Another pandemic-powered delay is pushing the effective date back for new standards related to audits of financial statements for employee benefit plans (EBP).
In July 2019, the American Institute of CPAs (AICPA) Auditing Standards Board (ASB) issued a final new standard, Statement on Auditing Standards No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, to reform employee benefit plan audits, initially set to take effect by the end of last year. However, due to the ongoing pandemic, the new standards are now scheduled to go into effect for plan audits with more than 120 eligible participants with years ending December 31, 2021.
What sparked the overhaul in auditing standards for EBP? The changes followed a 2015 study performed by the Department of Labor (DOL), which found a 39% deficiency rate in EBP audits, finding insufficiencies “with respect to one or more Generally Accepted Auditing Standards (GAAP) requirements which would lead to rejection of Form 5500 filing, putting $653 billion and 22.5 million plan participants and beneficiaries at risk.”
The new standards have been put in place to improve the quality of ERISA EBP audits and enhance the auditor reporting. Changes on the form and content of the related auditor’s report are intended to offer greater transparency and increased communicative value, providing an opportunity to share additional insight into key areas of the audit.
- Engagement acceptance
- Risk assessment related to plan instrument, plan tax status and prohibited transactions and responding to identified risks, as well as consideration of relevant plan provisions
- Communication with those charged with governance and sharing reportable findings in writing to management
- Additional audit procedures and responsibilities for the auditor relating to the ERISA, including required supplemental schedules and Form 5500
- A “limited scope audit” will now be referred to as an “ERISA section 103(a)(3)(C) audit”
How to Prepare
While most of the new standards will only affect auditors, there are a few changes that will impact plan sponsors. Plan sponsors, management teams, and other trustees should review and prepare for the following changes to ensure a seamless transition to the new auditing standards by year end.
Prior to the engagement, auditors will now be required to receive clarification of management responsibilities and written documentation acknowledging the organization’s obligation for plan compliance. You will need to confirm that the plan documents are current and that contributions and distributions are in accordance with the plan’s provisions.
In addition, plan sponsors will need to produce a completed draft Form 5500 prior to the dating of the auditor’s report in order for the auditor to identify any material inconsistencies or material misstatements of fact (if any) with the audited ERISA plan financial statements.
Lastly, organizations that opt for an ERISA section 103(a)(3)(C) audit will need to show written representation related to the reliability of the certified investment information, allowing the auditor to evaluate the amounts and disclosures in the financial statements and present an opinion of the fair representation of the information.
What to Expect
Auditors are presented with a multitude of changes, as nearly every facet of the ERISA plan audit will be affected by the new standards. However, BPW is already performing many of these compliance practices, as they are suggested audit procedures pursuant to the existing AICPA Audit and Accounting Guide. In effect, clients should not expect to see significant changes to testing, but rather may note changes in the audit report and audit letters to reflect the new communication requirements.
Current clients will receive clear guidance and support from their BPW audit team. Please reach out with any questions you may have related to the new standards for next year.
Prospective clients who are reaching 120 plan participants or looking for a highly experienced team of auditors, please contact me at (805) 963-7811 or email@example.com to discuss choosing BPW for a successful employee benefit plan audit. We are here to bring valuable insight to your business.