Presentation on theme: "Auditing and Financial Reporting Overview of Employee Benefit Plans"— Presentation transcript:
1 Auditing and Financial Reporting Overview of Employee Benefit Plans Andy Harper, CPA, CBATed Hotz, CPAAshley Ogle, CPAPugh & Company, P.C.
2 Learning Objectives To obtain a basic understanding of the following: Background information on EBP’sWhen is a plan required to be audited?Types of PlansEBSA Oversight of Audit FirmsCommon Audit DeficienciesIndustry and Regulatory UpdateResources for auditors, plan sponsors and participantsLimited-scope AuditsElectronic FilingOverview of auditing for employee benefit plansOverview of financial reporting requirements08/2010PUGH & COMPANY, P.C.
3 Background Information on EBP’s ERISA signed into law in 1974Most plans were defined benefit and health and welfare plans that provided benefits from employer-funded investmentsTypical investments at that time were U.S. government securities, publicly traded stock, and corporate bonds whose value was easily determined by reviewing the financial pages of the daily newspaper08/2010PUGH & COMPANY, P.C.
4 Background Information on EBP’s Today, most plans are defined contribution plans funded by participant and/or employer contributionsInvestments are often “hard-to-value” such as:Hedge fundsPrivate equity fundsReal estate fundsVenture capital fundsCommodity fundsNon-marketable derivatives08/2010PUGH & COMPANY, P.C.
5 Background Information on EBP’s EBP’s are significant economic entities in the United States today.There are nearly 695,000 private pension plans covering more than 122 million participants. In addition, there are approximately 5 million health and welfare benefit plans.EBP’s own significant amounts of investments. Private pension plans own more than $5.2 trillion in assets.08/2010PUGH & COMPANY, P.C.
6 Background Information on EBP’s 10,000 independent qualified public accountants audit 76,000 plans6 perform more than 1,000 audits, (80% of all plan assets)64 perform more than 100 audits that cover 25,000 plans8,000 perform 5 or fewer audits4,800 perform only 1 audit08/2010PUGH & COMPANY, P.C.
7 Audit Requirement When is an audit required? Generally when a plan has 100 or more participants at the beginning of the plan year.Instructions to Form 5500 define “active participants” as those who are eligible to participate in the plan (that is, to contribute to the plan) as well as those who are participating.08/2010PUGH & COMPANY, P.C.
8 Audit Requirement 08/2010 PUGH & COMPANY, P.C. Number of Participants at Beginning of Current YearRequirements Followed for the Previous Year Form 5500Requirements to Be Followed for the Current Year Form 5500Fewer than 80“Small” plan“Large” plan80-99 (inclusive)May elect to file Form 5500 again as a “large” plan or switch to a “small” plan(inclusive)May elect to file Form 5500 as a “small” plan again or switch to a “large” planMore than 12008/2010PUGH & COMPANY, P.C.
9 Types of Employee Benefit Plans Defined Benefit Pension PlansDefined Contribution Pension PlansHealth and Welfare Benefit Plans08/2010PUGH & COMPANY, P.C.
10 Types of Employee Benefit Plans EBP’s may also be classified as follows:Single-employer, multiemployer, or Multiple-employer plansNoncontributory or contributoryFunded or unfundedTrusteed or nontrusteedQualified or nonqualified08/2010PUGH & COMPANY, P.C.
11 Types of Employee Benefit Plans Defined benefit plans can be:Defined benefit retirement planCash balance pension planPension equity plan08/2010PUGH & COMPANY, P.C.
12 Types of Employee Benefit Plans Defined contribution plans can be:401(k) planProfit-sharing planMoney purchase planStock bonus planEmployee Stock ownership planKSOPTarget benefit planThrift or savings plan403(b) plan08/2010PUGH & COMPANY, P.C.
13 Types of Employee Benefit Plans 403(b) PlansSponsored by charities and schools (subject to ERISA)and religious organizations and governments (not subject to ERISA)Similar to 401(k) plans08/2010PUGH & COMPANY, P.C.
14 Types of Employee Benefit Plans Cash Balance PlanConsidered a defined benefit plan and must follow the rules relating to those plans.Looks like a defined contribution plan to the participant.A hypothetical account is maintained for each participant, the company makes annual notional contributions, and interest is credited on the account.The contribution to the account is either a flat dollar amount or a percentage of compensation.Like any defined benefit plan, benefits are based on the plan’s formula and not on the actual investment earnings on plan assets.Actual investment earnings of the plan assets also do not affect the account balance.The company rather than the employee bears the investment risk.08/2010PUGH & COMPANY, P.C.
