Auditing Standards Board prepares to amend guidance for ERISA plan audits

The American Institute of Certified Public Accountants’ (AICPA) Auditing Standards Board (ASB) is expected to vote on issuing a final standard for audits of benefit plan financial statements covered by the Employee Retirement Income Security Act of 1974 (ERISA) at a meeting on July 23-26, 2018, in Nashville.

The ASB is basing its work on Proposed Statement on Auditing Standards: Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, which the AICPA issued in April 2017. Comments were due in September.

If the board votes to issue the standard, it will be effective for audits of ERISA plan financial statements for periods ending on or after Dec. 15, 2019, according to a discussion paper prepared ahead of the meeting. Auditors are not allowed to apply the changes before the effective date.

If the guidance is released as a final standard, it will include several revisions to the proposal to address issues identified in comment letters. The ASB dealt with the issues at meetings in October 2017 and January and May 2018.

The planned standard is intended to help auditors better understand their responsibilities and provide plan sponsors and participants, Department of Labor (DOL) officials, and others with more information about what auditors do in examining the financial statements of benefit plans governed by ERISA. The planned standard focuses on situations such as audits that are limited in scope by the plan’s management, which is permitted by DOL reporting and disclosure rules.

According to a draft version of the standard, the audit report should discuss the limits a plan’s executives or administrator imposed on the auditor. Section 103(a)(3)(C) of ERISA lets management or an administrator exclude assets held by a bank, trust company or insurer from the audit. The Labor Department found that many plan beneficiaries do not understand the financial statements or the limits imposed on examinations by external auditors. Congress excluded benefit plan assets held by banks and insurers from the audits of ERISA plans because it was assumed that the safety of the assets and their value were verified by the custodian’s auditor. But the DOL concluded that the retirement industry had changed so much since the 1970s, that the assumptions underlying the limitations imposed on ERISA audits were no longer applicable.

A significant change from the April 2017 exposure draft deals with the form and content of the auditor’s report on ERISA plan financial statements when management limits the scope of the audit. The proposal said an auditor’s report about a benefit plan should differentiate between the financial information examined in the audit and the information excluded from it in a section titled the “Basis for Limitation on the Scope of the Audit.” The section should explain how the auditor reviewed the financial statements and the information management gave to explain the information that was not covered in the audit.

But many auditors in comment letters did not support the proposed format of the auditor’s report because they believe that the auditor cannot express an opinion about the financial statements when they have not audited most of the plan’s assets. They said an opinion disclaimer is more appropriate in such circumstances.

In response, the ASB decided in May to establish a new form of the report that is not within the reporting framework for U.S. generally accepted accounting principles (GAAP) and call it an “ERISA section 103(a)(3)(C) audit” to better signal these types of engagements.

The board also decided to change the proposed requirement that the auditor perform certain procedures “irrespective of the risks of material misstatement” to test the ERISA plan provisions—such as plan formula and calculation—because of opposition from auditors. In comment letters, auditors said requiring auditors to perform certain procedures irrespective of the risks would add unnecessary costs to plan sponsors and participants.

Instead, the ASB decided to make the requirement more principles-based and require the auditor to test relevant plan provisions when the risk of misstatement could be material. The planned standard would also include a requirement for the auditor to document and communicate to those charged with governance if the auditor has not tested plan provisions.

The planned guidance is intended to replace AU-C Section 700, “Forming an Opinion and Reporting on Financial Statements,” and paragraph 0.09 of AU-C Section 725, “Supplementary Information in Relation to the Financial Statements as a Whole,” formerly AU Section 551, as they apply to audits of the financial statements for ERISA benefit plans.

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