In 2018, the Auditing Standards Board (ASB) of the American Institute of Certified Public Accountants (AICPA) changed the audit standards applicable to audits of financial statements of employee benefit plans subject to ERISA. These standards impact what is currently known as “limited-scope audits.” Initially, the new standards were to apply to audits of plan years ending on or after December 15, 2020, which means they would apply to 2020 plan year audits performed in 2021. However, due to the COVID-19 pandemic, the AICPA changed the effective date of the standards to plan years ending after December 15, 2021, extending the implementation of the standards for one year. Plan sponsors of plans subject to ERISA should be aware of the new responsibilities the standards impose on auditors, as these changes also indirectly create new responsibilities for plan sponsors.
In general, U.S. Department of Labor regulations require that a report of an independent qualified public accountant be filed as part of an employee benefit plan’s annual reporting obligations, which also include filing a Form 5500. The audit report must 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, the regulations do not require an auditor’s report to cover any statement or information prepared and certified by a bank, similar institution, or insurance carrier with respect to the plan assets that are held by such bank, similar institution, or insurance carrier. Audit reports that fall under this exception are known as “limited-scope audits.”
With limited-scope audits, an auditor may disclaim the opinion on plan financial statements prepared and certified by a bank, similar institution, or insurance carrier when a plan sponsor instructs the auditor not to perform an audit of such statements. Until recently, disclaiming an opinion complied with generally accepted accounting industry standards as set forth by the AICPA.
The ASB of the AICPA in 2018 voted to issue new audit standards for audits of financial statements of employee benefit plans subject to ERISA. These new standards follow an assessment by the U.S. Department of Labor reporting that a large number of audits of employee benefit plans contain major deficiencies with respect to generally accepted auditing standards and recommending that the limited-scope audit exception be repealed.
The new standards are set forth in Statement on Auditing Standards (SAS) No. 136, refer to limited-scope audits as “ERISA Section 103(a)(3)(C) audits,” and include a new audit report format. Instead of disclaiming an opinion, in an ERISA Section 103(a)(3)(C) audit an auditor must provide an opinion on audit areas that are not certified and perform limited procedures on investments. For instance, the new standards will require ERISA Section 103(a)(3)(C) audit reports to comply with more extensive content requirements and include sections that address the auditor’s opinion, the basis for her opinion, the responsibilities of plan sponsors for financial statements, and the responsibilities of the auditor for the audit of financial statements.
Plan sponsors that elect an ERISA Section 103(a)(3)(C) audit will likely have more responsibilities than plan sponsors have with respect to limited-scope audits. For example, before performing an ERISA Section 103(a)(3)(C) audit, an auditor must obtain acknowledgement from a plan sponsor that an ERISA Section 103(a)(3)(C) audit is permissible, that the investment information is prepared and certified by a bank, similar institution, or insurance carrier qualified under the regulations, that the certification meets regulatory requirements, and that the certified investment information is appropriately measured, presented, and disclosed in accordance with the applicable financial reporting framework.
Plan sponsors must also substantially complete a draft Form 5500 before an auditor may accept engagement to perform an ERISA Section 103(a)(3)(C) audit. A substantially complete Form 5500 means the forms and schedules that could have a material effect on the audit are completed.