15 EBSA Oversight of EBP Audits Top-down, bottom-up approachFor firms with 200 or more clients (inspection)On-site review of a sample of engagementsMeeting with firm managementReview of policies and proceduresFor firms with between 100 and 200 clients (mini inspection)Work papers reviewed in EBSA’s officeTop level communication performed through use of questionnaire and telephone interview08/2010PUGH & COMPANY, P.C.
16 EBSA Oversight of EBP Audits For audit firms with fewer than 100 EBP clients, the EBSA focuses its review on selected work papers (desk review).Focus is on firms performing a small number of EBP auditsTarget plans with assets >$10 M audited by firms with < 40 EBP audits08/2010PUGH & COMPANY, P.C.
17 EBSA Oversight of EBP Audits To date, the EBSA has competed:22 inspections15 mini inspectionsOver 1,800 desk reviews08/2010PUGH & COMPANY, P.C.
18 Common Audit Deficiencies DOL & Peer Review Findings The auditor undertook an engagement that could not reasonably be expected to be completed competently.Improperly worded reports related to GAAS and GAAP.Audit reports that incorrectly contain language for a full scope audit when the auditor was engaged to perform a limited scope audit.Audit reports that inappropriately identify statements and /or supplemental schedules that are not presented or the audit report does not extend to supplemental schedules that are presented.08/2010PUGH & COMPANY, P.C.
19 Common Audit Deficiencies DOL & Peer Review Findings Audit scope inappropriately limited. Entity holding the plan's investments did not qualify for limited scope treatment pursuant to DOL regulation 29 CFR .Inadequate documentation of auditor’s understanding of internal control: the control environment, risk assessment, control activities, information and communication, and monitoring.Reliance on audit information from the plan sponsor but no documentation of any understanding of the internal controls at the plan sponsor.Over-reliance on a SAS 70 report or relied on the report without having obtained and read the report.08/2010PUGH & COMPANY, P.C.
20 Common Audit Deficiencies DOL & Peer Review Findings Reliance on a SAS 70 report that covers a different reporting period than the plan's fiscal year. Auditor failure to take actions to obtain an understanding of the internal control environment at the TPA during the period under audit.No analytical review in the planning stageOne time all-inclusive brainstorming not acceptable to DOLNo audit programs08/2010PUGH & COMPANY, P.C.
21 Common Audit Deficiencies DOL & Peer Review Findings Failure to disclose (or inadequately disclosed) the following in the footnotes:investments that represent 5 percent or more of total net assets.the net change in fair value of each significant type of investment.the amount and disposition of forfeited non-vested accounts.the plan's federal tax status.related party transactions.08/2010PUGH & COMPANY, P.C.
22 Common Audit Deficiencies DOL & Peer Review Findings Footnotes failed to disclose…the policy for the payment of administrative expensesa description of the method and significant assumptions used to determine the fair value of investments.the use of estimatesthe funding policy of the planconcentrations of credit risk arising from all financial instrumentsthe vesting provisionsthe termination provisions and priorities for distribution of assets08/2010PUGH & COMPANY, P.C.
23 Common Audit Deficiencies DOL & Peer Review Findings Footnotes failed to disclose…basis for determining participant contributions.a reconciliation between the financial statement amounts and amounts on Schedule H of Form 5500 .Defined Benefit Plans: The plan's status with respect to any applicable minimum funding requirements.08/2010PUGH & COMPANY, P.C.
24 Common Audit Deficiencies DOL & Peer Review Findings Limited scope audits: The financial statement disclosures addressing information certified by the trustee incorrectly included noninvestment information, which should have been subjected to audit procedures or improperly excluded information that was certified (for example – contributions receivable).Health and welfare plans: The benefit obligations exceed the net assets of the plan, but the footnotes do not disclose the method of funding this deficit.the assumed health care cost-trend rates used to measure the expected cost of benefits covered by the plan for the next year.the effect of a one percentage point increase in the assumed health care cost-trend rates for each future year on the postretirement benefit obligation.08/2010PUGH & COMPANY, P.C.
25 Common Audit Deficiencies DOL & Peer Review Findings Other deficienciesThe schedule of assets (held at end of year) did not properly identify partys-in-interest to the plan in column (a) as required by the DOL's Rules and Regulations for Reporting and Disclosure under ERISA.The schedule of assets (held at end of year) improperly excluded participant loans.The maturity date and rate of interest related to participant loans was not disclosed in the schedule of assets (held at end of year).The schedule of assets (held at end of year) did not include cost information for investments that are nonparticipant directed.08/2010PUGH & COMPANY, P.C.
