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AUDITING PENSION PLANS: TOP 10 MOST COMMON AUDIT FINDNGS and OVERVIEW OF DOL INITATIVES
AFFECTING PLAN AUDITS
Concurrent session 16Allen P. Deleon, CPA – DeLeon & Stang, CPAS &
AdvisorsIan Dingwall, CPA - Chief Accountant
DOL Employee Benefits Security Administration
Allen P. DeLeon, CPA
Founding Partner, Deleon & Stang, CPAs and Advisors
Member of the AICPA Credit Union Conference Planning Committee and the AICPA Benefit Plan Audit Quality Center
Chair, Maryland Association of CPAs
Contact information:• 301-948-9825• [email protected]• @allendeleon
401k Plan Auditing Concerns and Issues
2
BASIC OVERVIEW OF A 401k PLAN AUDIT
A 401k plan is a type of defined contribution plan, which means that the participants account balance equals his plan benefits.
A “qualified” plan established by employers to which eligible employees may make “salary deferral” contributions on a post-tax and/or pre-tax basis.
“Qualified” means meets the standards set forth in section 401, paragraph (k) of the Internal Revenue code.
“Salary deferral” is money that is deducted from your paycheck before taxes are withdrawn. Some plans do allow you to contribute money on an after-tax basis as well.
Participant data• Eligibility• Auto enrollment
Contributions
Contribution limits• Increasing limits EGTRRA• Catch up contributions• Rollover
Vesting & forfeiture
Eligible compensation
Portability
Salary deferral
Employer match
Roth contributions
Testing 415 (c) limits
ADP/ACP testing limits
Timeliness & reporting
FEATURES OF A 401k PLAN
4
Investments• Elections (participant
directed vs. non-participant directed)
• Frequency of changes to elections
• Types of investments• Valuation methods (daily
valuation)
Benefit Payments• Distributions• Timing• Rollover• Reporting
Other• Participant loans• PII• PT’s• Expenses and new
reporting
FEATURES OF A 401k PLAN (CONTINUED)
5
WHAT IS DIFFERENT ABOUT 401k PLANS
Employee contributions can vary, up to the maximum allowed by law ($16,500 for 2012)
Employee contributions are made pre-tax
Many employers will match a portion of employee contributions
Investment earnings are tax deferred until withdrawn at retirement age.
An excise tax penalty is imposed if distributions are taken from the plan prior to retirement age (591/2)
HOW THE PROCESS WORKS
KEY PLAYERS AND ROLES
Plan Sponsor – employer and decides on plan features
Plan Administrator – responsible for operation of the plan. Can be employer or third party
Custodian/Trustee- Hold plan assets in trust
Record-keeper- maintain participant accounts, prepares 5500 etc..
Oversight Agencies- • Department of Labor (DOL)• Internal Revenue Service (IRS)
INITIAL OR FIRST TIME 401k PLAN AUDIT TIPS
Engagement letter
Communicate with predecessor auditor and review work papers
What type is audit is required? Full or limited scope?
Who are the service providers• Trustee• Record keeper• Sponsor
INITIAL OR FIRST TIME 401k PLAN AUDIT TIPS (continued)
Risk assessment and get a feel for the quality of records and what SOC reports are available
Read plan document and amendments and understand the plan
Opening balances:• What procedures need to be performed?• Participant data
MOST COMMON EBP PLAN AUDITING MISTAKES
< 100 participants? Is an audit necessary?
Full scope audit vs. limited scope audit? What is the difference?
Too much reliance on SOC reports
Contributions based on correct plan definition of compensation?
Supplemental schedules:• Delinquent participant contributions• Assets held• 5% reportable contributions
Limited Scope vs. Full Scope
Audit Procedures Limited Scope Full Scope
Confirm assets directly with custodian X
Agree the certified investment information to the Plan’s financial statements
X
Year-end market value testing and leveling X
Investment transaction testing X
Test investment income allocation to participants
X X
Determine that the Plan’s financial statement and disclosures are in compliance with GAAP
X X
MOST COMMON EBP PLAN AUDITING MISTAKES
No or limited fraud assessment – Examples of EBP Fraud• Eligibility – person entered into the HR system and enrolled into
the plan who never actually began work• Fictious employee who then took out 401k plan loans• Participant who faked his death to get money out of the plan• HR employee who handled both plan contributions and payroll
and reconciled payroll bank account diverted money to personal accounts
• HR director made changes to employer contributions before submitting file to TPA
MOST COMMON EBP PLAN AUDITING MISTAKES
No or limited fraud assessment – Examples of EBP Fraud (continued)• HR employee manually processed participant statements to
hide loans• Employee said car loan was for home purchase to get longer
amortization period• Plan administrator used forfeiture account to pay personal credit
card expenses.• Plan administrator paid himself by setting up a fake vendor and
paying himself and approving invoices.
