lessons learned from the dol and an ebp audit update on asu 2015-12 financial reporting...

Lessons Learned from the DOL…

EBP UpdateTINA ISBITSKY, CPA, CGMA, TMI CPA, P.C.

NYSSCPA NASSAU/SUFFOLK JOINT A&A UPDATE – NOVEMBER 7, 2015

TMI CPA, P.C. Specializing in Employee Benefit Plan Auditswww.erisaCPAaudit.com

DOL EBSA Audit Quality Study

•Released May 28, 2015

•Reviewed 400 plan audits from 2011 Form 5500 filings

•Six strata using # of audits per firm

•Random sample within each strata

•Analyzed licensing and peer review status as part of the study


Who Audits Employee Benefit Plans?2011 Form 5500 Database

CPA Firms Performing Plan Audits# of PlansAudited

# of CPA Firms

% of CPA Firms

# of Audits Performed

% of Audits Performed

1-2 3,684 51% 4,891 6%3-5 1,519 20% 5,773 7%

6-24 1,603 21% 17,747 22%25-99 433 6% 18,910 23%

100-749 77 1% 15,418 19%750 + 14 1% 18,423 23%Total 7,330 100% 81,162 100%


Number of Audits Performed by CPA Firms by Stratum

7,330 CPA Firms

1 or 2 Audits (51%)3 - 5 Audits (20%)6 - 24 Audits (21%)25 - 99 Audits (6%)100 - 749 Audits (1%)750 + Audits (1%)


Key Audit Quality Study FindingsMajor GAAS Deficiencies -Reject Form

550039%

Compliant or Minor

Findings61%


Trend of Audit Quality Study Audits with GAAS Deficiencies

23%19%

33%

39%

0%5%

10%15%20%25%30%35%40%45%

1988 1997 2004 2014

Audits with GAAS Deficiencies


Major Deficiency Audit Rates by StratumStrata Audit

ReviewsAudits w/

DeficienciesStandard

ErrorLower Bound

UpperBound

1-2 95 75.8% 4.4% 66.1% 83.4%3-5 95 68.4% 4.8% 58.3% 77.0%

6-24 95 67.4% 7.7% 50.9% 80.4%25-99 65 41.5% 9.7% 24.4% 61.0%

100-749 25 12.0% 4.9% 5.2% 25.4%750+ 25 12.0% 8.0% 3.0% 37.8%Total 400 38.8% 3.5% 32.2% 45.9%


Additional Audit Quality Study Findings

•17% of audit reports didn’t comply with ERISA reporting / disclosure requirements

•The smaller the firm’s EBP audit practice, the greater overall deficiency rate and increased number of deficient audit areas

•Decline in quality appears to have some nexus to increased # of limited scope audits

•Concern that peer review and practice monitoring efforts are not improving audit quality or identifying deficient EBP audits


Deficient Audits and Clean Peer Reviews

Strata (Audits)Deficient Audits with

Clean Peer Review Report1-2 52% (49)3-5 58% (55)

6-24 63% (60)25-99 40% (26)

100-749 12% (3)750+ 4% (1)


Is Membership in the AICPA’s EBPAQC Related to Audit Quality?

StrataEBPAQC Member

Non-EBPAQC Member

TotalFirms

1-2 11 (12%) 84 (88%) 953-5 27 (28%) 68 (72%) 95

6-24 15 (79%) 4 (21%) 1925-99 12 (92%) 1 (8%) 13

100-749 5 (100%) 0 (0%) 5750+ 5 (100%) 0 (0%) 5Total 75 (32%) 157 (68%) 232


Audit Deficiency Rate by EBPAQC Status

29.9%

82.3%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

EBP-AQC Members EBP-AQC Nonmembers


DOL Recommendations - Enforcement•Target for inspection:oCPA firms with smaller EBP audit practices and larger $$ of plan assetsoCPA firms auditing 25-99 EBPs due to high deficiency rate and large # of plan

participants and $$ of plan assets at risk

•Work more closely with NASBA and State Boards

•Amend ERISA to allow penalties against audit firms

•Peer reviewoWork with AICPA to streamline and improve peer review to improve audit qualityoEnsure EBP audit firms undergo peer reviewoRefer audit firms without acceptable peer review to Boards of Accountancy


