After the U.S. Department of Labor expressed concerns about the quality of audits in employee benefit plans, the American Institute of Certified Public Accountants (AICPA) released a Statement on Auditing Standards (SAS 136) to address those concerns. Originally slated to go into effect in 2020, AICPA delayed implementing the audit rules for one year due to the COVID-19 pandemic. As a result, SAS 136 will apply to 2021 employee benefit plan audits.
Changes to the Limited Scope Audit
The current standards for audit reports allow a limited scope audit and a “disclaimer” audit opinion. SAS 136 still allows for a limited scope audit, but it is now referred to as an ERISA Section 103(a)(3)(C) audit, with no scope limitations. In addition, instead of a disclaimer, the auditor’s opinion will now be a two-part opinion that covers the fair presentation of information in the financial statements not covered by the certification and the reconciliation of the investment information in the financial statements with the certification.
Consequences for Plan Sponsors
SAS 136 places responsibility for some issues that directly impact plan-on-plan sponsors. Specifically, the plan sponsor must acknowledge responsibility to the auditor in writing for the administration of the plan, including:
- Ensuring that the trustee or plan provider is a “qualified institution”
- Determining whether a Section 103(a)(3)(C) audit is permissible
- Determining whether the certification meets ERISA requirements
- Maintaining and providing a current plan document
- Preparing and presenting financial statements
- Substantially completing a Form 5500 for the auditor to review before the date of the audit report
- Understanding which investments and disclosures are subject to the “qualified institution’s” certificate of completeness and accuracy
Therefore, plan sponsors may need to spend more time preparing for and ensuring that they fully understand their responsibilities before an audit. Completion of Form 5500 also must occur earlier than in past years so that the auditor has adequate time to review it before the audit.
Consequences for Auditors
Some of the rules that SAS 136 imposes also have consequences for auditors that perform these audits. For instance, their audit engagement letters must lay out many of the details and requirements imposed by SAS 136, as mentioned above.
Furthermore, the audit report is likely to be lengthier than in past years. First, SAS 136 replaces the disclaimer opinion with a longer two-part opinion. Next, SAS 136 also reformats and reorganizes certain portions of the report for clarity, adding to its length.
SAS 136 also requires auditors to undertake specific responsibilities during the audit, including:
- Reading the current plan documents
- Considering plan provisions in designing and performing audits
- Identifying which investment information is certified
- Providing detailed written communications with the plan sponsor, including management and anyone in governance, about the audit results, including any “reportable findings”
SAS 136 places particular emphasis on the auditors’ duties concerning “reportable findings,” which it defines as:
- Suspected or actual noncompliance with laws or regulations
- A significant finding from the audit that concerns those responsible for overseeing the financial reporting process
- Sufficiently important deficiencies in internal controls of which management is not already aware
Although many of the SAS 136 changes pertain only to the auditor’s duties, plan sponsors should be aware of these changes to avoid surprises. For example, plan sponsors may be more likely to receive specific communications in writing from the auditor than they would have in the past. Therefore, if you understand these changes, you should better know what to expect during the audit process.
HBL has experience in all areas of benefits and employment law, offering a comprehensive solution to all your business benefits and HR/employment needs. We help ensure you are in compliance with the complex requirements of ERISA and the IRS code, as well as those laws that impact you and your employees. Together, we reduce your exposure to potential legal or financial penalties. Learn more by calling 470-571-1007.
Hall Benefits Law, LLC
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