John Russon, CPA Audit Partner, CNM LLP

Transcription

1 PENSION PLAN AUDITS HOW TO PREPARE AND WHAT TO EXPECT John Russon, CPA, Audit Partner, CNM LLP John Russon, CPA Audit Partner, CNM LLP John Russon has 13 years of related accounting and audit experience, ranging from private industry accounting for a global company to public accounting for both ""Big Four"" and local CPA firms. John's experience includes accounting and audit services such as audits, reviews, and compilations as well as other consulting services.

2 John Russon, CPA Audit Partner, CNM LLP Since 2005 John has dedicated all of his time to employee benefit plan audit services. Over the last seven years while at CNM LLP, John has built one of the fastest growing employee benefit plan audit practices in Southern California currently performing audits for over 100 benefit plans. John graduated with honors with a B.S. in Accounting from the California State University, Northridge. He is a Certified Public Accountant and a member of the National Institute of Pension Administrators. John lives in Thousand Oaks with his wife and four kids. SPEAKER INTRODUCTION Warner Center Lane, Suite 140 Woodland Hills, CA John Russon, CPA Partner-in-charge of the Employee Benefit Plan Audit Practice Audited approximately 110 plans during 2013 Member of the AICPA Employee Benefit Plan Audit Quality Center

3 PENSION PLAN AUDITS HOW TO PREPARE AND WHAT TO EXPECT Audit requirement and scope How best to prepare / assist a client for an audit SSAE 16 reports (formerly SAS 70) What to expect during the audit process Handling discrepancies between the Schedule H and audited financial statements WHO S AUDITING PLANS?

4 AUDIT REQUIREMENT Why Do Plans Need an Audit? 1. Title I of ERISA requires that plans with more than 100 participants be audited by an Independent Qualified Public Accountant a) Schedule H b) 80/120 rule c) Schedule I, line 4k i. Yes indicates that the plan is claiming a waiver under 29 CFR At least 95% of plan assets are qualifying plan assets or are covered by a fidelity bond ii. No the plan is subject to an audit (but still files Schedule I) SCOPE OF THE AUDIT Full Scope Audits 1. The auditor intends to issue an unqualified opinion and will subject all balances and transactions to auditing procedures a) Recalculate and confirm ending investment balances b) Recalculate earnings on investments to ensure accuracy c) Document internal controls around investments and investment activity i. Typically this will be covered in the SSAE A full scope audit is performed when the plan s assets are not held at a qualified institution or it is an 11-k filer 3. Box 3a on the Form 5500 Schedule H should be marked (1) Unqualified

5 SCOPE OF THE AUDIT Limited Scope Audits 1. The auditor intends to disclaim an opinion and will limit the scope of audit work performed on certain balances and transactions 2. Custodians holding plan assets at qualified institutions can issue a certification letter or complete and accurate certification. Under Title 29 of the Code of Federal Regulations , plan sponsors are permitted to direct auditors to limit the scope of audit work around balances held by and transactions initiated by these institutions 3. The SSAE 16 report does not permit an auditor to perform a limited scope audit SCOPE OF THE AUDIT Limited Scope Audits 4. What constitutes a qualified institution? a) A bank, trust company or similar institution regulated and supervised and subject to periodic examination by a State or Federal regulatory agency b) An insurance carrier subject to period examination by a State regulatory agency c) Not a brokerage firm or payroll company 5. Auditors exclude investment balances and transactions from test work but still have the responsibility to test participant and plan sponsor transactions 6. Box 3a on the Form 5500 Schedule H should be marked (3) Disclaimer