26 Common Audit Deficiencies DOL & Peer Review Findings InvestmentsFailure to test end of year market valuesFailure to obtain proper certification for limited scopeInadequate or missing disclosuresStable Value Funds not properly recorded (GIC’s)Failure to obtain confirmation from the appropriate party08/2010PUGH & COMPANY, P.C.
27 Common Audit Deficiencies DOL & Peer Review Findings ContributionsFailure to test payroll (payroll register, elective deferral, authorizations, etc.)Inappropriate reliance on SAS 70 reportTimeliness of participant contributions not testedDefinition of compensation08/2010PUGH & COMPANY, P.C.
28 Common Audit Deficiencies DOL & Peer Review Findings Benefit PaymentsFailure to test participant eligibility to receive benefit paymentsInappropriate reliance on SAS 70 reportFailure to test approval of benefit payments08/2010PUGH & COMPANY, P.C.
29 Common Audit Deficiencies DOL & Peer Review Findings Related Party/Prohibited TransactionsNo related parties noted in workpapersLack of understanding as to what are prohibited transactionsParties-in-interest, not N/ASponsor is a party-in interest/meets exception08/2010PUGH & COMPANY, P.C.
30 Industry Update Current recession began in December 2007 Longest recession since the end of WWIIConsumer savings rate was .5% negative in 2005First time a negative savings rate occurred for an entire year sinceUncertainty over health care reformDB plans facing sizable funding obligationsEmployer commitment to retirement plansCredit crisisVolatile marketsBaby boomersLiquidity concernsFraud considerations08/2010PUGH & COMPANY, P.C.
31 Regulatory Update Pension Protection Act of 2006 effective for 2009 Impacts qualified plans and 403(b)’sNumerous plan amendments and number of optional amendmentsGenerally, plans must be amended on or before the last day of plan year beginning on or after January 1, 200908/2010PUGH & COMPANY, P.C.
32 Regulatory Update PPA (Cont.) Effective in 2007, change in vesting of employer contributions – 3 year cliff or 6 year gradedMakes permanent a number of EGTRRA provisions, including increased contribution limits, faster vesting, catch-up contribution and Roth contributionsEffective in 2007, quarterly benefits statements for participant-directed DC plans, annual statements for others, every three years for DB PlansEffective in 2008, new annuity rules for DB and money purchase plans – participants must be offered a new “qualified optional survivor annuity"08/2010PUGH & COMPANY, P.C.
33 Regulatory Update PPA (Cont.) Revised rollover and plan distribution rulesNew rules encouraging “automatic enrollment” in 401(k) plansEffective in 2008, safe harbor automatic enrollment is allowedRevised rules that govern employer funding of DB plansProvided new rules related to funding, withdrawal liability and disclosures for multiemployer plans08/2010PUGH & COMPANY, P.C.
34 Regulatory Update PPA (Cont.) Effective in 2010 is a new plan design – the DB(k)PPA amends ERISA to require more transparency to participants in multiemployer plans. Financial and actuarial information must be furnished to participants upon written requestNew DOL safe harbor guidelines for fiduciaries who invest the assets of participants in “qualified default investment alternatives” in the absence of participant investment direction08/2010PUGH & COMPANY, P.C.
35 Regulatory Update PPA (Cont.) Provides for a new prohibited transaction exemption for investment advice from a fiduciary advisor to DC plan participants under an “eligible investment advice arrangement”A proposal of simplified annual reporting requirements for plans with fewer than 25 participants – Form 5500-SFElectronic filing of the Form 550008/2010PUGH & COMPANY, P.C.
36 Regulatory Update Field Assistance Bulletin (“FAB”) 2009-02 Issued July 20, 2009Provides guidance to DOL Field OfficesProvides Enforcement Relief for Form 5500 filings for 403(b) plansDoes NOT provide audit reliefDOL/EBSA will not reject a 403(b) plan Form 5500 filing solely because the auditor’s report is qualified, adverse or disclaims an opinion (other than a “limited scope” disclaimer allowed under 29 CFR ) due to the exclusion of pre-2009 annuity contracts and/or custodial accounts meeting 4 criteria08/2010PUGH & COMPANY, P.C.
