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2. EBPAQC Live Forum403(b) Plan Audits UpdateJune 10, 2010 ?. 3. Panelists. Marilee LauMarilee Lau CPABob LavenbergBDO Seidman LLPDebbie SmithGrant Thornton LLP. Tim DesmondO'Connor Davies Munns
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2. 2 EBPAQC Live Forum
403(b) Plan Audits
Update
June 10, 2010
3. 3 Panelists
Marilee Lau
Marilee Lau CPA
Bob Lavenberg
BDO Seidman LLP
Debbie Smith
Grant Thornton LLP
Tim Desmond
O’Connor Davies Munns & Dobbins LLP
Lynne McMennamin
McGladrey & Pullen LLP
4. CPE Credit For Participating Must have registered for CPE credit prior to this live forum
CPE Credit Approval Form posted on webinar instruction site
Listen for announcement of 4 CPE codes (7 digits: ALL_ _ _ _ ) and 4 polling questions during the live forum
Record CPE Codes on CPE Credit Approval Form (no need to record polling questions)
Return completed form (by fax or mail) to AICPA Service Center for record of attendance
Keep a copy of completed CPE Credit Approval Form for your records
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5. Introduction
Marilee Lau, CPA
Chair
EBPAQC Executive Committee 5
6. 6 Objectives Available 403(b) plan audit resources
General considerations- client acceptance, fees, opening balances, etc.
Impact of reporting relief in DOL Field Assistance Bulletins 2009-02 and 2010-01
Impact of DOL Advisory Opinion 2010-10A on reporting certain insurance contracts
Initial audit considerations- engagement letter, special audit considerations
Financial statements and disclosures
Audit reports
SAS 115 communications
AICPA FAQs on 403(b) Plan Audits
Questions and answers
7. Previous EBPAQC 403(b) Plan Audits Live Forum- November 6, 2008
basic understanding of 403(b) plans
similarities to and differences from 401(k) plans
which plans are ERISA-covered
new DOL reporting and audit requirements
implementation issues
initial steps to take
EBPAQC members can listen to the archived event and view the presentation materials at the EBPAQC web site.
403(b) Plan Audit Resources
8. EBPAQC 403(b) Plan Audit Resource Center
On the EBPAQC web site
403(b) Plans Primer
403(b) Filing and Audit Requirements
403(b) Getting Started: Meeting the New Form 5500 Reporting and Audit Requirements
403(b) Questions to Expect from Your Plan Auditor
403(b) Sample Auditor Request List for Plan Information
403(b) Retirement Plan Audits-Frequently Asked Questions
Share these with your plan clients!
403(b) Plan Audit Resources
9. AICPA Audit Risk Alert Employee Benefit Plans Industry Developments – 2010 (Audit Risk Alert)
overview of 403(b) plans
pertinent Internal Revenue Service (IRS) regulations
Department of Labor's (DOL) Field Assistance Bulletins related to 403(b) enforcement relief
significant differences between 401(k) plans and 403(b) plans
client acceptance and continuance
engagement letter
initial audit considerations
example audit reports
Available at AICPA Store at CPA2Biz.com
403(b) Plan Audit Resources
10. U. S. Department of Labor
DOL EBSA 403(b) Website- http://www.dol.gov/ebsa/403b.html
Employee Benefit Security Administration's (EBSA) toll-free Form 5500 help desk is available from 8:00 am to 8:00 pm, Eastern Time, at 1-866-GO-EFAST (866-463-3278)
Questions concerning the information contained in the Field Assistance Bulletins may be directed to the DOL's Division of Coverage, Reporting and Disclosure at 202-693-8523
Questions concerning individual plans facing specific transition issues should be directed to EBSA's Office of the Chief Accountant at 202-693-8360
403(b) Plan Audit Resources
11. Internal Revenue Services (IRS)
IRS Web site on IRC 403(b) Tax-Sheltered Annuity Plans at http://www.irs.gov/retirement/article/0,,id=172430,00.html
IRS Publication 571 Tax-Sheltered Annuity Plans (403(b) Plans) (Rev. November 2007) Cat. No. 46581C http://www.irs.gov/pub/irs-pdf/p571.pdf Other IRS Publications:
Pub. 4482, 403(b) Tax-Sheltered Annuity for Participants
Pub. 4483, 403(b) Tax-Sheltered Annuity Plan for Sponsor
Pub. 4484, Choose a retirement plan for employees of tax-exempt and government entities (schools, hospitals, churches, charities)
Pub. 4530, Designated Roth Accounts under a 401(k) or 403(b) Plan
Pub. 4546, 403(b) Plan Checklist
Pub. 4547, Have you had your check-up this year? for 403(b) Retirement Plans 403(b) Plan Audit Resources
12. General Considerations and DOL Reporting Relief Bob Lavenberg, CPA
Partner
BDO Seidman LLP
Chair
AICPA 403(b) Plan Audit Joint Task Force
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13. Universal availability
Vendors
Custodial accounts
