5. Overseeing Managing Plan Audits Flashcards
The FASB issued the FASB Accounting Standards Codification (ASC) as the single source of authoritative, nongov, U.S. GAAP. The Codification is updated through the issuances of FASB Accounting Standards Updates. What are the purposes of these ASUs?
FASB doesn’t consider ASUS as authoritative in their own right. Instead, new ASUs serve only to update the Codification and provide background info about the guidance.
Explain how the Codification treats the accounting and reporting standards for EBP in the topic: FASB ASC 960, Plan Accounting - Defined Benefit Pension Plans
Establishes the accounting and financial reporting standards for defined benefit retirement plans
Explain how the Codification treats the accounting and reporting standards for EBP in the topic: FASB ASC 962, Plan Accounting - Defined Contribution Plans
Includes the accounting & fin reporting standards for defined contribution retirement plans
Explain how the Codification treats the accounting and reporting standards for EBP in the topic: FASB ASC 965, Plan Accounting - Health and Welfare Benefit Plans
Provides the accounting and financial reporting standards for HWBPs.
Explain the purpose of ASC Topic 960
Establishes financial accounting and reporting standards for the annual fin statements of defined benefit pension plans. FASB believes ASC Topic 960 is generally consistent with the views of the DOL and the American Academy of Actuaries. This means that most private pension plans will be able to prepare 1 set of fin statements in accordance with ASC Topic 960 for filings under ERISA and for distribution to other users.
ASC Topic 960 applies to which plans?
All ongoing plans, funded/unfunded, that provide pension benefits for the EEs of 1+ ERs or for the members of a trade or other EE ass’n, including:
1. Plans subject to ERISA
2. Plans not subject to ERISA
3. Plans w/ no intermediary funding agency, or plans that may be financed through 1. One or more trust funds, 2. One or more contracts with insurance entities or 3. A combo thereof
Plans maintained ex-US that are similar to plans maintained within US are also subject to these rules if the fin statements of such plans are intended to conform to GAAP.
ASC Topic 960 doesn’t apply to gov’t-sponsored SS plans.
All pension plans that issue fin statements in conformity with GAAP, including plans with <100 participants, are covered by ASC Topic 960.
Summarize (5 points) the accounting and reporting reqs of ASC Topic 960
- The plan fin statements should be prepared on the accrual basis of accounting and should include a statement of net assets available for benefits as of the EOPY and a statement of changes in net assets available for benefits for the PY then ended.
- Plan investments should be presented at their fair value, except for insurance contracts, which should be presented in the same manner as req’d for ERISA filing (i.e., fair value or contract value).
- Info should be included about a) the actuarial present value of accumulated plan benefits and b) significant changes therein
- Accumulated plan Ben info may be disclosed in one of 3 places: 1. On the face of the statement of net assets available for bens and on changes in net assets available for bens; 2. In separate statements, or; 3. In the notes to the fin statements
- The actuarial present value of accumulated plan bens should be based on EE earnings & service rendered before the measurement date. Plan actuaries shouldn’t consider future sal increases or Ben improvements unless they’re specified (e.g., automatic COLA).
Although ASC Topic 960 doesn’t identify any one group as the primary users of plan fin statements, the content of them should focus on the needs of ____; why are its needs paramount?
Plan participants, because pension plans exist primarily for their benefit.
However, plan fin statements should be useful to others who:
1. Advise or represent participants
2. Are current/potential investors or creditors of the ER
3. Are responsible for funding the plan, or
4. For other reasons have a derived/indirect interest in the status of the plan
Does ASC Topic 960 require fin statements that compare more than one year’s info? Explain?
No. It recommends, but doesn’t require, supplementing the fin statements with voluntary disclosures of matters deemed important.
Even though the primary objective of pension plan fin statements is to provide info that helps users assess the plan’s present/future ability to pay benefits, Topic 960 doesn’t require comparative fin statements.