37 Regulatory UpdateExpanded business associate liability (civil and criminal penalties) under Technology for Economic and Clinical Health Act (HITECH Act) for violations of HIPAACOBRA premium subsidy – former employees pay 35% of average cost of insurance from 2/17/09 thru 2/28/10. Employer gets 65% payroll tax credit.08/2010PUGH & COMPANY, P.C.
38 Regulatory UpdateDOL guidance on timeliness of remittance of participant contributionsSafe harbor for small plans – 7 days08/2010PUGH & COMPANY, P.C.
39 AICPA EBPAQC Testimony Before DOL Advisory Council on EBP’s Discontinue limited-scope audit exemptionRegulatory reporting or agreed-upon procedures for 403(b) plansEvaluate cost/benefit of audits for single-employer DB H&W plans or consider agreed-upon proceduresApply agreed-upon procedures at the participant account level for defined contribution plans08/2010PUGH & COMPANY, P.C.
40 AICPA EBPAQC Testimony Before DOL Advisory Council on EBP’s (cont.) Audit of 5500 and related schedules would not provide any additional participant protectionNew reporting model for ERISA plans (except 403(b)) plans not necessaryContinue to follow generally accepted auditing standards (GAAS) for FS audits of ERISA plansPiecemeal audit opinions should not be allowed08/2010PUGH & COMPANY, P.C.
41 AICPA EBPAQC Testimony Before DOL Advisory Council on EBP’s (cont.) Engagements to review or audit a plan’s compliance with laws and regulations, plan operations or governance would require DOL regulations and should consider cost/benefitPeer reviews and additional minimum qualifications should be required for all ERISA audit firms08/2010PUGH & COMPANY, P.C.
42 AICPA Employee Benefit Plan Audit Quality Center ResourcesAICPA Employee Benefit Plan Audit Quality CenterOver 1,900 firm membersAll 50 states and territories88% of the Firms have fewer than 50 CPA’s90% of the Firms audit 50 or less plans08/2010PUGH & COMPANY, P.C.
43 Resources AICPA EBPAQC EBPAQC News Alerts – accounting, auditing and regulatory developments; tools and resources; upcoming live forum and other CPE eventsEBPAQC Plan Advisories – documents for auditors to share with clients regarding information to help plan sponsors, administrators, and trustees in understanding their fiduciary and other responsibilitiesEBPAQC Primers – non-authoritative practice tools developed by the Center to assist member firms in preparing staff for the audits they perform08/2010PUGH & COMPANY, P.C.
44 Resources AICPA EBPAQC Online Resource Center 403(b) Plans Audit DocumentationAuditor IndependencePlan Investments/ FAS 157Defined benefit plansHealth and welfare plansLimited scope auditsForm 11-K plan auditsSAS 115 and 112Pension Protection Act of 2006Plan SponsorsMarketing Toolkit08/2010PUGH & COMPANY, P.C.
45 Resources AICPA EBPAQC New 403(b) Tools Questions to Expect from Your Plan AuditorSample Auditor Request List for Plan InformationFAS 157 ToolsIllustrative DisclosuresPlan Sponsor FAQ’sLimited Scope PrimerEmployee Benefit Plans DOL Criminal Enforcement CasesExamples of Internal Control Communications for Employee Benefit PlansStatement on Accounting Standards No. 115 ToolsA Comparison with Statement on Auditing Standards No. 112Summary of the RequirementsFrequently Asked QuestionsAuthoritative Accounting and Reporting Standards for Employee Benefit Plans: FASB Accounting Standards CodificationTM08/2010PUGH & COMPANY, P.C.
46 Resources AICPA EBPAQC EBPAQC resources available now to help in understanding FAS 157 & alternative investments:Getting started: Applying New Accounting Rules for Measuring and Reporting Fair Value of Plan InvestmentsEBPAQC Alternative Investments in Employee Benefit Plan Primer08/2010PUGH & COMPANY, P.C.
47 Resources for Auditors – AICPA EBPAQC Online ForumOver 2,900 participantsOver 1,700 topics7 forumsAuditFAS 157 Implementation403(b) Plan AuditsTax and ComplianceMultiemployer planForm 5500Form 11-k08/2010PUGH & COMPANY, P.C.