90-24 transfer
Excludable contracts 403(b) Plan Environment
14. Considerations Relating to Client Acceptance, Fees, Opening Balances Vendors
How many now
Any others in the past
Internal controls
Historical records
90-24 transfers
History of Plan
Age of Plan
Organizational Factors
Tone at the top
Attitude towards compliance
Internal controls
Historical records
Vendors and vendor selection
Dedicated staff – not just how many – but who
Budget – internal & external
Understanding/attitude about audit opinion
15. Field Assistance Bulletin (FAB) 2009-02 DOL FAB 2009-02 allows the plan administrator to exclude certain pre-January 1, 2009 annuity contracts and custodial accounts for ERISA reporting purposes. Must meet all of these criteria:
the contract or account was issued to a current or former employee before January 1, 2009;
the employer ceased to have any obligation to make contributions (including employee salary reduction contributions), and in fact ceased making contributions to the contract or account before January 1, 2009;
all of the rights and benefits under the contract or account are legally enforceable against the insurer or custodian by the individual owner of the contract or account without any involvement by the employer; and
the individual owner of the contract is fully vested in the contract or account.
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16. FAB 2009-02 (CONT) The plan sponsor will need to ensure that the four criteria have been met in order for them to be properly excluded
The FAB allows but does not require that contracts and/or accounts be excluded
Contracts/accounts that do not meet all of the four criteria may not be excluded
Contracts/accounts that are excludable under the FAB may also be excluded from the comparative (2008) financial statements included in the 2009 Form 5500
17. FAB 2009-02 (CONT) DOL’s expectation is for a “good faith” effort to comply with the ERISA annual reporting requirements
Some vendors will not be in a position to exclude contract or account information that meets the criteria
The FAB applies to both large and small plans
The FAB also applies to years beyond 2009
Current or former employees with contracts excludable under this relief are not counted as participants
Note: This does not change the IRS’s Universal Availability Rule
18. FAB 2009-02- Auditor considerations If plan sponsor elects to exclude certain pre-2009 contracts or accounts…
Need to consider
Effect on completeness of the financial statement presentation
Effect of restrictions on the scope of the audit
Some sponsors may not find a qualified, adverse or disclaimer of opinion acceptable
19. FAB 2009-02- Auditor considerations Will likely have to issue a modified audit report
Scope limitation
GAAP departure
Or both!
DOL will not reject a 403(b) plan Form 5500 on the basis of a qualified, adverse or disclaimed opinion if the accountant expressly states that the sole reason for such an opinion was because such pre-2009 contracts and accounts were not covered by the audit or included in the plan’s financial statements
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20. FAB 2009-02- Auditor considerations ERISA and DOL regulations require the audit to be performed in accordance with Generally Accepted Auditing Standards (GAAS) – requiring all plan assets to be reported
Need to audit the information that is available
Cannot limit test work because of a scope limitation or because a modified report (disclaimer, adverse, etc.) will be issued
Regardless of the type of opinion issued,
the auditor is still required to complete all other GAAS audit procedures (e.g.- contributions, distributions, etc.) Page 20
21. FAB 2010-01, Annual Reporting and ERISA Coverage for 403(b) Plans Issued February 17, 2010
Provides additional guidance in a Frequently Asked Questions (FAQ) format
Confirms that if, as a result of applying FAB 2009-02, the number of eligible participants is below 100, then the plan becomes a small filer
Affirmed that the limited scope exemption is available, but make sure that all requirements are met and that properly certified statements are obtained from all vendors
Acknowledged that the inability of the auditors to obtain sufficient evidence is a restriction on scope of audit, and opinion may be modified accordingly 21
22. FAB 2010-01 (CONT) States that if, as part of the audit the auditor was engaged to perform, the auditor discovers that contracts were incorrectly excluded under DOL FAB 2009-02 from the plan’s financial statements, the DOL expects that the auditor will alert the plan administrator.
