Compliance April 22, 2011

Limited Scope Audits Misunderstood by Some

The 2010 ERISA Advisory Council found that deficiencies in limited scope audits of retirement plans may be due to some misunderstandings.
Reported by

In its report, “Employee Benefit Plan Auditing and Financial Reporting Models,” the Council explained that with the Employee Retirement Income Security Act’s authorization of the limited scope audit, a plan administrator may choose to have the plan audited in a manner that would not otherwise be consistent with Generally Accepted Accounting Standards (GAAS).

The limited scope audit allows plan administrators to instruct the auditor not to perform any auditing procedures with respect to investment information prepared and certified by a bank or similar institution or by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency and that holds plan assets. Proper certifications must address both the accuracy and the completeness of the information submitted. 

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

Concerns were raised by those that testified before the Council that limited scope audits are not well understood by some users, and perhaps misunderstood by some auditors as well, and that they might be employed in inappropriate situations.   

The report said potential misunderstandings relate to: 

  • What is covered by a limited scope audit
  • What entities can offer asset certifications 
  • The significance of the certifications with regard to asset valuation and the audit
  • What is the importance of a limited scope audit

The Council concluded that the limited scope audit should not be repealed, but the quality of the limited scope audits and the required certifications should be reinforced and strengthened. The primary rationale for the Council's conclusion that the limited scope audit should not be repealed was a deficiency of specific material evidence of participant harm caused by limited scope audits and the concern for possible increased costs that could result from a full scope audit.  

Witnesses expressed concern about entities – such as retirement plan recordkeepers – that issue limited scope certifications, but who in reality might not be the kinds of entities that should issue certifications.  

The Council recommended that: 

  • The Department of Labor should clarify the kinds of entities that are qualified to issue certifications under existing regulations and guidance and reiterate that only qualified entities may issue certifications; 
  • The Department should amend the limited scope audit regulations to require that the certification of investment information include a disclaimer that investment values may not have been subject to independent verification of fair value by the certifier; 
  • The Department should require plan administrators to include any certification issued in connection with a limited scope audit in the plan's Form 5500 filing or other annual report; and 
  • The Department should issue informal education materials targeted to plan sponsors and plan auditors that would assist them in understanding their respective obligations with respect to limited scope audits. 
The Council’s report is here.
Compliance April 22, 2011

Group Offers Recommendations for Retirement Plan Audits

The 2010 ERISA Advisory Council found significant problems with retirement plan audit quality, auditor quality, or both.
Reported by

In its report, “Employee Benefit Plan Auditing and Financial Reporting Models,” the Council said that the problems are not lack of adequate codification of practices, but rather a failure by auditors to understand or follow established practices and requirements.  

Ian Dingwall, Chief Accountant for the Office of the Chief Accountant (OCA) for the Employee Benefits Security Administration (EBSA) of the Department of Labor (DoL) testified before the Council, citing four problem areas that lead to most audit failures, which are:

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

  • Inadequate technical training and knowledge
  • Lack of awareness of the nature of employee benefit plans
  • Lack of quality control on audit processes
  • A failure to understand the limited scope audit requirements

The ERISA Advisory Council noted that the American Institute of Certified Public Accountants (AICPA) provides guidance on how audits for employee benefit plans are to be conducted. Therefore, because a lack of guidance does not appear to be an issue, the Council concluded that auditor training and a failure to allocated adequate auditor/firm resources are leading causes.  

In addition, the report noted that Paul Beswick, Deputy Chief Accountant for Office of the Chief Accountant of the Securities and Exchange Commission (SEC) testified that “confidence in the reliability of audited financial statements depends upon the public perception of the outside auditor as a competent and independent professional.” He stated that for this reason the SEC “imposes strict standards of conduct on auditors who practice before the [SEC],” and also noted that the SEC established the Public Company Accounting Oversight Board (PCAOB). 

The DoL also discussed problems it faces when attempting to enforce auditor quality. Auditors are licensed by the states. The AICPA provides guidance on approved practice for audits, but it is a voluntary membership organization. Not all auditors licensed by the states are members of the AICPA.   

The DoL has no authority to discipline or sanction auditors. It works cooperatively with the AICPA and state authorities to report problem audits, but there is no assurance that this will prevent or obviate further issues with the auditor or remedy a defective audit. Moreover, states are not compelled to take action when the DoL reports problems with an auditor. The DoL can, generally, impose a penalty on the plan administrator for the auditor's failure to comply with Generally Accepted Accounting Standards (GAAS).   

One of the Council's general recommendations is that the DoL establish a task force to work with the AICPA and other stakeholders on audit matters, and a second general recommendation urges the DoL to engage in a study of quality and promotion of quality.  

The Council also recommended: 

  • The Department should require plan administrators to identify on the Form 5500, or other annual report, whether or not the plan auditor is a member of the AICPA Employee Benefit Plan Audit Quality Center.
  • The Department should establish a fiduciary safe harbor in the initial selection of plan auditors who are members of the AICPA Employee Benefit Plan Audit Quality Center. 
The Council’s report is here.

«