New audit standard will impact large ERISA plan financial audits. How will this affect plan sponsors?

If you are the plan sponsor of a large ERISA retirement plan which requires an annual financial statement audit, there is a new audit standard which will require you to provide additional information and documentation to your CPA firm.

Statement on Auditing Standard (SAS) No. 136 is effective for plan years ending after December 15, 2021, with early adoption allowed. Most CPA firms will not adopt this new standard until the audits of plans with year ends of December 31, 2021 or later. However, some CPA firm may choose to early adopt this audit standard for plans with December 31, 2020 year ends.

How will this new SAS impact the audit of your plan? What are the major impacts to you, as a plan sponsor? Here are five key changes:

1.      A new name and new type of audit opinion! This first key change will not impact anything you as a plan sponsor need to do. However you will want to know that if your plan undergoes what is currently known as a “DOL Limited-Scope audit”, that name is changing. Instead of DOL Limited-Scope, the audit will be known as an ERISA section 103(a)(3)(c) audit. In addition, the audit opinion for these types of audits will be changing. An ERISA section 103(a)(3)(c) audit will no longer considered to have a scope exception, therefore the audit opinion does not need to be modified.

Now for the changes which will directly impact plan sponsors and information they will be expected to provide to their CPA firms. This SAS requires the CPA firm to perform certain procedures as part of planning for the audit of a retirement Plan. This additional planning procedures will require management to provide the CPA firm with documentation for the following:

2.      Maintaining a current plan instrument. Seems pretty easy and straightforward. The plan sponsor should maintain the most current plan document, as well as all amendments to the plan document. Plan sponsors will need to be ready to demonstrate to their CPA firm that they have the most current plan document and amendments, and are operating the plan in compliance with the current plan document and amendments.

3.      Properly administering the Plan and verifying that the ERISA financial statements are in accordance with the Plan’s provisions, including maintaining sufficient participant records. This requirement has two parts:

-         Properly administering the Plan and verifying that the ERISA financial statements are in accordance with the Plan’s provisions: The CPA firm will need information from the plan sponsor about how the plan sponsor ensures that plan transactions, which ultimately flow into the financial statements, have been initiated and recorded in accordance with the provisions of the plan document.

-         Maintaining sufficient participant records: The Plan sponsor will need to provide information to the CPA firm to describe how participant records are maintained in a sufficient manner to allow for each participant to be credited for all of the benefits due under the plan provisions. This would include documentation such as

o  Maintaining accurate census data and payroll records.

o  Having appropriate controls to ensure eligible participants are entered into the plan timely.

o  Participant salary deferral rate changes are processed timely and accurately.

o  Participant accounts are maintained in an accurate manner.

o  Distributions to participants are for all benefits due to the participant.

4.      The plan sponsor is required to determine whether an ERISA Section 103(a)(3)(c) audit is permissible, if the certification is appropriate, and if the certified information is correctly measured, presented, and disclosed in accordance with the applicable financial reporting framework. This may be the most challenging requirement of this SAS for plan sponsors. The CPA firm will need to document and understand:

a.      How the plan sponsor determined that an ERISA Section 103(a)(3)(c) audit is permissible for the plan under audit.

b.      How the plan sponsor determined that the entity preparing the certification statement is an institution qualified to issue a certification statement.

c.      How the plan sponsor determined the certification is worded correctly and meets the requirements of CFR 2520.103-5.

d.      How the plan sponsor determined if the certification covers all assets held by the plan, or if multiple certification statements are needed.

e.      How the plan sponsor determined that the financial information and reports, covered by the certification statement, have been prepared in accordance with generally acceptance accounting principles. 

5.      Providing the auditor with a substantially complete draft of the Form 5500 prior to the date of the auditor’s report. This may seem like a no-brainer. However, if the preparer of the Form 5500 for your plan is typically slow, then you will want to make arrangements well in advance with the 5500 preparer to provide a draft 5500 to your CPA firm by a specific date.  This new SAS will not allow a CPA firm to issue the plan’s financial statement without a substantially completed draft of the 5500.

The information above is not all-inclusive, and each CPA firm will approach what they require from the plan sponsor in different manners.

As I mentioned above, some CPA firms may choose to early adopt this SAS for the 2020 year end audits. As a plan sponsor, you should contact your CPA firm to find out if they will be early adopting SAS 136.

Finally...Here is a tip for plan sponsors to navigate this new SAS. I suggest that all plan sponsors prepare a “SAS 136 Planning Memo” for each plan audit, to provide your CPA firm. Your SAS 136 Planning Memo can address all of the key items above for your CPA firm.

Have questions or concerns? Then let’s talk!