Aicpa cu conference 2012 concurrent session 16


Published on

Published in: Business
  • Be the first to comment

  • Be the first to like this

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

Aicpa cu conference 2012 concurrent session 16

  1. 1. AUDITING PENSION PLANS: TOP10 MOST COMMON AUDIT FINDNGSand OVERVIEW OF DOL INITATIVES AFFECTING PLAN AUDITS Concurrent session 16 Allen P. Deleon, CPA – DeLeon & Stang, CPAS & Advisors Ian Dingwall, CPA - Chief Accountant DOL Employee Benefits Security Administration
  2. 2. 401k Plan Auditing Concerns and Issues 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 • • @allendeleon 2
  3. 3. 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 “Salary deferral” is money that is deducted from your paycheck before taxes are withdrawn.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.
  4. 4. FEATURES OF A 401k PLANParticipant data Salary deferral• Eligibility Employer match• Auto enrollment Roth contributionsContributions Testing 415 (c) limitsContribution limits ADP/ACP testing limits• Increasing limits EGTRRA Timeliness & reporting• Catch up contributions• RolloverVesting & forfeitureEligible compensationPortability 4
  5. 5. FEATURES OF A 401k PLAN (CONTINUED) Investments Other • Elections (participant • Participant loans directed vs. non-participant • PII directed) • PT’s • Frequency of changes to • Expenses and new elections reporting • Types of investments • Valuation methods (daily valuation) Benefit Payments • Distributions • Timing • Rollover • Reporting 5
  6. 6. 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made pre-tax Many employers will match a portion of employee contributions Investment earnings are tax deferred until withdrawn at retirement age.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)
  8. 8. 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)
  9. 9. 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
  10. 10. INITIAL OR FIRST TIME 401k PLAN AUDIT TIPS (continued)Risk assessment and get a feel for thequality of records and what SOC reports areavailableRead plan document and amendments andunderstand the planOpening balances: • What procedures need to be performed? • Participant data
  11. 11. MOST COMMON EBP PLAN AUDITING MISTAKES< 100 participants? Is an audit necessary?Full scope audit vs. limited scope audit? What is thedifference?Too much reliance on SOC reportsContributions based on correct plan definition ofcompensation?Supplemental schedules:• Delinquent participant contributions• Assets held• 5% reportable contributions
  12. 12. Limited Scope vs. Full Scope Audit Procedures Limited Scope Full ScopeConfirm assets directly with custodian XAgree the certified investment information to Xthe Plan’s financial statementsYear-end market value testing and leveling XInvestment transaction testing XTest investment income allocation to X XparticipantsDetermine that the Plan’s financial statement X Xand disclosures are in compliance with GAAP
  13. 13. MOST COMMON EBP PLAN AUDITING MISTAKESNo or limited fraud assessment – Examples of EBPFraud• 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
  14. 14. MOST COMMON EBP PLAN AUDITING MISTAKESNo or limited fraud assessment – Examples of EBPFraud (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.
  15. 15. Questions?????
  16. 16. 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
  17. 17. Overview of DOL Initiatives AffectingEmployee Benefit Plan (EBP) AuditsDOL Current FocusEBSA Audit Quality InitiativesFraud in EBPsRegulatory Initiatives
  18. 18. 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
  19. 19. 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 performed 19
  20. 20. 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. 21. Reporting Compliance Initiatives • Electronic Communication w/Filers • Schedule C Compliance • Reporting of Funded Welfare Plans • Missing IQPA Reports • Collaboration w/IRS & PBGC 21
  22. 22. EBSA Audit Quality InitiativesFirm InspectionsMini InspectionsSmall Practice Reviews
  23. 23. CPA Firm Inspection ProgramReview EBP practice of firms that perform significantnumber of plan audits or that audit significantamount of plan assetsSimilar to PCAOB InspectionsReview policies and proceduresReview audit work papers of selected auditengagements