DOL Recommendations –Regulatory / Legislative

•Amend ERISA definition of “qualified public accountant” to include additional requirements and qualifications

•Repeal limited scope audit exemption or further regulate use

•Amend ERISA to give Secretary of Labor authority to establish accounting and auditing principles for EBPs


DOL Recommendations - Outreach•Work with NASBA to encourage State Boards to require specific licensing for CPAs who perform EBP audits•Expand EBSA’s outreach activities to include:oPlan administrator organizations (e.g. ASPPA), importance of hiring quality

auditorsoSend targeted correspondence to plan administrators in the 1-2 and 3-5 plan

strata highlighting high deficiency rate among plan auditors

•Expand EBSA’s outreach with individual state societies of CPAs who have a large number of plan audits performed by CPA firms in the 1-5 plan audit stratum.


Collaborative Effort…

Department of Labor

NASBA

AICPA

AccountancyBoards


DOL Audit Quality Referrals…

DOL has made 145 referrals

132 to AICPA 13 to BOAs

Over 65% of referrals to AICPA conclude with issuance of confidential

Required Corrective Action letter


Audit Deficiencies by Type

Deficiency Type

% of Audits with

Deficiencies Deficiency Type

% of Audits with

DeficienciesPlanning & Supervision 7.0% Commitments & Contingencies 3.1%Investments 4.2% Internal Controls 18.3%Contributions Received 8.1% Administrative Expenses 4.9%Benefit Payments 7.8% Subsequent Events 4.9%Participant Data 7.8% Plan Representations 4.9%Plan Obligations 3.7% Compliance Reporting 6.0%Party-in-Interest 6.6% Compliance with ERISA 4.4%Plan Tax Status 4.4% Notes Receivable 3.6%

All Deficiencies 33.9% (Standard Error 3.3%)


Unacceptable Major Findings (5 or more)Planning and Supervision# Description of Unacceptable, Major Finding49 No/insufficient review of plan documents/plan operations37 No evidence of required communications (114/115)25 No/lack of evidence of audit planning21 No/inadequate evidence of planning analytics with developed expectations19 No/insufficient audit program15 No/inadequate assessment of fraud risk14 No/inadequate procedures on initial/beginning balances8 No evidence of planning materiality6 No/inadequate review of audit workpapers or engagement not adequately supervised


Unacceptable Major Findings (5 or more)Internal Controls# Description of Unacceptable, Major Finding52 No/inadequate documentation of internal control environment37 Failure to assess/document control risk37 No evidence of SOC1 report review and/or reliance29 No/inadequate evidence of fraud “brainstorming”27 Lack of documentation of risk assessment procedures22 Failure to review internal controls of service provider(s)17 Failure to document evaluation of internal control15 No/inadequate evidence of fraud inquiries12 No evidence of work performed


Unacceptable Major Findings (5 or more)Investments, Full Scope# Description of Unacceptable, Major Finding18 Failure to test investment transactions14 Failure to test investment income7 Failure to test end of year asset values5 No evidence of work performed


Unacceptable Major Findings (5 or more)Investments, Limited Scope# Description of Unacceptable, Major Finding10 Audit workpapers do not contain the certification6 Failure to adequately test change in service provider5 Certifying entity does not qualify for limited scope


Unacceptable Major Findings (5 or more)Notes Receivable# Description of Unacceptable, Major Finding21 No work performed30 No/inadequate testing compliance with plan7 No review of supporting loan documentation5 No/inadequate testing for determination of delinquent loans that should be reported as

deemed distributions


Unacceptable Major Findings (5 or more)Contributions Received & Receivable# Description of Unacceptable, Major Finding53 Failure to test timely remittance of employee contributions35 Failure to test compliance with plan compensation provisions24 No/inadequate testing of use of forfeitures10 Failure to agree/reconcile contributions to plan sponsor payroll records, employee records,

custodian/trust, and/or Schedule H10 No/inadequate testing of rollover contributions9 No work performed7 Failure to address testing errors and/or variance and their impact on financial statements5 No/inadequate testing of contribution receivable(s)5 Inadequate testing/documentation of recalculation of contributions/deferrals