Plan administrators have an obligation to take reasonable steps to resolve questions concerning the exclusion of such contracts in their annual report.
If the plan administrator and auditor do not agree with how to resolve issues relating to excluded contracts, the DOL expects these issues to be noted in the audit report. 22
23. DOL Advisory Opinion and Initial Audit Considerations
Debbie Smith, CPA
Partner
Grant Thornton LLP
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24. DOL Advisory Opinion (AO) 2010-10A Issued March 4, 2010- Addresses Traditional Annuities issued by TIAA-CREF
Allocated vs. Unallocated insurance contracts?
DOL concluded the contracts are UNALLOCATED
For plan years beginning on or after 1/1/09 must be reported as plan assets on the Form 5500
DOL will not reject (or require amended) Form 5500 for plan years ending in 2008 or prior which contain a modified opinion due to exclusion of these contracts from plan assets
What about similar contracts with other insurance companies?
25. 25 DOL Advisory Opinion (AO) 2010-10A-Audit/5500 Considerations Depends on facts and circumstances
Financial Statements
Could be an error
May require restatement of financial statements
Modified opinion
Reconciliation to the 5500
Form 5500
Will not have to restate or amend
Treat the contracts as a transfer in for the 2009 Schedule H
26. 26 Allocated ContractsEmerging Technical Issues FASB Definition (FASB Codification Master Glossary)-
A contract in which an insurance entity unconditionally undertakes a legal obligation to provide specified pension benefits to specific individuals in return for a fixed consideration or premium. An annuity contract is irrevocable and involves the transfer of significant risk from the employer to the insurance entity.
Allocated=not recognized as a plan asset Unallocated=recognized as a plan asset
Read insurance contracts and supporting documentation to determine appropriate classification of the contract
27. Initial Audit Considerations Engagement letter
Scope of services
Any client-imposed scope restrictions?
Excluded contracts per DOL FAB?
Limited scope audit under 29 CFR 2520.103-8?
Auditor responsibility for prior year (comparative) statement of net assets available for benefits?
Audit, review, compilation?
28. Initial Audit Considerations Make inquires of the plan administrator and outside service providers, as applicable, regarding the plan’s operations during those earlier years
Obtain relevant information (for example, plan and /or participant level statements, recordkeeping reports, reconciliations, minutes of meetings, and SAS No. 70 reports) for earlier years, as applicable, to determine whether any errors were noted during those years that could have a material effect on current year balances
Gain an understanding of the accounting practices that were followed in prior years to determine that they have been consistently applied in the current year
29. Initial Audit Considerations- Comparative Statements of Net Assets Comparative statements of net assets available for benefits required by ERISA
Apply procedures that are practicable and reasonable in the circumstances to obtain assurance that the accounting principles used by the plan in the current and the preceding year are consistent
See paragraphs .24–.25 of AU section 420, Consistency of Application of Generally Accepted Accounting Principles (AICPA, Professional Standards, vol. 1), for further guidance
30. Initial Audit Considerations-Risk Assessment Procedures Need to perform procedures over the completeness and accuracy of participant level information
Assets are not held in “trust” but in individual annuity contracts or custodial accounts rather than in the plan’s name
Risk assessment may need to consider condition of records and internal controls over multiple vendors
Planning the nature, timing, and extent of further audit procedures depends on the outcome of the auditors risk assessment procedures.
See paragraph .42 of the 2010 EBP Audit Risk Alert
31. Initial Audit Considerations-Areas of Special Consideration
32. Numerous Audit Risk Factors Size of plan and number of years in existence
Adequacy and organization of critical plan documents
Incomplete or missing records (participant data, payroll, etc.)
Disaggregation and completeness of recordkeeping information
Identifying all current and former participant accounts to be included as plan assets
“Missing” participants
“Orphan” contracts
Multiple service provider concerns
Adequacy of internal controls
Fiduciary oversight
Availability of SAS No. 70 reports
Monitoring controls
Regulatory compliance matters
Investment valuation and reporting
Fraud risks
33. Typical Compliance Issues Late deposit of participant deferrals & loan repayments
Failure to properly apply plan’s definition of compensation
Failure to update plan document
Failure to follow plan’s eligibility provisions
Incorrect employer contributions
Failure to properly apply plan’s vesting provisions
Improper use of plan forfeitures
Failure to comply with Form 5500 filing requirements
34. Financial Statements and Disclosures Tim Desmond, Partner
O’Connor Davies
Munns & Dobbins 34
35. 403(b) Financial Statements and Disclosures 403(b) plans are considered a type of defined contribution plan.