  24. 24. CPA Firm Mini InspectionsFocus on CPA firms that perform between 100-199plan auditsNo initial onsite visitQuestionnaire to CPA firmAssess overall firm structure and controlenvironmentSelect a sample of audit engagements for detailedreview
  25. 25. Small Practice ReviewsFocus is on firms performing a small number of EBPauditsEBSA Office of Chief Accountant reviewsworkpapers of selected audit areasScope of review may be expandedReviews performed in-house
  26. 26. What To Expect From UsInquiry letter to plan administratorReview of audit workpapersStatement of Preliminary FindingsRejection of plan filingAssessment of civil penaltiesReferral to AICPA/state regulators
  27. 27. Audit Deficiencies Found in Workpaper Reviews1,946 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
  28. 28. EBP Audit Best PracticesCommitment to Quality• Executive Level• Firm-wideImportance of EBP Audit Practice• Focal point within firm• Realistic audit fees• Comprehensive EBP specific resourcesInternal Inspection ProgramsUse of Internal Experts
  29. 29. Fraud in EBP“Sandhogs” Union Local 147• $40 million embezzlement by fund administratorDOL Criminal Enforcement Cases• News releases at’s expectations and auditor’s responsibilities
  30. 30. DOL Regulatory Initiatives 31
  31. 31. 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 32
  32. 32. Fee & Expense Disclosures – Plan to Participant (ERISA §404) Effective – plan years beginning on or after 11/1/11Requires 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 33
  33. 33. Fee & Expense Disclosures – Plan toParticipant (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 34
  34. 34. Fee & Expense Disclosures – Service Providers to Plans (ERISA §408(b)(2))Brings new transparency to the process of selectingand monitoring of plan service providersEstablishes comprehensive disclosures fromservice providers concerning services, fees, andpotential conflicts of interestApplies to plan contracts or arrangements forservices in existence on or after 7/1/12, extendedfrom 7/16/11, 1/1/12 and 4/1/2012Applies to covered service contracts ≥ $1,000
  35. 35. ERISA § 404 Disclosures – InitialImplementation 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 36
  36. 36. Clarification of the Meaning of “Reasonable Arrangement” in 408(b)(2) Disclosure RulesAll service agreements must be in writing (noprescribed format)Impose new service provider disclosureobligations before or at the time the plan enters aservice agreement
  37. 37. 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
  38. 38. 408(b)(2) – Required DisclosuresService providers are required to disclose (beforethe 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 CReporting
  39. 39. Consequences of Non Disclosure = Prohibited TransactionContract or arrangement will not be “reasonable”and violates 408(b)(2)Responsible Plan Fiduciary violates 406(a)(1)(c) byparticipating in the prohibited transaction.Reportable on Schedule GService provider is a “disqualified person” under IRSprohibited transaction rules and is subject to excisetaxes under Code section 4975 40
  40. 40. Investment AdviceFinal rule published in the Federal Register – October 25,2011Designed to improve participant access to fiduciaryinvestment advicePermits a fiduciary investment adviser who receivesadditional fees from investment providers if certainconditions 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 selectedMay be viewed at 41
  41. 41. Definition of Fiduciary ProjectDOL intends to re-issue proposed ruleThe purpose of the reg. is to ensure that potentialconflicts of interest among advisors do notcompromise the quality of investment adviceThe proposed reg. would more broadly define“fiduciary” when a person provides investmentadvice 42
  42. 42. Definition of Fiduciary Project - ContinuedRevisions 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 transactionsAnticipated exemptions will:• Address current fee practices of brokers and advisors• Clarify that longtime exemptions that allow certain commissions will still apply 43
  43. 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:
  44. 44. Guidance for Apprenticeship & TrainingPrograms – 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
  45. 45. Reporting Compliance Initiatives • Electronic Communication w/Filers • Schedule C Compliance • Reporting of Funded Welfare Plans • Missing IQPA Reports • Collaboration w/IRS & PBGC 46
  46. 46. And Now it’s Your Turn… 47