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Auditing and Financial Reporting Overview of Employee Benefit Plans

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1 Auditing and Financial Reporting Overview of Employee Benefit Plans
Andy Harper, CPA, CBA Ted Hotz, CPA Ashley Ogle, CPA Pugh & Company, P.C.

2 Learning Objectives To obtain a basic understanding of the following:
Background information on EBP’s When is a plan required to be audited? Types of Plans EBSA Oversight of Audit Firms Common Audit Deficiencies Industry and Regulatory Update Resources for auditors, plan sponsors and participants Limited-scope Audits Electronic Filing Overview of auditing for employee benefit plans Overview of financial reporting requirements 08/2010 PUGH & COMPANY, P.C.

3 Background Information on EBP’s
ERISA signed into law in 1974 Most plans were defined benefit and health and welfare plans that provided benefits from employer-funded investments Typical 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 newspaper 08/2010 PUGH & COMPANY, P.C.

4 Background Information on EBP’s
Today, most plans are defined contribution plans funded by participant and/or employer contributions Investments are often “hard-to-value” such as: Hedge funds Private equity funds Real estate funds Venture capital funds Commodity funds Non-marketable derivatives 08/2010 PUGH & 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. 08/2010 PUGH & COMPANY, P.C.

6 Background Information on EBP’s
10,000 independent qualified public accountants audit 76,000 plans 6 perform more than 1,000 audits, (80% of all plan assets) 64 perform more than 100 audits that cover 25,000 plans 8,000 perform 5 or fewer audits 4,800 perform only 1 audit 08/2010 PUGH & 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. 08/2010 PUGH & COMPANY, P.C.

8 Audit Requirement 08/2010 PUGH & COMPANY, P.C.
Number of Participants at Beginning of Current Year Requirements Followed for the Previous Year Form 5500 Requirements to Be Followed for the Current Year Form 5500 Fewer than 80 “Small” plan “Large” plan 80-99 (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” plan More than 120 08/2010 PUGH & COMPANY, P.C.

9 Types of Employee Benefit Plans
Defined Benefit Pension Plans Defined Contribution Pension Plans Health and Welfare Benefit Plans 08/2010 PUGH & COMPANY, P.C.

10 Types of Employee Benefit Plans
EBP’s may also be classified as follows: Single-employer, multiemployer, or Multiple-employer plans Noncontributory or contributory Funded or unfunded Trusteed or nontrusteed Qualified or nonqualified 08/2010 PUGH & COMPANY, P.C.

11 Types of Employee Benefit Plans
Defined benefit plans can be: Defined benefit retirement plan Cash balance pension plan Pension equity plan 08/2010 PUGH & COMPANY, P.C.

12 Types of Employee Benefit Plans
Defined contribution plans can be: 401(k) plan Profit-sharing plan Money purchase plan Stock bonus plan Employee Stock ownership plan KSOP Target benefit plan Thrift or savings plan 403(b) plan 08/2010 PUGH & COMPANY, P.C.

13 Types of Employee Benefit Plans
403(b) Plans Sponsored by charities and schools (subject to ERISA) and religious organizations and governments (not subject to ERISA) Similar to 401(k) plans 08/2010 PUGH & COMPANY, P.C.

14 Types of Employee Benefit Plans
Cash Balance Plan Considered 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. 08/2010 PUGH & COMPANY, P.C.

15 EBSA Oversight of EBP Audits
Top-down, bottom-up approach For firms with 200 or more clients (inspection) On-site review of a sample of engagements Meeting with firm management Review of policies and procedures For firms with between 100 and 200 clients (mini inspection) Work papers reviewed in EBSA’s office Top level communication performed through use of questionnaire and telephone interview 08/2010 PUGH & 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 audits Target plans with assets >$10 M audited by firms with < 40 EBP audits 08/2010 PUGH & COMPANY, P.C.

17 EBSA Oversight of EBP Audits
To date, the EBSA has competed: 22 inspections 15 mini inspections Over 1,800 desk reviews 08/2010 PUGH & 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. 08/2010 PUGH & 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. 08/2010 PUGH & 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 stage One time all-inclusive brainstorming not acceptable to DOL No audit programs 08/2010 PUGH & 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. 08/2010 PUGH & COMPANY, P.C.