2010 EBP Audit Risk Alert notes that the financial statements and disclosures would be similar to those described in chapter 3 (and appendix E) of the AICPA Audit and Accounting Guide Employee Benefit Plans.
Comparative Statement of Net Assets Available for Benefits (2009/2008)
Current year Statement of Changes in Net Assets Available for Benefits
Similar disclosures as for a 401(k) plan
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36. 403(b) Financial Statements and Disclosures 403(b) plans would make all of the appropriate footnote disclosures that apply to 401(k) plans (e.g.- FASB ASC 820 investment fair values, insurance contracts, etc.)
Consideration should be given concerning which disclosures may need to be modified or added.
For example, the general description of the plan, eligibility requirements, funding, and tax status should reflect the requirements of the 403(b) plan document.
Note: The IRS has not yet established a process for issuing determination and opinion letters for 403(b) plans
Additional or modified disclosures of the accounting policies surrounding the accounting treatment of certain contracts under DOL FAB 2009-02 may be necessary
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37. 37 403(b) Financial Statements and Disclosures “Loans to participants” vs. “Participant loans”
Loans to participants are made by the vendor and are secured by the participant’s individual account balance (plan assets)
Participant loans are made by the plan
Loans to participants are not currently on the plan’s financial statements or the Form 5500
Need to consider additional disclosure in the footnotes of collateralized plan assets
DOL is considering additional guidance
Stay tuned!
38. Auditor Reports
Marilee Lau, CPA 38
39. 39 Auditor Reports What type of audit report will be issued?
Depends on the auditor’s professional judgment
Whether sufficient appropriate audit evidence has been obtained to form an opinion
Could be unqualified, qualified, adverse or disclaimer of opinion
Authoritative guidance
AU section 508, Reports on Audited Financial Statements
AU Section 551, Reporting on Information Accompanying the Basic Financial Statements in Auditor-Submitted Documents
40. Auditor Reports Many reports will be disclaimers
Not limited-scope disclaimers as permitted by 29 CFR 2520.103.8
“Real” disclaimers
Concerns over completeness of reported information
Can excluded contracts that are “excludable” under the FAB be quantified?
Are the “excludable” contracts material to the financial statements
Not auditing their “good faith effort”
Other anticipated scope restrictions (records issues, certified investment information, etc.)
41. 41 Auditor Reports The limited scope audit opinion allowed by the DOL under 29 CFR 2520.103-8 may not be appropriate
Opinion on the supplemental schedules would be the same opinion as for the report—reference to compliance with the DOL’s rules and regulations as to form and content would not be appropriate
42. 42 Auditor Reports Fact Pattern #1
The plan administrator is not able to determine the amount or materiality of the excluded assets due to the lack of records
Disclaimer of opinion
Example opinions based on specific fact patterns when contracts or accounts are excluded as permitted by DOL FAB 2009-2
43. Illustrative Auditor Report- Fact Pattern #1- Disclaimer of Opinion 43
44. 44 Auditor Reports Fact Pattern #2
Plan administrator has elected the limited scope audit exemption and has also elected to exclude certain contracts and accounts. The amounts of the excluded contracts or accounts are determinable and are material.
Disclaimer of opinion
Example opinions based on specific fact patterns when contracts or accounts are excluded as permitted by DOL FAB 2009-2
45. Illustrative Auditor Report- Fact Pattern #2- Limited Scope Disclaimer of Opinion 45
46. 46 Auditor Reports Fact Pattern #3
Amounts of excluded assets are determinable and material to the financial statements
Adverse opinion
Example opinions based on specific fact patterns when contracts or accounts are excluded as permitted by DOL FAB 2009-2
