Changes Coming to ERISA Limited-Scope Plan Audits

In an effort to improve the quality of retirement plan audits, the Auditing Standards Board (ASB) introduced a new auditing standard last year. When passed, this new standard is predicted to impact almost all audits of benefit plans that are subject to the Employee Retirement Income Security Act of 1974 (ERISA). Although the change does not concern plan management directly, benefit plan sponsors will feel its effects. Their auditors will ask new and different questions, and the reports they produce will look quite different. The final draft of the new standard should be released shortly, and the ASB is expected to finalize the Statement on Accounting Standards (SAS) at its meeting in October later this year.

Effective Date

If passed, the new auditing standard will be effective for audits of periods ending on or after December 15, 2020.

Purpose of the New Standard

Current auditor’s reports include a lot of information, but the information is not always relevant to the general public. The new SAS alters the reporting requirements to include more relevant information and paints a clear picture of both management’s and the auditor’s responsibilities. Most notably, it will reveal when management chooses to limit the scope of their audit by electing into what is currently known as an ERISA-permitted limited scope audit.

Change to Limited Scope Audits

The most current SAS draft calls for a few different changes, but the one most likely to impact plan owners will be the change to ERISA-permitted limited scope audits. As the name suggests, these audits are more limited in scope compared to regular benefit plan audits, which means that auditors are not responsible for testing plan assets that are held for investment. Because they are not required to audit the plan’s investment assets, most auditors will choose to disclaim an opinion about them all together.

The new SAS renames limited-scope audits to “ERISA section 103(a)(3)(C) audits,” which comes from the section of the law that permits them. Under the new guidance, auditors are not given as much freedom. When performing an ERISA section 103(a)(3)(C) audit, auditors must now accomplish the following tasks:

• Perform specific procedures to review the assets’ investment certifications;
• Evaluate management’s conclusion that the investment certifications are from qualified institutions;
• Compare asset information with other audit disclosures for continuity; and,
• Assess whether management’s disclosures about their investment assets appear to be compliant with GAAP.

After performing these specific tasks, auditors should be able to issue an opinion about two things: (1) whether the investment asset information agrees with the statements prepared by the investment institutions, and (2) whether the non-investment assets are presented fairly and in accordance with GAAP.

Management Responsibility

Atlanta Benefit plan sponsors who elect into ERISA section 103(a)(3)(C) audits will have to make a few changes. As part of the new auditing procedures, they must provide auditors with three specific management representations: that (1) a limited-scope audit is permissible; (2) they are confident that entity certifying their investment information is qualified to do so; and, (3) the certified information is accurately presented and disclosed. But it doesn’t stop there.

All ERISA audits, whether limited in scope or not, require management to prove that they accept responsibility for the plan, maintain a current plan instrument, and keep detailed participant records. And beginning in 2020, they will need to produce a draft of the plan’s annual return (IRS tax Form 5500) before the auditors can issue their opinion.

Contact Us

As the SAS transitions from a proposed standard to a finalized Statement, we are working to comply with its changes so that we can hit the ground running. While it may seem like these changes impact just the auditors work, there are new responsibilities for plan management to address as well. If you have any questions about the changes coming to plan audits or need assistance with your 401k or other benefit plan audit, Wilson Lewis can help! For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.