22 Common Audit Deficiencies DOL & Peer Review Findings
Footnotes failed to disclose… the policy for the payment of administrative expenses a description of the method and significant assumptions used to determine the fair value of investments. the use of estimates the funding policy of the plan concentrations of credit risk arising from all financial instruments the vesting provisions the termination provisions and priorities for distribution of assets 08/2010 PUGH & 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. 08/2010 PUGH & 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. 08/2010 PUGH & COMPANY, P.C.

25 Common Audit Deficiencies DOL & Peer Review Findings
Other deficiencies The 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. 08/2010 PUGH & COMPANY, P.C.

26 Common Audit Deficiencies DOL & Peer Review Findings
Investments Failure to test end of year market values Failure to obtain proper certification for limited scope Inadequate or missing disclosures Stable Value Funds not properly recorded (GIC’s) Failure to obtain confirmation from the appropriate party 08/2010 PUGH & COMPANY, P.C.

27 Common Audit Deficiencies DOL & Peer Review Findings
Contributions Failure to test payroll (payroll register, elective deferral, authorizations, etc.) Inappropriate reliance on SAS 70 report Timeliness of participant contributions not tested Definition of compensation 08/2010 PUGH & COMPANY, P.C.

28 Common Audit Deficiencies DOL & Peer Review Findings
Benefit Payments Failure to test participant eligibility to receive benefit payments Inappropriate reliance on SAS 70 report Failure to test approval of benefit payments 08/2010 PUGH & COMPANY, P.C.

29 Common Audit Deficiencies DOL & Peer Review Findings
Related Party/Prohibited Transactions No related parties noted in workpapers Lack of understanding as to what are prohibited transactions Parties-in-interest, not N/A Sponsor is a party-in interest/meets exception 08/2010 PUGH & COMPANY, P.C.

30 Industry Update Current recession began in December 2007
Longest recession since the end of WWII Consumer savings rate was .5% negative in 2005 First time a negative savings rate occurred for an entire year since Uncertainty over health care reform DB plans facing sizable funding obligations Employer commitment to retirement plans Credit crisis Volatile markets Baby boomers Liquidity concerns Fraud considerations 08/2010 PUGH & COMPANY, P.C.

31 Regulatory Update Pension Protection Act of 2006 effective for 2009
Impacts qualified plans and 403(b)’s Numerous plan amendments and number of optional amendments Generally, plans must be amended on or before the last day of plan year beginning on or after January 1, 2009 08/2010 PUGH & COMPANY, P.C.

32 Regulatory Update PPA (Cont.)
Effective in 2007, change in vesting of employer contributions – 3 year cliff or 6 year graded Makes permanent a number of EGTRRA provisions, including increased contribution limits, faster vesting, catch-up contribution and Roth contributions Effective in 2007, quarterly benefits statements for participant-directed DC plans, annual statements for others, every three years for DB Plans Effective in 2008, new annuity rules for DB and money purchase plans – participants must be offered a new “qualified optional survivor annuity" 08/2010 PUGH & COMPANY, P.C.

33 Regulatory Update PPA (Cont.)
Revised rollover and plan distribution rules New rules encouraging “automatic enrollment” in 401(k) plans Effective in 2008, safe harbor automatic enrollment is allowed Revised rules that govern employer funding of DB plans Provided new rules related to funding, withdrawal liability and disclosures for multiemployer plans 08/2010 PUGH & 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 request New DOL safe harbor guidelines for fiduciaries who invest the assets of participants in “qualified default investment alternatives” in the absence of participant investment direction 08/2010 PUGH & 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-SF Electronic filing of the Form 5500 08/2010 PUGH & COMPANY, P.C.

36 Regulatory Update Field Assistance Bulletin (“FAB”) 2009-02
Issued July 20, 2009 Provides guidance to DOL Field Offices Provides Enforcement Relief for Form 5500 filings for 403(b) plans Does NOT provide audit relief DOL/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 criteria 08/2010 PUGH & COMPANY, P.C.

37 Regulatory Update Expanded business associate liability (civil and criminal penalties) under Technology for Economic and Clinical Health Act (HITECH Act) for violations of HIPAA COBRA 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. 08/2010 PUGH & COMPANY, P.C.

38 Regulatory Update DOL guidance on timeliness of remittance of participant contributions Safe harbor for small plans – 7 days 08/2010 PUGH & COMPANY, P.C.