Questions?????
DOL Initiatives Affecting Your EBP Audits
Ian Dingwall, CPA
Chief Accountant
DOL
Employee Benefits Security
Administration
The views expressed are those of the speaker and do not necessarily represent the official position of the Department
Overview of DOL Initiatives Affecting Employee Benefit Plan (EBP) Audits
DOL Current Focus
EBSA Audit Quality Initiatives
Fraud in EBPs
Regulatory Initiatives
What is EBSA’s Current Focus?
High Risk Audit Engagements
Multi-employer Plans• Defined Benefit Pension Plans• Defined Contribution Pension Plans
Single Employer Defined Benefit Pension Plans
Health and Welfare Plans
ESOPs
403(b) Plans
18
ESOPs
Over 50% of audits contained deficiencies
Common audit deficiencies include:• Failure to identify valuation of employer stock in the
risk assessment• Review of the work of the appraiser (full scope audits)• Testing the release of shares from the suspense
account• Testing benefit payments• Obtaining and reviewing documentation of stock
purchases• Party-In-Interest = inadequate or no audit work
performed19
403(b) Plan Audits
Review of 84 sets of 2009 403(b) plan audit work papers
Firms of all sizes
Opinions varied and included• Clean limited-scope• FAB language• Recordkeeping language
Work on opening balances varied greatly
What will OCA deem rejectable?
20
21
Reporting Compliance Initiatives
• Electronic Communication w/Filers
• Schedule C Compliance
• Reporting of Funded Welfare Plans
• Missing IQPA Reports
• Collaboration w/IRS & PBGC
EBSA Audit Quality Initiatives
Firm Inspections
Mini Inspections
Small Practice Reviews
CPA Firm Inspection Program
Review EBP practice of firms that perform significant number of plan audits or that audit significant amount of plan assets
Similar to PCAOB Inspections
Review policies and procedures
Review audit work papers of selected audit engagements
CPA Firm Mini Inspections
Focus on CPA firms that perform between 100-199 plan audits
No initial onsite visit
Questionnaire to CPA firm
Assess overall firm structure and control environment
Select a sample of audit engagements for detailed review
Small Practice Reviews
Focus is on firms performing a small number of EBP audits
EBSA Office of Chief Accountant reviews workpapers of selected audit areas
Scope of review may be expanded
Reviews performed in-house
What To Expect From Us
Inquiry letter to plan administrator
Review of audit workpapers
Statement of Preliminary Findings
Rejection of plan filing
Assessment of civil penalties
Referral to AICPA/state regulators
Audit Deficiencies Found in Workpaper Reviews
1,946 Workpaper Reviews Performed
• 1,324 – No Deficiencies
• 622 – Contain Deficiencies
- 199 – 1 Deficiency
- 148 – 2 Deficiencies
- 95 – 3 Deficiencies
- 62 – 4 Deficiencies
- 46 – 5 Deficiencies
- 72 – 6+ Deficiencies
EBP Audit Best Practices
Commitment to Quality• Executive Level• Firm-wide
Importance of EBP Audit Practice• Focal point within firm• Realistic audit fees• Comprehensive EBP specific resources
Internal Inspection Programs
Use of Internal Experts
Fraud in EBP
“Sandhogs” Union Local 147 • $40 million embezzlement by fund administrator
DOL Criminal Enforcement Cases• News releases at http://
www.dol.gov/ebsa/newsroom/criminal/main.html
DOL’s expectations and auditor’s responsibilities
31
DOL Regulatory Initiatives
32
Informed Decision Making and Excessive Fees – The Three Legged Stool
Disclosures by plans to participants of certain plan and investment-related information – Interim Final 10/20/10
Disclosures to plan fiduciaries to assist in assessing 408(b)(2) reasonableness of compensation and potential conflicts of interest – Interim Final 7/16/10
Disclosures to public and government on electronically filed Form 5500 Annual Report including indirect compensation – Form 5500, Schedule C
33
Fee & Expense Disclosures – Plan to Participant (ERISA §404)
Effective – plan years beginning on or after 11/1/11
Requires fiduciaries to:
Give workers quarterly statements of plan fees & expenses deducted from their accounts
Give workers core information about investments available under the plan
Use standardized methodologies when calculating and disclosing expense and return information
34
Fee & Expense Disclosures – Plan to Participant (ERISA §404) (continued)
Centerpiece – a requirement to provide investment-related advice in a format that permits workers to comparison shop among investment options
DOL has developed a model chart for complying with this requirement
The reg., model chart, and fact sheet may be viewed at www.dol.gov/ebsa
Fee & Expense Disclosures – Service Providers to Plans (ERISA §408(b)(2))
Brings new transparency to the process of selecting and monitoring of plan service providers
