Big Changes Coming to 401(k) Audits

Plan sponsors required to undergo an annual financial statement audit of their 401k, 403b, or other employee benefit plan should be prepared for upcoming changes to the audit process. The American Institute for Certified Public Accountants (AICPA) recently issued a final balloted draft of new auditing standards governing how such audits are performed. The regulations formally known as, Statement on Auditing Standards, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, changes several aspects of the benefit plan audit process. While there is a small possibility additional edits could be made in the final version, it’s unlikely that changes to the audit reports, requirements for additional management disclosures and supplemental disclosures areas will be altered.  To help clients, prospects and others understand the changes and how it will impact their plan audit JLK Rosenberger has provided a summary of key details below.

Why are Plan Audits Changing?

The changes are being implemented as a reaction to the findings outlined in a Department of Labor (DOL) study on benefit plan audit quality. The 2015 report, Assessing the Quality of Employee Benefit Plan Audits, uncovered serious issues with the quality of audits being conducted. A startling finding of the study revealed that there was a 39% deficiency rate in audits analyzed and that 17% of audits failed to comply with one or more of the established reporting requirements. The assessment made many conclusions including that the smaller a firm’s benefit plan audit practice, the greater the likelihood of issues being present. When such failures occurred it was often because of lack of auditor education and training. Remedies were suggested as part of the report, but the standards board was requested to review and make formal process recommendations.

Key Plan Audit Changes

  • New ERISA Section 103(a)(3)(C) Audit –Since many of the issues uncovered in the DOL assessment occurred with limited scope audits, many of the new changes have a direct impact on these areas such as client acceptance, risk assessment and reporting and communicating with those charged with governance. ERISA Section 103(a)(3)(C) Audits will replace the current limited-scope audit.
  • Expanded Auditor Report – There are several changes to the audit report for both full and limited scope audits. The more major ones include notice that management is responsible for maintaining essential plan documents and they are required to ensure plan transactions are properly represented according to the plan’s provisions. There will also be an Other Matters Paragraph where the auditor will disclose their evaluation of supplemental schedules to determine conformity with established ERISA reporting guidelines.
  • 5500 – Auditors will be required to obtain a substantially completed 5500 in order to determine consistency with the audited ERISA plan financial statements. If the auditor identifies material inconsistencies, the auditor should determine if the plan financial statements or 5500 should be revised for consistency.  The new guidance addresses auditor’s responsibilities if management refuses to correct inconsistencies. 
  • Enhanced Risk Management – The new standards will require auditors to design and implement testing procedures in areas of plan operations that are susceptible to the greatest risk. A central component of this approach is a careful review of the plan’s provisions to identify where the possibility of misstatement may occur. It’s expected that this change will result in additional questions about plan operations and testing procedures as deemed necessary.

When Do the Changes Become Effective?

When issued as final, the new audit standard is expected to be effective for financial statement periods ending on or after December 15, 2020.

Contact Us

While the new audit standard is not yet final, it’s expected to be approved with few modifications. The changes will significantly impact the number of disclosures and amount of information plan management will need to provide auditors as part of the process. This will mean additional time and attention needs to be dedicated to managing the 401(k) or other benefit plan audit in the future. If you have questions about the new audit standard, or need assistance with your benefit plan audit, JLK Rosenberger can help. For additional information please call our Los Angeles, Orange County or Dallas office. We look forward to speaking with you soon.