39 AICPA EBPAQC Testimony Before DOL Advisory Council on EBP’s
Discontinue limited-scope audit exemption Regulatory reporting or agreed-upon procedures for 403(b) plans Evaluate cost/benefit of audits for single-employer DB H&W plans or consider agreed-upon procedures Apply agreed-upon procedures at the participant account level for defined contribution plans 08/2010 PUGH & 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 protection New reporting model for ERISA plans (except 403(b)) plans not necessary Continue to follow generally accepted auditing standards (GAAS) for FS audits of ERISA plans Piecemeal audit opinions should not be allowed 08/2010 PUGH & 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/benefit Peer reviews and additional minimum qualifications should be required for all ERISA audit firms 08/2010 PUGH & COMPANY, P.C.

42 AICPA Employee Benefit Plan Audit Quality Center
Resources AICPA Employee Benefit Plan Audit Quality Center Over 1,900 firm members All 50 states and territories 88% of the Firms have fewer than 50 CPA’s 90% of the Firms audit 50 or less plans 08/2010 PUGH & COMPANY, P.C.

43 Resources AICPA EBPAQC
EBPAQC News Alerts – accounting, auditing and regulatory developments; tools and resources; upcoming live forum and other CPE events EBPAQC Plan Advisories – documents for auditors to share with clients regarding information to help plan sponsors, administrators, and trustees in understanding their fiduciary and other responsibilities EBPAQC Primers – non-authoritative practice tools developed by the Center to assist member firms in preparing staff for the audits they perform 08/2010 PUGH & COMPANY, P.C.

44 Resources AICPA EBPAQC Online Resource Center 403(b) Plans
Audit Documentation Auditor Independence Plan Investments/ FAS 157 Defined benefit plans Health and welfare plans Limited scope audits Form 11-K plan audits SAS 115 and 112 Pension Protection Act of 2006 Plan Sponsors Marketing Toolkit 08/2010 PUGH & COMPANY, P.C.

45 Resources AICPA EBPAQC New 403(b) Tools
Questions to Expect from Your Plan Auditor Sample Auditor Request List for Plan Information FAS 157 Tools Illustrative Disclosures Plan Sponsor FAQ’s Limited Scope Primer Employee Benefit Plans DOL Criminal Enforcement Cases Examples of Internal Control Communications for Employee Benefit Plans Statement on Accounting Standards No. 115 Tools A Comparison with Statement on Auditing Standards No. 112 Summary of the Requirements Frequently Asked Questions Authoritative Accounting and Reporting Standards for Employee Benefit Plans: FASB Accounting Standards CodificationTM 08/2010 PUGH & 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 Investments EBPAQC Alternative Investments in Employee Benefit Plan Primer 08/2010 PUGH & COMPANY, P.C.

47 Resources for Auditors – AICPA EBPAQC
Online Forum Over 2,900 participants Over 1,700 topics 7 forums Audit FAS 157 Implementation 403(b) Plan Audits Tax and Compliance Multiemployer plan Form 5500 Form 11-k 08/2010 PUGH & 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 benefits Develop policies and regulations that encourage the growth of employment-based benefits Assist workers in getting the information they need to exercise their benefit rights Assist plan officials to understand the requirements of the relevant statutes in order to meet their legal responsibilities The public may reach EBSA on its toll-free participant assistance number,  EBSA (3272); EFAST help line:   ; and via its‘ Web-site.  08/2010 PUGH & COMPANY, P.C.

49 DOL Regulatory Resources
FAQ’s – pension and retirement information for consumers, compliance assistance, voluntary corrections program, reporting and disclosure Consumer Information Laws and Regulations – proposed and final rules, public comments Technical Guidance – advisory opinions, exemptions, field assistance bulletins, information letters, interpretive bulletins, Executive Order 12866 Compliance Assistance – abandoned plans, correction programs, fiduciary education, health plans, retirement plans, small employers, reporting and filing, 403(b) plans, webcasts 08/2010 PUGH & COMPANY, P.C.

50 Example Public Comment to Laws & Regs
-----Original Message----- From: Sent: Tuesday, October 24, :14 PM To: EBSA, E-ORI - EBSA Subject: independance of accountant RFI As 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. 08/2010 PUGH & 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, 2009 An 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. 08/2010 PUGH & COMPANY, P.C.

52 Electronic Filing How 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. 08/2010 PUGH & 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. 08/2010 PUGH & COMPANY, P.C.

54 Electronic Filing Does 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 filing 08/2010 PUGH & COMPANY, P.C.

55 Electronic Filing Most 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. 08/2010 PUGH & COMPANY, P.C.

56 Auditing and Financial Reporting Overview for Employee Benefit Plans

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