New Rules for ‘Limited Scope’ ERISA Audits Designed to Improve Quality

New rules governing ERISA plan audits will impose new responsibilities for certain matters on plan sponsors, particularly those who engage auditors to perform “limited scope” audits of their plans. The rules, which will take effect for ERISA plans ending after December 15, 2021, are designed to bring consistency to audit methods and to address concerns about audit quality.

One notable change will be that limited scope audits will no longer be called limited scope. In July 2019, the Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to the Employee Retirement Income Security Act of 1974 (ERISA). SAS 136 made significant changes to many aspects of employee benefit plan audits covered by ERISA. One of the biggest changes was the creation of Section 103(a)(3)(C), which effectively replaces the limited scope audit provision with new rules. Due to COVID-19, the effective date for this change was delayed to periods ending on or after December 15, 2021.

Why Change the Name?

For this type of audit, plan management can choose to exclude from the audit certain investment information that is held and certified by a qualified institution. The new rule increases the auditor’s responsibilities when performing audits under the Section 103(a)(3)(C) election. Rather than disclaiming an opinion on the entire audit, auditors will be issuing an opinion on whether the information in the financial statements and supplemental schedules related to certified assets is derived from or agrees to, in all material respects, the information prepared and certified by a qualified institution. Auditors will also be expressing an opinion on whether all other financial statement amounts and disclosures, such as noninvestment-related information and investment information that was not certified, is presented fairly, in all material respects.

During an ERISA Section 103(a)(3)(C) audit, your auditor performs the following procedures:

• Confirms that the institution issuing the certification is indeed qualified under DOL rules and regulations.
• Classifies which investment information is certified.
• Acquires and evaluates the certification to ensure that it relates to investment information prepared and certified by a qualified institution.
• Ensures that plan management acknowledges and understands its responsibility for determining the appropriate measurement, presentation, and disclosure of certified investment information, in accordance with the applicable financial reporting framework.
• Assesses both the certified information and the related information presented and disclosed in the ERISA plan financial statements and ERISA-required supplemental schedules to evaluate that they match.
• Reviews any disclosures relating to the certified investment information and evaluates whether they are in accordance with the presentation and disclosure requirements of the applicable financial reporting framework.
• Performs any procedures necessary to ensure that all received or disbursed amounts reported by the trustee or custodian were determined in accordance with the plan provisions (this is for all audits of ERISA plan financial statements, not just those under Section 103(a)(3)(C)).

Additionally, the auditor should perform the following procedures, if the audit calls for them:

• In the event that the auditor discovers any incomplete, inaccurate, or otherwise unsatisfactory portions of the certified investment information in the financial statements and related disclosures, the auditor should meet with plan management professionals to discuss the discrepancies and work to determine any additional procedures or actions.
• The auditor should perform audit procedures on any information not covered by the certification if the auditor’s assessment of the risk of material misstatement so requires. This includes both disclosures and noninvestment-related information. If the plan holds any investments not covered by the certification, the auditor should perform audit procedures on them.

Impact on Plan Sponsors

Under the new rules, you also have new responsibilities as a plan sponsor. You must provide to the auditor acknowledgements that you are responsible for:

• Determining whether a 103(a)(3)(C) audit is permissible and whether the certification meets ERISA requirements.
• Maintaining and providing a current plan document.
• Preparing and fairly presenting financial statements.
• Providing a substantially completed (draft) Form 5500.

You also will be responsible for understanding which investments and disclosures are certified, and you will need to acknowledge, in writing, that all the conditions are met.

Change in 5500 Preparation

It is important to note that the Form 5500 will have to be substantially complete before the audit can be completed, as your auditors will be required to review a substantially complete draft of the Form 5500 before dating the auditor’s report. This may change the timing of Form 5500 completion for some plan sponsors.

When Does This New Standard Go Into Effect?

ERISA Section 103(a)(3)(C) audits replace limited scope audits beginning with the 2021 plan year. That means that this type of audit will begin to be performed in 2022. Please note that early adoption is not permitted.

For further details or specific information on how the new audit standard will impact your plan audit, please reach out to your Adams Brown plan auditor.

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