Unacceptable Major Findings (5 or more)Benefit Payments# Description of Unacceptable, Major Finding41 No recalculation of benefit payments38 No/inadequate work regarding eligibility of individuals receiving benefit28 No work performed19 No/inadequate work regarding validity of claims10 Inappropriate reliance on SOC1 report9 No/inadequate work regarding forfeitures7 Failure to trace benefit payments to individual participant account6 No/inadequate work regarding participant receipt of benefit payment6 No/inadequate testing of hardship/in-service benefit payments


Unacceptable Major Findings (5 or more)Participant Data, Including Participant Accounts# Description of Unacceptable, Major Finding89 Failure to adequately test allocations to participant accounts73 No/insufficient testing of payroll data68 No/inadequate testing of participant investment options41 No reconciliation of total individual participant accounts to total plan assets35 Failure to adequately test eligibility, terminations and forfeitures29 Failure to test compliance with plan compensation provisions18 No work performed10 Failure to adequately test change in service provider10 Inappropriate reliance of SOC1 report


Unacceptable Major Findings (5 or more)Plan Obligations# Description of Unacceptable, Major Finding7 No/insufficient testing of census data (defined benefit pension plan)


Unacceptable Major Findings (5 or more)Parties in Interest / Prohibited Transactions# Description of Unacceptable, Major Finding46 No work performed39 Failure to document related parties/parties in interest29 Failure to document results of inquiries of management17 Inadequate work


Unacceptable Major Findings (5 or more)Plan Tax Status# Description of Unacceptable, Major Finding27 No work performed20 No evidence of IRS tax compliance tests were reviewed8 No tax determination letter obtained7 Failure to document results of inquiries with management


Unacceptable Major Findings (5 or more)Commitments & Contingencies# Description of Unacceptable, Major Finding33 No work performed12 Failure to document results of inquiries with management8 Inadequate work


Unacceptable Major Findings (5 or more)Administrative Expenses# Description of Unacceptable, Major Finding55 No work performed7 Inadequate work performed


Unacceptable Major Findings (5 or more)Subsequent Events# Description of Unacceptable, Major Finding42 No work performed14 Failure to review interim financial information13 Failure to document results of inquiries with management9 Inadequate work performed


Unacceptable Major Findings (5 or more)Plan Representations# Description of Unacceptable, Major Finding6 Inadequate representations obtained5 Client representations were not appropriately tailored to the plan


Unacceptable Major Findings (5 or more)Compliance with GAAS & GAAP# Description of Unacceptable, Major Finding57 Inadequate footnote disclosures28 Inappropriate presentation of financial information on financial statements16 No/lack of ASC 820 Fair Value Measurements disclosures


Unacceptable Major Findings (5 or more)Compliance with DOL Rules & Regs for Reporting# Description of Unacceptable, Major Finding11 No/inadequate footnote disclosures11 Required supplemental schedules not prepared/attached9 Incomplete Schedule of Assets Held for Investment (e.g. does not include all investments,

missing participant loans, no indication of parties in interest, etc.)8 Unsigned audit report7 Delinquent employee contributions not reported/disclosed

6 No/incomplete audit report attached to the plan’s Form 5500

5 Financial statements do not agree to the Schedule H


Accounting Standards Update (ASU) 2015-12

Plan Accounting:

Defined Benefit Pension Plans (Topic 960)

Defined Contribution Pension Plans (Topic 962)

Health and Welfare Benefit Pension Plans (Topic 965)


Financial Reporting Simplifications

•FASB issued a three-part ASU to simplify financial reporting for benefit plansoPart I: Fully Benefit-Responsive Investment ContractsoPart II: Plan Investment DisclosuresoPart III: Measurement Date Practical Expedient

•Effective for fiscal years beginning after December 15, 2015oEarly application is permittedoPlans can early adopt any of the ASU’s three parts without early adopting the other

parts


Part I: Fully Benefit-Responsive Investment Contracts•Affects defined contribution and health and welfare plans

•Definition of fully benefit-responsive investment contract (FBRIC) in master glossary did not change

•Clarifies that contract value is the relevant measure for FBRICs because that is the amount participants would receive in a transaction