6 PREPARING FOR AN AUDIT PBC List Please provide a copy of the following: 1 Plan Document 2 Plan amendments, if any 3 IRS Determination/Opinion Letter 4 Meeting Minutes, if applicable 5 Summary Plan Description 6 Prior year Plan financial statements (if audited last year) N/A 7 Prior year 5500 X Auditor's package including the following: 8 "Complete and Accurate Certification" Plan statements participant detail loan detail (if applicable) detail of the distributions 13 SSAE 16 Report (formerly SAS 70) nondiscrimination tests 15 Schedule of the 2013 deposits to the plan by pay period (see sample attached) 16 Copy of the Fidelity Bond or Crime policy with ERISA endorsement 17 1st quarter 2014 Plan statements 18 Copy of the draft (CNM LLP EIN# is ) Deposit Schedule PREPARING FOR AN AUDIT date deferrals match repayments contributions deposited deposited 1/15/2013 1, ,600 1/18/2013 1,600 1/31/2013 1, ,600 2/3/2013 1,100 2/15/2013 1, ,600 2/18/2013 1,600 2/29/2013 1, ,600 3/3/2013 1,600 3/15/2013 1, ,600 3/18/2013 1,600 3/31/2013 1, ,600 4/3/2013 1,600 4/15/2013 1, ,600 4/18/2013 1,600 4/30/2013 1, ,600 5/3/2013 1,600 5/15/2013 1, ,600 5/18/2013 1,600 5/31/2013 1, ,600 6/3/2013 1,600 6/15/2013 1, ,600 6/18/2013 1,600 6/30/2013 1, ,600 7/3/2013 1,600 7/15/2013 1, ,600 7/18/2013 1,600 7/31/2013 1, ,600 8/3/2013 1,100 8/15/2013 1, ,600 8/18/2013 1,600 8/31/2013 1, ,600 9/3/2013 1,600 9/15/2013 1, ,600 9/18/2013 1,600 9/30/2013 1, ,600 10/3/2013 1,600 10/15/2013 1, ,600 10/18/2013 1,600 10/31/2013 1, ,600 11/3/2013 1,600 11/15/2013 1, ,600 11/18/2013 1,600 11/30/2013 1, ,600 12/3/2013 1,600 12/15/2013 1, ,600 12/18/2013 1,600 12/31/2013 1, ,600 1/3/2014 1,600 24,000 12,000 2,400 38,400 37,400

7 PREPARING FOR AN AUDIT Auditor s Package 1. Complete and Accurate Certification a) As discussed before, this will determine if the auditor can perform a limited scope audit b) Issued by a qualified institution, signed, references the plan and plan year, certifies reports are complete and accurate, and will typically cite 29 CFR c) May be stamped directly on the plan statements 2. Plan Statements a) Annual statement showing activity by investment b) Transaction detail usually only necessary for full scope audits PREPARING FOR AN AUDIT Auditor s Package 3. Participant Detail Report a) Should show investments, activity and money type by participant b) If provided as a separate report as the Plan Statements, totals must agree or be reconciled 4. Loan Detail Report a) Report showing the loans outstanding by participant b) Should show beginning balance, activity, and ending balance for the plan year c) Some Record Keepers maintain this report but sometimes this is maintained by the TPA 5. Distribution Report a) Report showing distributions at the participant level

8 PREPARING FOR AN AUDIT Audit Selections 1. Eligibility, Contributions, Compensation a) Auditor will select a sample of participants to test if they meet eligibility, if their contributions are being made as they directed, and if their contributions are being calculated correctly using compensation as defined in the plan document b) Selections are typically made from the participant detail report c) Employer contributions, if applicable, would be tested with these selections d) Paper vs. paperless enrollment i. Evidence of an online enrollment ii. Confirmation letter PREPARING FOR AN AUDIT Audit Selections 2. Loans Issued a) Auditor will test a sample of new loans issued during the plan year b) Test authorization, terms, repayment c) Paper vs. paperless - loan applications i. Cancelled checks ii. Terms sheet/amortization schedules iii. Confirm with the participant 3. Distributions a) Auditor will test a sample of distributions issued during the plan year b) Test authorization, vesting, compliance with plan document c) Additional testing for hardship distributions d) Paper vs. paperless withdrawal requests i. Cancelled checks ii. 1099Rs

9 PREPARING FOR AN AUDIT Additional Requests 1. Hard to Value Assets ASC 820 a) Investments that do not have a readily available value available on a public market may require additional work and research by an auditor b) Guaranteed Investment Contracts (GICs) i. The auditor will need to review the contract to make sure the terms are properly disclosed in the financial statements ii. The auditor will need to obtain the fair value adjustment from the issuer of the contract to disclose in the financial statements c) Stable Value Fund i. The auditor will need to review the financial statements for the common/collective trust to obtain the fair value adjustment for the underlying GICs and make sure it is properly disclosed in the financial statements d) Real Estate, Privately Held Common Stock, Notes Receivable, etc. PREPARING FOR AN AUDIT Additional Requests 2. Initial Plan Audits a) Prior year reports b) Group annuity contracts c) Prior year non-discrimination tests d) Increase sample sizes for audit test work 3. Defined Benefit Plan Audits a) Actuarial report b) Participant census report