Establishes comprehensive disclosures from service providers concerning services, fees, and potential conflicts of interest
Applies to plan contracts or arrangements for services in existence on or after 7/1/12, extended from 7/16/11, 1/1/12 and 4/1/2012
Applies to covered service contracts ≥ $1,000
36
ERISA § 404 Disclosures – Initial Implementation Dates
First disclosure dates follow the effective date of the 408(b)(2) regulation
Initial annual chart disclosure of “plan level” & “investment-level” info – 8/30/12
First quarterly statements – 11/14/12
Clients need your pro active help
Clarification of the Meaning of “Reasonable Arrangement” in 408(b)(2) Disclosure Rules
All service agreements must be in writing (no prescribed format)
Impose new service provider disclosure obligations before or at the time the plan enters a service agreement
408(b)(2) Disclosure Rules – Covered Service Providers
Persons who provide services as an ERISA fiduciary or under the Investment Advisors Act of 1940.
Persons who provide certain recordkeeping or brokerage services and make available investment options to be offered by the plan
Persons who receive or may receive indirect compensation for the following services: accounting, auditing, actuarial, appraisal, banking, consulting, custodial, insurance, investment advisory (plan or participants), legal, recordkeeping, brokerage, TPA, or valuation
408(b)(2) – Required Disclosures
Service providers are required to disclose (before the parties enter into an agreement for services):• All services to be provided under the agreement• The compensation or fees to be received for each
service• The manner of receipt of compensation or fees• Information about conflicts of interest.
Establishes disclosure burden on service provider – integrated with 2009 Form 5500 Schedule C Reporting
40
Consequences of Non Disclosure = Prohibited Transaction
Contract or arrangement will not be “reasonable” and violates 408(b)(2)
Responsible Plan Fiduciary violates 406(a)(1)(c) by participating in the prohibited transaction. Reportable on Schedule G
Service provider is a “disqualified person” under IRS prohibited transaction rules and is subject to excise taxes under Code section 4975
Investment Advice
Final rule published in the Federal Register – October 25, 2011
Designed to improve participant access to fiduciary investment advice
Permits a fiduciary investment adviser who receives additional fees from investment providers if certain conditions are met• Use of a computer model that is certified as unbiased by
an independent expert or • Through an adviser compensated on a “level-fee” basis,
meaning that the fees do not vary based on investments selected
May be viewed at http://s.dol.gov/J4
41
Definition of Fiduciary Project
DOL intends to re-issue proposed rule
The purpose of the reg. is to ensure that potential conflicts of interest among advisors do not compromise the quality of investment advice
The proposed reg. would more broadly define “fiduciary” when a person provides investment advice
42
Definition of Fiduciary Project - Continued
Revisions are likely to:• Be limited to individualized advice directed to specific parties• Address concerns about the effect of the reg. on routine appraisals and arm’s-length commercial transactions
Anticipated exemptions will:• Address current fee practices of brokers and advisors• Clarify that longtime exemptions that allow certain commissions will still apply
43
Interim Policy on Electronic Disclosures
Technical Release 2011-03
Expands the ability of plans to use electronic disclosure requirements under DOL’s final participant-level fee disclosure regulation
Allows plan administrators to furnish information electronically while ensuring that all employees will benefit from the regulation’s increased transparency
Includes the use of continuous access websites if certain conditions and safeguards are met
DOL will not take enforcement action solely based on a plan administrator’s use of electronic technologies
Please see: www.dol.gov/EBSA/pdf/tr11-03.pdf
Guidance for Apprenticeship & Training Programs – FAB 2012-01
Issued 4/2/12
Provides guidance regarding plans paying graduation ceremony and advertising expenses
Certain “modest” graduation ceremony and outreach expenses are permissible
Violations more prevalent where plans lack written expense policies & internal controls
OLMS has published a list of useful internal controls
46
Reporting Compliance Initiatives
• Electronic Communication w/Filers
• Schedule C Compliance
• Reporting of Funded Welfare Plans
• Missing IQPA Reports
• Collaboration w/IRS & PBGC
47
And Now it’s Your Turn…