Each year the AICPA (American Institute of Certified Public Accountants) presents the Employee Benefit Plans Accounting, Auditing and Regulatory Update Conference, in Washington, D.C. As you would expect, the presentations are for accounting professionals engaged in auditing of employee benefit plans. However, the presentations gave indication of both the direction that the AICPA would like the accounting profession to take going forward, as well as by governmental officials that can foreshadow areas of regulatory interest in employee benefit plans. Some of the presentations indicated that administrative costs and complexity could increase.
Ian Dingwall, CPA, Chief Accountant at the U.S. Department of Labor, Employee Benefit Security Administration, first outlined challenges facing the Department of Labor (DOL), and followed up with the initiatives that are in progress.
The challenges and initiatives included:
- Management transitions effective January 20, 2017, with a new President, new Secretary of Labor, new Assistant Secretary and new Chief Accountant all assuming their roles and replacing the incumbents.
- Funding issues for pursuing initiatives, with a continuing resolution in place until April 28, 2017 (passed at expiration of December 9, 2016, resolution). New funding is not guaranteed.
- The EFAST 2 (automated electronic filing program) contract expires June 2020, with significant work required to prepare an updated replacement.
- A new Form 5500 is scheduled for 2019, with a draft copy already released for public comment.
- Audit quality issues continue to be a concern, and the DOL has suggested changes to improve quality.
- Fiduciary issues remain a concern, with the new fiduciary rule still being implemented.
The DOL’s management-transition issues, funding concerns, and EFAST 2 update problems may create uncertainties for plan sponsors because the outcome of those issues is not certain. However, there seemed to be agreement by both the DOL and the other conference presenters regarding the work to be done in addressing audit quality, updating the Form 5500, and concerns about fiduciary responsibilities.
Audit quality has been a focus of the conference for several years. In 2014, the DOL completed a study of audit quality. The conclusions were reviewed and confirmed by the AICPA in their own study in 2015. Both studies concluded that audit quality had to be improved. Four in 10 audits failed to meet professional standards (76% deficiency rate for firms doing two or fewer audits, 12% for those doing 100 or more). The fewer the audits performed, the higher the deficiency rate. Peer review alone was inadequate to correct deficiencies, and training for many CPAs was inadequate. Because of the poor overall results, you may remember the letter the DOL sent to plan sponsors suggesting that they review the quality of their audit work.
Several recommendations have been made because of the study, including enforcement activities and suggested changes to the independent audit process. If these recommendations are implemented, I would expect them to cause an increase in audit costs due to the additional work involved. The improvement process includes DOL enforcement efforts, the threat of penalties for noncompliance, and changes in the independent audit report requirements.
- Audit Quality Study Recommendations
- Increase enforcement process by case targeting and working with NASBA/AICPA Ethics Division when audit deficiencies are identified.
- Repeal limited-scope audit exception (This will increase the amount of audit testing required and could result in increased audit fees.).
- Authorize the DOL to set accounting standards and auditing principals for employee benefit plans (Presumably these will be more stringent than current standards.).
- Risks to Plan Sponsors for Noncompliance
- The DOL can, but so far has been reluctant to, reject a client’s Form 5500 filing due to deficient audit work (up to $50,000/day late-filing penalty).
- Those responsible for engaging the plan auditor whose work was rejected can be subject to fiduciary risk for lack of prudence in selecting a qualified CPA firm.
- Possible civil monetary penalties.
- Change the audit report requirements for independent auditors, including:
- Add key audit matters to the report (not just in management letter)
- Include in the audit report a discussion about compliance with plan provisions.
- Emphasize management’s responsibilities in ensuring plan compliance.
- Provide information on compliance and internal control material weaknesses and deficiencies in the audit report.
- Improve review of cybersecurity risks.
Updates to the Form 5500 for 2019 are now under review. In fact, the commentary period on the revised form ended on December 5, 2016. The proposed form is designed to provide the government and other interested parties with much more detailed information about employee benefit plans. One surprising comment was that there was no comprehensive database of information on employee benefit plans. Details regarding plan provisions are absent, and information regarding health and welfare plans (which would assist in evaluating Affordable Care Act compliance) is seriously deficient. I have concerns that the additional requirements will add to the complexity of the form and to the time required to complete a filing.
Highlights of the proposed changes to the Form 5500 include:
•Expanded reporting by the plan auditors regarding any errors or irregularities, internal control weaknesses, plan qualification issues, and disclosures regarding peer review of the auditor.
- Enhanced Schedule H reporting about alternative investments, hard-to-value assets, collective investment vehicles and direct filing entities.
- Provide more information about qualified default investment alternatives and other participant-directed options.
- More information around plan terminations, mergers and frozen plans.
- More questions for plans where the DOL, IRS or PBGC have found compliance issues.
- Schedule C to be revised to more closely match 408(b)(2) disclosures, and attachments regarding 404(a)(5) comparisons.
- All group health plans would have to provide claims payment data and identify key service providers, and all group health plans, whether funded, unfunded or insured, would be subject to filing at least some portions of the Form 5500. In addition, information to support reporting requirements under the Affordable Care Act would be added.
- Expanded information regarding ESOPs would be required.
And finally, with all the current discussions about changing the fiduciary rule, it is no surprise that there was a discussion at the conference about fiduciary responsibilities and what the auditor should consider when conducting the audit.
Expect the auditor to consider:
- Who are the fiduciaries?
- Do the fiduciaries properly understand their responsibilities?
- Do they have ongoing fiduciary training?
- Documentation is critical. Are all decisions memorialized in minutes?
- Do the fiduciaries carefully follow the plan document? Be sure that all plan records are retained, and carefully monitor all changes and updates.
- Do fiduciaries understand the fees paid by the plan, and are they reasonable?
- Has an Investment Policy Statement been prepared, and is it followed?
- Carefully monitor employer stock in any plan since this can be a big risk.
The changes discussed above can all have an impact on the complexity of employee benefit plan administration and, therefore, the cost of administration. However, these proposed changes are somewhat independent of the political administration and even the management at the DOL or IRS. All of them seem to have the support of the accounting profession. All are focused on the safety and security of benefits promised to employees. As such, I think that these changes should be part of our planning process for the next few years.
Lawrence Peters is a Senior Consultant at Westminster Consulting, LLC.
He can be reached at firstname.lastname@example.org or 585.246.3750.