At the beginning of this year, we wrote about changing standards applicable to audits of financial statements of employee benefit plans subject to ERISA. Specifically, we explained that the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) issued new standards for what are currently known as “limited-scope audits.” Initially, the changed audit standards were effective for plan years ending on or after December 15, 2020, but due to the COVID-19 pandemic the AICPA delayed the implementation of the standards to audits of plan years ending on or after December 15, 2021. We want to remind plan sponsors of employee benefit plans required to include an auditor’s report as part an annual Form 5500 filing that the changed audit standards create new responsibilities for plan sponsors in 2022.
In general, a report of an independent qualified public accountant must be filed with Form 5500 for employee benefit plans with 100 or more participants. U.S. Department of Labor (DOL) regulations require the report to include the opinion of the accountant as to the financial statements and schedules included in the report and the accounting principles and practices expressed in the report. However, there is an exception in the regulations for “limited-scope audits.” Under a limited-scope audit, plan management may choose to exclude any statement or information prepared and certified by an institution such as a bank, similar institution, or insurance carrier, with respect to the plan assets held by such institution. Due to the exception, it has been a generally accepted accounting industry practice for an auditor to disclaim an opinion on a limited-scope audit.
After the DOL recommended that the limited-scope audit exception be repealed due to a large number of audit deficiencies, the AICPA issued new standards applicable to audits of employee benefit plan financial statements in the AICPA’s Statement on Auditing Standards (“SAS”) No. 136. As explained in our previous blog post, SAS No. 136 refers to limited-scope audits as “ERISA Section 103(a)(3)(C) audits.” Unlike limited-scope audits, ERISA Section 103(a)(3)(C) audits impose more obligations on auditors and do not permit an auditor to disclaim an opinion on an entire audit. In addition, ERISA Section 103(a)(3)(C) audits create new responsibilities for plan sponsors.
SAS No. 136 provides a description of a plan sponsor’s additional responsibilities with respect to an ERISA Section 103(a)(3)(C) audit, which include:
- Acknowledging plan management’s responsibility for:
- maintaining a current plan document,
- administering the plan, and
- determining that the plan’s transactions presented and disclosed in the plan financial statements comply with the plan.
- Providing an auditor with written acknowledgement that:
- an ERISA Section 103(a)(3)(C) audit is permissible with respect to the plan,
- the investment information is prepared and certified by a bank, similar institution, or insurance carrier described in DOL regulations,
- the certification meets DOL regulatory requirements, and
- the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.
- Substantially completing a draft Form 5500 before engaging an auditor, including any related forms and schedules that could have a material effect on the audit.
Plan sponsors that elect an ERISA Section 103(a)(3)(C) audit beginning in 2022 need to carefully consider all legal and regulatory requirements applicable to auditors’ reports and other Form 5500 requirements and should consult legal counsel.