Retirement Plan Sponsors who are required to include a financial audit with their Form 5500 filings in 2022 should understand that their responsibilities related to the audit have increased because a new standard will become effective.
The Employee Retirement Income Security Act (ERISA) requires that a sponsor of an employee benefit plan with 100 or more participants at the beginning of the plan year must engage an independent qualified public accountant to conduct an audit of the plan's financial statements.
However, there is a section of this act that gives plan sponsors the ability to elect a limited-scope audits which means that the auditor does not audit investment information prepared and certified by a "qualified institution," such as a bank or other financial institution. Instead, the institution certifies both the accuracy and completeness of the information submitted. Because the scope of the audit is limited, the auditor may issue a disclaimer of opinion.
This ended up creating lots of problems and the U.S. Department of Labor (DOL) expressed concern regarding limited-scope audits. So, the DOL conducted a study and found that nearly 40% of the audits contained major deficiencies.
SAS 136 to the Rescue
In 2019, the American Institute of Certified Public Accountants (AICPA) released a new standard for employee benefit plans – Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA.
SAS 136 was originally effective for periods ending on or after 12/15/20. But, due to the pandemic, the effective date was delayed one year to 12/15/21. Auditors can implement the standard as of the original effective date.
SAS 136 was issued to improve the consistency and transparency of audits and to expand the level of communication between auditors and their clients.
Specifically, SAS 136:
- Clarifies the responsibilities of management and the plan auditors in the auditor's report, engagement letter and other required communications
- Eliminates the limited scope audit and offers a more reliable replacement
Implications for Plan Sponsors
Plan sponsors should pay close attention to the following three key provisions of SAS 136:
- Limited-Scope Audits – Plan sponsors can continue to exclude certified investment information from an audit – but limited-scope audits are now called "ERISA Section 103(a)(3)(C) audits” and it clarifies what is expected of the auditor as well as establishing a new report that provides greater transparency about the scope and nature of the audit and describes the procedures performed on the certified investment information.
As a result, instead of issuing a disclaimer of opinion, an auditor will issue an opinion in two parts:
- One on the fair presentation of information in the financial statements not covered by the certification
- And the other on whether the investment information in the financial statements reconciles with information in the certification
If a plan sponsor elects an ERISA Section 103(a)(3)(C) audit, the plan sponsor must provide the auditor with a written statement that the investment information is certified both complete and accurate and signed by an authorized person of the certifying entity.
- Acknowledgement of Responsibility – Plan sponsors will be required to acknowledge their responsibility for the plan’s administration in the audit engagement letter. Also, they must provide written statements at the end of the audit regarding their responsibilities such as:
- Retaining a copy of the current plan document and amendments
- Guaranteeing that plan transactions are consistent with plan provisions
- Maintaining sufficient participant records to determine the benefits due
- Form 5500 Preparation – Plan sponsors must substantially complete Form 5500, including associated schedules before the issuance of an audit report. The auditor will review the documents to identify any material inconsistencies between the financial statements and Form 5500. If there are differences, the auditor will decide if the Form 5500 or the financial statements need to be adjusted.
The plan sponsor will need to manage their Form 5500 preparer to make sure they get the auditor a nearly compete Form 5500 on time.
One major change under SAS 136 for auditors is the requirement to communicate "reportable findings" to those charged with plan governance. While some of these communications were previously handled verbally, they are now all required to be provided in writing.
SAS 136 uses the following three clarified auditing standards (AU-Cs) to determine a reportable finding:
- AU-C 250: Non-compliance (or suspected non-compliance) with laws and/or regulations
- AU-C 260: Certain findings that the auditor believes are significant and relevant to those charged with governance
- AU-C 265: Deficiencies in internal controls found during the audit that the auditor finds merit management's attention\
How Plan Sponsors Can Prepare for Audits Under SAS 136
Remember SAS 136 is intended to increase the transparency of audit reports and the plan sponsors’ involvement in the audit process.
Plan sponsors should plan on having discussions with their auditors to learn about their new responsibilities and to plan out the audit. They should agree on the communication process during the audit so both parties can discuss audit results and get real-time updates. Proper planning helps alleviate surprises and often helps to identify common issues that need to be addressed.
The goal is to get a higher quality audit. But this can only occur if plan sponsors, and auditors communicate to ensure that everyone understands the objectives of the audit and the roles and responsibilities of the auditor.
RINA’s Audit team, has extensive experience working with Plan Sponsors on their audits. For additional information, please contact a member of our audit team.