•Eliminates requirements to measure at fair value and present related fair value measurement disclosuresoResponds to concerns about the cost and effort to measure the fair value of FBRICs when fair

value is not the relevant measure


Part I: Fully Benefit-Responsive Investment Contracts (continued)•Instead, plans will present FBRICs at contract value in the statement of net assets available for benefits, either as • Investments at contract value• Fully benefit-responsive investments at contract value

•Investment contracts that do not meet the definition of a FBRIC continue to be presented at fair value


Illustrative Statements of Net Assets Available for Benefits: FBRICsPrior to Adoption of ASU 2015-12 (Part I)

20X4 20X3

Assets:

Investments at fair value $ 740,000 $ 610,000

Notes receivable from participants 10,000 9,000

Net assets reflecting investments at fair value 750,000 619,000

Adjustment from fair value to contract value for fully benefit-

responsive investment contracts (3,000) (5,000)

Net assets available for benefits $ 747,000 $ 614,000


Illustrative Statements of Net Assets Available for Benefits: FBRICsMarked-up for Adoption of ASU 2015-12 (Part I)

20X4 20X3

Assets:

Investments at fair value $ 721,000 740,000 $ 588,000 610,000

Fully benefit-responsive investment contracts at contract valueNotes receivable from participants

16,00010,000

17,0009,000

Net assets reflecting investments at fair value 750,000 619,000

Adjustment from fair value to contract value for fully benefit-

responsive investment contracts (3,000) (5,000)



Illustrative Statements of Net Assets Available for Benefits: FBRICsFinal for Adoption of ASU 2015-12 (Part I)

20X4 20X3

Assets:

Investments at fair value $ 721,000 $ 588,000

Fully benefit-responsive investment contracts at contract valueNotes receivable from participants

16,00010,000

17,0009,000



FBRIC Disclosures•Required disclosureso New disclosure: Total contract value of each type of FBRIC (e.g., traditional investment contracts,

synthetic investment contracts)

o Previously required disclosure: Description of the nature of each type of FBRIC (including how it operates)

o Previously required disclosure: Description of events that limit the ability of the plan to transact at contract value, including a statement that these events are not probable of occurring

o Previously required disclosure: Description of events and circumstances that would allow the issuer to terminate the contracts and settle at an amount different from contract value

20X4 20X3

Traditional investment contract $ 1,500,000 $ 1,000,000

Synthetic investment contract 500,000 250,000

Total $ 2,000,000 $ 1,250,000


FBRIC Disclosures (continued)

Eliminated Disclosures• Hierarchy level• Valuation techniques and inputs• Level 3 reconciliation• Average yields

Apply new guidance retrospectively


Part II: Plan Investment Disclosures•Affects all types of plans

•Simplifies the level of disaggregation for investments measured using fair valueoDisaggregate by general type of investment (mutual funds, common stocks,

corporate bonds, self directed brokerage accounts)oPlans are exempt from requirements of ASC 820-10-50-2B to disaggregate assets by

class (e.g. nature, characteristics, risks)oProvides consistency with level disaggregation provided by most trustees, custodians

and insurance companies and with information required in Form 5500


Part II: Plan Investment Disclosures (continued)

•Disclosure simplificationsoEliminates the requirement to disclose the net appreciation/depreciation in fair value

of investments by general type (only disclose in aggregate)oEliminates requirement to disclose individual investments 5% or more of plan net

assetsoNo longer required: the significant investment strategies for an investment in a fund

that files an annual report on Form 5500 as a direct filing entity when the plan measures that investment using the NAV practical expedient

•ASU is to be applied retrospectively


Part III: Measurement Date Practical Expedient

•Simplifies accounting for Fiscal Year End (FYE) plans that don’t coincide with a calendar month end

•Added to the project as a result of similar practical expedient that the FASB recently issued for employers with FYEs that don’t end at the end of a calendar month

•Allows a plan to measure its investments and investment related accounts using the month end closes to its FYE (alternative measurement date)oDisclose as an accounting policyoDisclose financial effects of contributions, distributions and/or significant events that occur

between alternative measurement date and plan’s fiscal year end

•ASU to be applied prospectively


Tina M. Isbitsky, CPA, CGMA [email protected]

631-406-4065TMI CPA, P.C. Specializing in Employee Benefit Plan Audits

www.erisaCPAaudit.com

lessons learned from the dol and an ebp audit update on asu 2015-12 financial reporting...

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