meantime, the AICPA’s ASB decided to release the final balloted draft to give auditors time to prepare for the EBP audit reporting changes it knows will be coming.
Core Changes in Forming an Opinion and Reporting on Financial Statements of ERISA Plans
Both plan sponsors and plan auditors have a role to play in ERISA plan compliance. The new EBP SASs will require plan auditors to obtain evidence from plan management that the plan management understands its responsibility in maintaining current plan documents and amendments, and ensuring that plan transactions are presented and disclosed in accordance with plan terms and provisions, including recordkeeping that supports participants’ benefits.
Another big set of changes involves limited scope audits under ERISA Section 103(a)(3)(C). Limited scope audits had a particularly high rate of audit deficiency in the 2014 DOL study. To address this, the AICPA voted for several changes to the limited scope audit procedures and to create a new reporting format.
One of the changes involves the nomenclature used; rather than a limited scope audit, the final balloted EBP SASs refers to these audits as ERISA Section 103(a)(3)(C) audits. It provides further detail about the procedures an auditor uses to verify that plan management is eligible for the ERISA Section 103(a)(3)(C) election, the procedures an auditor uses to compare the certified investment information with the amounts reported in the ERISA plan’s financial statements, and management’s responsibility when the auditor finds discrepancies between certified investment information and financial statement reporting.
Apart from the guidance around ERISA Section 103(a)(3)(C) audits, the final balloted draft of the auditing standard includes new requirements for audit risk assessments and communications with plan management. It replaces AU-C Section 700, Forming an Opinion and Reporting on Financial Statements and also modifies AU-C Section 725, Supplementary Information in relation to the Financial Statements as Whole.
Although the exact timing of the issuance of this final EBP SASs is still unclear, the balloted draft comes with an effective date. It will apply no earlier than audits of financial statements for financial periods ending on or after Dec. 15, 2020.
We will continue to monitor for the issuance of the final EBP SASs and provide further information as it becomes available. For any questions, comments, or concerns, please contact us.
Published on December 18, 2018