48 DOL Regulatory Resources The Department of Labor provides numerous resources for employee benefit plan auditors and Form 5500 and financial statement preparers, as well as individuals who select auditors. The DOL's Employee Benefits Security Administration (EBSA) protects the integrity of pensions, health plans, and other employee benefits for more than 150 million people. Its mission is to: Deter and correct violations of the relevant statutes through strong administrative, civil and criminal enforcement efforts to ensure workers receive promised benefitsDevelop policies and regulations that encourage the growth of employment-based benefitsAssist workers in getting the information they need to exercise their benefit rightsAssist plan officials to understand the requirements of the relevant statutes in order to meet their legal responsibilitiesThe public may reach EBSA on its toll-free participant assistance number, EBSA (3272); EFAST help line: ; and via its‘ Web-site. 08/2010PUGH & COMPANY, P.C.
49 DOL Regulatory Resources FAQ’s – pension and retirement information for consumers, compliance assistance, voluntary corrections program, reporting and disclosureConsumer InformationLaws and Regulations – proposed and final rules, public commentsTechnical Guidance – advisory opinions, exemptions, field assistance bulletins, information letters, interpretive bulletins, Executive Order 12866Compliance Assistance – abandoned plans, correction programs, fiduciary education, health plans, retirement plans, small employers, reporting and filing, 403(b) plans, webcasts08/2010PUGH & COMPANY, P.C.
50 Example Public Comment to Laws & Regs -----Original Message-----From:Sent: Tuesday, October 24, :14 PMTo: EBSA, E-ORI - EBSASubject: independance of accountant RFIAs a member of a local union I have been deeply concerned about our accountant's ability to be objective and subjective with particular concern to our pension plan. I have recently talked to him in regards to problems I saw in our locals 5500 filing. He was evasive and defensive to my questions.He also is our accountant for our general fund's LMRDA reporting requirements, and possibly for our building corporation and other funds.There are substantial sums of money being paid to his firm, and I for one would expect the term independent to mean that there is absolutely no business relationship at all with an independent accountant. This accountant seems to have a cozy relationship with my business manager and is probably advising him how to embezzle funds from our membership.08/2010PUGH & COMPANY, P.C.
51 EFAST-2 (Electronic Filing) All pension plans, welfare plans and direct filing entities (DFEs) subject to ERISA must file electronically for plan years commencing on or after Januaary 1, 2009An individual (e.g., officer of an employer, preparer) may register for electronic credentials on January 1, The following types of electronic credentials are available: (1) filing author, (2) filing signer, (3) schedule author, (4) transmitter, and (5) third party software developer. A filing author prepares a 5500 under IFILE. A preparer using third party software does not need filing author credentials. A filing signer has an obligation to review the 5500 and the signature indicates a belief that the submission is true, correct and complete. The employer continues to be responsible for the timeliness of the filing.Schedule SSA is no longer part of the 5500 filing. Commencing with the 2009 plan year, Schedule SSA becomes Form SSA and an employer will file the form on paper directly with the IRS.An employer no longer attaches the Form 5558 to a filing. However, the employer continues to use the form to obtain an extension to file.08/2010PUGH & COMPANY, P.C.
52 Electronic FilingHow does the Form 5500 filer include the auditor's report and audited financial statements with the Form 5500 filing?The auditor's report and audited financial statements must be submitted in a searchable PDF file.No encryption or password protection is allowed.Submitting an encrypted auditor report to your client will result in the Form 5500 being rejected by the EFAST2 system.Using software that you can save or print the document as a PDF file will be the best option. Text format is also acceptable.Scanning the document is allowed however, this may result in a large file that is not searchable or attachable to the filing.08/2010PUGH & COMPANY, P.C.
53 Electronic Filing How does my client file for an extension? Extensions must be filed in paper format as they are mailed to the Internal Revenue Service.The extension is no longer required to be attached to the Form 5500 filing, but a copy of the extension should remain on file.Extensions are required to be filed by the Form 5500 due date.08/2010PUGH & COMPANY, P.C.
54 Electronic FilingDoes the plan auditor need to register for EFAST2 credentials?If your firm is only preparing audit reports for your clients you do not need to register with the EFAST 2.However, if you will be preparing any Form 5500s, you will probably need to register for filing credentials prior to the actual filing08/2010PUGH & COMPANY, P.C.
55 Electronic FilingMost parties assisting in the filing of the Form 5500 must register for EFAST 2 credentials.This would include anyone preparing the Form 5500 through IFile, signing the Form 5500, attaching a schedule through IFile, or transmitting the Form 5500 as a third party.08/2010PUGH & COMPANY, P.C.
56 Auditing and Financial Reporting Overview for Employee Benefit Plans Questions?
Your consent to our cookies if you continue to use this website.