47. Illustrative Auditor Report- Fact Pattern #3- Adverse Opinion 47
48. SAS 115 Communications and AICPA 403(b) Plan Audit FAQs Lynne McMennamin
McGladrey & Pullen, LLP 48
49. SAS 115 Communications Material weaknesses and significant deficiencies?
Oversight of the financial reporting process
Internal control over financial statement preparation and review
Financial statement knowledge
Missing records
Monitoring active/inactive accounts
50. AICPA 403(b) Retirement Plan Audits- Frequently Asked Questions (FAQs) 12 FAQs issued in March 2010 (EBPAQC EAlert # 200)
FAQs emphasize that ERISA requires plan auditors to follow professional standards and report on whether the plan's financial statements are consistent with generally accepted accounting principles (GAAP), even though the DOL enforcement relief allows plans to exclude contracts and accounts that meet the FAB criteria
FAQs also discuss:
client-imposed audit scope restrictions
initial audit procedures on beginning of year balances
audit procedures applied to comparative statements of net assets available for benefits
insufficient historical records
audit report modifications
plan investment fair value measurement
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51. AICPA 403(b) Retirement Plan Audits- Frequently Asked Questions (FAQs) FAQs should be considered in light of the particular facts and circumstance of each plan
Several factors can affect the scope of the audit, audit procedures performed, and the form of the auditor’s report, including, but not limited to
whether the plan administrator excludes contracts and accounts from the plan’s financial statements that meet the requirements of FAB 2009-02,
whether the plan administrator elects the limited scope audit exemption in accordance with ERISA,
whether historical records exist and are available for reported contracts and accounts, and
whether the plan has one or multiple vendors during the existence of the plan.
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52. 403(b) Retirement Plan Audits- Frequently Asked Questions (FAQs)
1. Does the DOL enforcement relief change the requirement to have an independent audit of the plan’s financial statements?
2. Does the DOL enforcement relief change the auditor’s responsibility to perform a financial statement audit?
3. Can the plan administrator of a 403(b) plan elect the limited scope audit exemption in accordance with DOL regulation 29 CFR 2520.103-8?
4. If the plan administrator excludes some contracts or accounts from the plan’s financial statements that meet the requirements of FAB 2009-02, and the plan administrator elects the limited scope audit exemption as permitted by DOL regulation 29 CFR 2520.103-8, what is the impact on the auditor’s report?
5. Generally, what initial audit procedures would the auditor perform on the beginning of year (e.g. – January 1, 2009) contract and accounts?
6. What procedures does the auditor need to apply to the comparative statements of net assets available for benefits?
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53. 403(b) Retirement Plan Audits- Frequently Asked Questions (FAQs) 7. What if historical records do not exist or are not available for reported contracts and accounts?
8. If the plan receives a modified auditor’s report in the first year, will the auditor be able to issue an unqualified opinion in subsequent years?
9. If the plan administrator excludes some contracts or accounts from the plan’s financial statements that meet the requirements of FAB 2009-02, or if the plan has inadequate historical records for reported contracts and accounts, what impact will these circumstances have on the auditor’s communications with those charged with plan governance?
10. Are there financial statement disclosure requirements if the plan administrator excludes contracts or accounts from the plan’s financial statements that meet the requirements of FAB 2009-02?
11. Who is responsible for determining the value of plan investments?
12. What if fair value of investments is not or cannot be estimated?
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54. 54 Question & Answer Session
55. 55 Question # 1
56. 56 Question # 2
57. 57 Question # 3
58. 58 Question # 4
59. 59 Question # 5
60. 60 Question # 6
61. 61 Question # 7
62. 62 Question # 8
63. 63 Question # 9
64. 64 Question & Answer Session
65. 65 AICPA 403(b) Plan Audit Training ERISA 403(b) Audit Issues
100 minute audio course based on the highly rated session from the AICPA National Conference on Employee Benefit Plans.
403(b) Plans -- DOL and IRS Compliance
100 minute audio course is based on the highly rated session from the AICPA National Conference on Employee Benefit Plans.
Best of AICPA National Conference on Employee Benefit Plans: 403(b) Update –
300 minute Conference On-Demand is a collection of conference highlights
Coming soon! Audits of 403(b) Plans: A Challenging New Audit Area
(Text Available June 15, 2010; DVD/Manual and On-Demand format available July 5, 2010)
Available at AICPA Store at CPA2Biz.com
66. 66 Coming Events Mark Your Calendars! Future EBPAQC Live Forum webinar:
Insurance Contracts- July 21, 2010
Upcoming AICPA Conferences:
December 13-14, 2010, EBP Accounting, Auditing and Regulatory Update, Omni Shoreham Hotel, Washington, DC
May 2-4 2011, National Conference on Employee Benefit Plans, Aria, Las Vegas, NV
67. 67 Wrap Up
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