List supplements info that FASB recommends be included in the annual fin statements of a plan
Recommends, but doesn’t require, supplementing w vol disclosures of matters deemed important, including:
1. Statement that includes info re: net assets available for benefits as of EOPY
2. Statement includes info re: changes during the year in net assets available for bens
3. Info re: actuarial present value of accumulated plan bens as of either beginning of EOPY
4. Info re: effects, if significant, of certain factors affecting the YOY change in actuarial present value of accumulated plan bens
DOL can assess significant penalties if a required auditor report for a qualified EBP is missing/deficient. What’s the amount of penalty, and on whom is it levied?
Up to $1,100 per day, capped at $50k per annual Form 5500, on plan sponsor.
How has the level of significant deficiencies in plan audits changed in recent years? Explain?
Despite the efforts of the DOL EE Benefits Security Administration Office of Chief Accountant to work closely with the Am Institute of CPAs to oversee the quality of EBP audits performed by CPAs, the level of significant deficiencies in plan audits has continued to increase.
What were the results of the 2014 DOL audit quality study?
Showed that nearly 4/10 EBP audits had “Unacceptable-Major” deficiencies that adversely affected overall audit quality and that the remaining plan audits either implied with pro audit standards or had minor deficiencies.
What is the EBPAQC? Is there any evidence this entity has any effect on the quality of plan audits?
AICPA established the EE Benefit Plan Audit Quality Cnter after the 2004 audit quality study. It is a voluntary membership org for firms that perform EBP audits. Its purpose is to promote the quality of plan audits.
EBPAQC has several membership reqs related to experience, education, and audit firm quality control. Although the 2014 EBPAQC study found that members of EBPAQC perform higher-quality audits, one or more GAA Standards deficiencies were found in 30% of audits performed by member firms. Nonmembers of EBPAQC had an 82% GAAS deficiency rate and also tended to have substantially more deficiencies, ranging to as many as 15 major deficiencies in a single audit engagement.
EBSA (the DOL EE Bens Sec Admin) has conducted studies to determine which factors have an impact on the quality of EBP audits. What have these studies shown about the relationship between audit quality and a CPA firm’s peer review rating?
CPA firm EBP audits are reviewed as part of the AICPA practice-monitoring peer review program. EBSA concluded that a CPA firm’s peer review rating had little bearing on the firm’s plan audit compliance. In one study, 48% of deficient plan audits were performed by CPA firms with “clean” peer review reports.
EBSA (the DOL EE Bens Sec Admin) has conducted studies to determine which factors have an impact on the quality of EBP audits. What have these studies shown about the relationship between audit quality and the number of audits performed each year by the CPA firm?
Based on audit quality results in each of six strata, EBSA concluded that audit firms that perform a smaller number of EBP audits each year tend to have a greater incidence of audit deficiencies.
This finding is consistent with the result of previous EBSA audit quality studies.
What penalties against CPA firms that perform deficient plan audits are available through ERISA? Explain?
While EBSA can reject a plan’s annual Form 5500 filing and assess civil penalties against the plan sponsor until plan audit deficiencies are remediated, ERISA currently provides EBSA no enforcement power to assess civil penalties against CPA firms performing deficient audits.
EBSA has found numerous audit cases where no audit work was performed, or where there was a lack of evidence of work performed. What are signs a plan sponsor should look for to see that audit work is, actually, being performed on the plan>
If the auditor isn’t making inquiries to understand how the plan operates and isn’t asking to see plan sponsor records to complete audit testing, there’s a good chance the audit work is deficient.
The plan sponsor should realize:
1. The plan sponsor must be involved in internal control and fraud inquiries for the audit firm to properly plan the audit.
- The audit testing that occurs during the fieldwork phase cannot be completed without records maintained by the company: personnel files, payroll records, deferral elections, Ben payments, participant loan pkgs…
- The fin statements can’t be completed without the involvement of the plan admin, who will ultimately sign the mgmt representation letter to take responsibility for the plan’s fin reporting.