New Rules Take Effect for 2021 Employee Benefit Plan Audits
New rules that are now effective will add significant detail and transparency to audit reports for retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) and impose new requirements on plan sponsors, particularly those who instruct their auditors to perform what until now has been known as a “limited scope audit.” Most of the responsibility to comply with the new rules, however, will rest with the independent auditors who perform the audits. As a result, the retirement plan audit reports that plan sponsors receive from their accounting firms will be noticeably longer and more detailed. These rules take effect for 2021 employee benefit plan audits.
The new rules are designed to address concerns about audit quality that were expressed by the U.S. Department of Labor (DOL) in 2015. To address the DOL’s findings and improve ERISA plan audit quality, the American Institute of Certified Public Accountants (AICPA) released a Statement on Auditing Standards – “SAS 136: Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA” (SAS 136).
The most significant change in SAS 136 is the audit report for ERISA plan financial statements. The audit report will look significantly different, as the information presented will be re-organized, and the language will be clarified and expanded to more clearly express the auditor’s opinion, and the basis for the opinion, on plan financial statements.
‘Limited Scope Audits’
Under current auditing standards, the audit report is produced under a limited scope audit and is a “disclaimer” audit opinion, which is acceptable by the DOL. SAS 136 will still allow for a limited scope audit but electing this type of audit is no longer considered a scope limitation.
The name of this type of audit has changed from a “limited scope audit” to an “ERISA Section 103(a)(3)(C)” audit. The audit opinion of an ERISA Section 103(a)(3)(C) audit will include information on the procedures performed on both certified and non-certified information.
Impact on Plan Sponsors
One of the most significant areas of SAS 136 is placing responsibility for some matters directly affecting the plan-on-plan sponsors. The plan sponsor will be responsible for ensuring that the trustee or plan provider is a “qualified institution” when it comes to certifying that the plan-level investment transactions are complete and accurate.
The plan sponsor must provide to the auditor acknowledgments that the plan sponsor is responsible for:
- Determining whether a 103(a)(3)(C) audit is permissible and whether the certification meets ERISA requirements;
- Maintaining and providing a current plan document;
- Preparing and fairly presenting financial statements; and,
- Providing a substantially completed (draft) Form 5500 to the auditor for the auditor’s review prior to the audit report date.
Plan sponsors will also be responsible for understanding which investments and disclosures are subject to the qualified institution’s certification of completeness and accuracy. Plan sponsors will need to acknowledge, in writing, that all the conditions are met. In most cases, these conditions will be added to the audit engagement letter for management to accept at the point of signing the letter.
Change in Form 5500 Preparation Will Also Impact Plan Sponsors
It is important to note that auditors must review a substantially completed Form 5500 before the audit can be completed. This means that the plan sponsor will need to make sure that the form is available for this review earlier than may have been the case in earlier years, changing some of the procedures that have historically been in place for the plan.
Impact on Auditors
The impact of this new responsibility under SAS 136 will start before the engagement is even accepted, as SAS 136 imposes new requirements on the content of the auditor’s engagement letter that lays out the details of the audit as mentioned previously.
The audit opinion for an ERISA Section 103(a)(3)(C) audit will be considerably longer, in part because SAS 136 replaces a modified opinion (typically a disclaimer opinion) previously used with limited scope audits with a new two-part opinion. The new rules also reformat and change certain content requirements within the auditor’s report as well as provide some more useful information to the readers of the plan’s financial statements.
Other auditor responsibilities under the new SAS 136 rules require the auditor to:
- Read the current plan document and consider relevant plan provisions when designing and performing audit procedures;
- Identify which investment information is certified; and,
- Follow detailed requirements for providing written communication to the plan sponsor about the results of the audit.
‘Reportable Findings’
The audit firm will be required to communicate “reportable findings” to management and those charged with governance for any instance where the plan is not in compliance with plan provisions or an error is detected that is serious enough to require communication to those charged with governance. Reportable findings must be communicated in writing under the new rules, as verbal communication is not sufficient. Additionally, reportable findings must be ranked by level of severity.
Reportable findings are defined as one or more of the following:
- An identified instance of non-compliance or suspected non-compliance with laws or regulations;
- A finding arising from the audit that is, in the auditor’s professional judgment, significant and relevant to those charged with governance regarding their responsibility to oversee the financial reporting process; or,
- An indication of deficiencies in internal control identified during the audit that has not been communicated to management by other parties and that, in the auditor’s professional judgment, are of sufficient importance to merit management’s attention.
Considerations for Plan Sponsors
While most of the new requirements of SAS 136 fall on the shoulders of the plan’s auditors, a plan sponsor must be aware of all the changes. Sponsors should anticipate that they may receive written communications noting deficiencies in how the plan is operating where in previous years these may have only been communicated verbally. This may alarm management but will hopefully enable the company to more readily recognize when corrections and modified procedures are required.
Now would be a good time for plan sponsors to anticipate what is needed and to make necessary changes. Moreover, a planning meeting with the plan’s independent auditors for the 2021 plan audit is a great time to map out the changes that will be coming in the next audit season. For more information, reach out to Anne Morris or your Windham Brannon advisor.