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
Questions?