10 SSAE 16 REPORT (FORMERLY SAS 70) 1. Does the SSAE 16 limit the scope of an audit? a) Statements on Standards for Attestation Engagements No. 16: Reporting on Controls at a Service Organization b) A report with an auditor s opinion attached describing a service organization s internal controls and usually includes reporting on tests of the operating effectiveness of those controls c) Does not enable the auditor to limit the scope of the audit, but can help the auditor in planning the audit and may allow reduced sample sizes d) Assists auditors in documenting internal controls i. Keeps auditors from having to call up service providers to review their controls e) Is not related to the limited scope audit or the complete and accurate certification PERFORMING AN AUDIT Phases of an Audit 1. Planning a) Gathering documents b) Performing preliminary analytical procedures c) Making selections 2. Testing a) Fieldwork b) Payroll records, bank statements, participant forms or other reports, personnel files 3. Documenting a) Document work performed and results b) Document tax status, internal controls, fraud risk

11 PERFORMING AN AUDIT Audit Concept of Materiality 1. The importance or significance of an amount, transaction or discrepancy to the financial statements as a whole a) Considered a matter of professional judgment b) Includes quantitative and qualitative considerations c) GAAP: information is material if its omission or misstatement could influence the economic decision of the users taken on the basis of the financial statements 2. Plan level materiality applicable to financial statements as a whole - Examples: $1M in plan assets ~ $18,000 materiality $25M ~ $140,000 $100M ~ $370, Participant level materiality is viewed differently THE AUDITOR S OPINION 1. Auditor s responsibility is to issue an opinion a) Auditor is engaged to provide an opinion on whether or not the financial statements are reasonably stated in accordance with GAAP b) Audit is the process of gathering sufficient evidential matter to support the accountant s opinion c) Audit is performed in accordance with generally accepted auditing standards (GAAS) 2. Types of audit opinions a) Unqualified Clean opinion. Auditor performed full scope audit and found financials to be reasonably stated b) Qualified Financials are reasonably stated other than a specific exception which is misstated c) Disclaimer Limited scope opinion. Certain aspects of the financials not audited in accordance with GAAS d) Adverse Financials are not reasonably stated in accordance with GAAP. In practice, auditor would generally withdraw from the engagement

12 THE AUDITOR S OPINION Schedule H, Part III Accountant s Opinion Section Line 3a What type of opinion issued? Line 3b Did the accountant perform a limited scope audit pursuant to 29 CFR and/or (d)? Line 3c Name and EIN of accountant or accounting firm AUDITOR S REPORT VS. FORM 5500 Schedule H Basis Differences 1. Audited financial statements must comply with generally accepted accounting principles (GAAP) promulgated by the Financial Accounting Standards Board (FASB) 2. Schedule H information is completed in accordance with the Form 5500 instructions 3. Net Assets of the Form 5500 must agree to Net Assets of the financial statements or be reconciled in the notes to the financial statements. Here are some common reconciling differences:

13 AUDITOR S REPORT VS. FORM 5500 Cash vs. Accrual Basis 1. Contributions Receivable a) Contributions on Form 5500 may be reported on the cash or accrual basis b) GAAP financial statements must be presented on an accrual basis c) If there are material receivables accrued that are not reflected on the Schedule H, a reconciling footnote must be included Benefit Claims Payable 1. Participant Withdrawal Requests a) Non cash basis plans must report benefit claims as a payable on Schedule H if the claims have been processed and approved but not yet paid on the reporting date b) GAAP prescribes that benefits are recorded when paid AUDITOR S REPORT VS. FORM 5500 Contract vs. Fair Value 1. Fully Benefit Responsive Investment Contracts a) Generally, Form 5500 requires reporting at fair value (although this is not typically done in practice) b) GAAP financials disclose the fair value but then reflect an adjustment to contract value c) Activity is reflected at contract value. If Schedule H reflects these items at fair value a reconciling footnote is required

14 AUDITOR S REPORT VS. FORM 5500 Excess Contributions 1. Corrective Distributions a) Corrective distributions reflected on line 2f of Schedule H in the year they are paid out b) Under GAAP, material corrections are accrued as a payable. For ADP/ACP test corrections, the amount is reduced from respective contribution income instead of being reflected as a withdrawal c) GAAP perspective = contribution was never income to the Plan QUESTIONS & ANSWERS Q&A Ask the Auditor John Russon, CPA jrusson@cnmllp.com