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Auditor’s Report “Disclaimer of Opinion” for Form 5500 Filings

“What does it mean when the auditor’s report for a plan’s Form 5500 filing says the auditor, ‘does not express an opinion?’ I thought that was the whole purpose of the auditor’s report.”

ERISA consultants at the Retirement Learning Center (RLC) Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare.  We bring Case of the Week to you to highlight the most relevant topics affecting your business.

A recent call with a financial advisor from Colorado is representative of a common inquiry related to the report performed by an independent qualified public accountant (the auditor)[1] that accompanies certain Form 5500 filings

Highlights of the Discussion

Most likely, the plan in question was subject to a “limited-scope” audit rather than a “full-scope” audit of the plan’s financial information. Under a limited scope audit, the auditor can only render a “Disclaimer of Opinion,” because he or she was not able to obtain sufficient audit evidence to provide a basis for an audit opinion.

Under ERISA Sec. 103(a)(3)(C) and DOL Reg. 2520.103–8, plan sponsors may instruct the auditor not to perform any auditing procedures with respect to investment information prepared and certified by “qualified institutions.”  A qualified institution could be a bank, trust company or similar institution, or an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as trustee or custodian for the investments. This option is referred to as a “limited scope audit,” and is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive that full scope audits.

Limited Scope Audit VS. Full Scope Audit

Limited Scope

Full Scope

The auditor does not audit the certified investment Information for the plan. He or she still tests participant data, including the allocation of investment income to individual participant accounts, and tests contributions, benefit payments and other information that was not certified. The auditor reviews the entity’s financial statements, including all assets; liabilities and obligations; and financial activities, without any limitation.

It is the responsibility of the plan sponsor to determine whether the conditions for limiting the scope of an auditor’s examination have been satisfied, and only the plan sponsor can request the auditor to limit the scope of the audit. The American Society of Certified Public Accountants (AICPA) has put together a “Limited Scope Audits Resource Center” to help plan sponsors satisfy their fiduciary responsibility in this area.

As an interesting aside, the Department of Labor (DOL) attributes the overall increase in noncompliant plan audits with the corresponding increase in the number of limited-scope audits performed.[2] According to a DOL report, “Assessing the Quality of Employee Benefit Plan Audits,” of the plans studied, 81 percent had limited scope audits and of those limited-scope audits, 60 percent contained major deficiencies. In fact, as a result of the study, the DOL recommended that Congress amend ERISA to repeal the limited-scope audit exemption.

To date there have been no law changes, but the AICPA Auditing Standards Board, in 2019, issued two new auditing standards related to the financial statements and annual reports of employee benefit plans, and transparency in annual reports:

  1. Statement on Auditing Standards(SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA; and
  2. Statement on Auditing Standards (SAS) No. 137, The Auditor’s Responsibilities Relating to Other Information Included in Annual Reports.

SAS 136 creates a new section in the AICPA Professional Standards, and deals with the auditor’s responsibility to form an opinion and report on the audit of financial statements of ERISA employee benefit plans. SAS 136 takes effect for audits of ERISA plan financial statements for periods ending on or after December 15, 2020. SAS 137 enhances transparency in reporting related to the auditor’s responsibilities for nonfinancial statement information included in annual reports.

SAS 136 will affect limited-scope audits when it takes effect by

  1. Referring to such audits as ERISA Sec.103(a)(3)(C) audits;
  2. Clarifying what is expected of the auditor, including specific, new procedures that apply when performing the audit; and
  3. Establishing a new form of report that provides greater transparency about the scope and nature of the audit, and describes the procedures performed on the certified investment information.

For a summary of the SAS 136 changes to Form 5500 reporting, please refer to AICPA’s At A Glance: New Auditing Standard for Employee Benefit Plans.

Conclusion

Limited scope audits of Form 5500 filings may only receive a Disclaimer of Opinion from the independent auditor. Note that for audits of plan information for periods ending on or after December 15, 2020, limited scope audits will change under new SAS 136 and SAS 137.

[1] Although there are exceptions, generally, Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series).

[2] DOL, “Assessing the Quality of Employee Benefit Plan Audits,” 2015

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Form 5500 Limited-Scope Audit

“What is a Form 5500 limited-scope audit, and how does a plan qualify for one?”

ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings plans, including nonqualified plans. We bring Case of the Week to you to highlight the most relevant topics affecting your business. A recent call with a financial advisor from Massachusetts is representative of a common inquiry related filing Form 5500, Annual Return/Report of Employee Benefit Plan.

Highlights of Discussion

Generally, ERISA requires administrators (the plan sponsors in most cases) of employee benefit plans  with 100 or more participants to have full scope audits of their plans, conducted by an independent qualified public accountant (IQPA), as part of their obligation to file an annual Form 5500 series of reports with the Department of Labor (DOL) and IRS. The IQPA is tasked with conducting an examination of all financial statements of the plan, and of other books and records of the plan as may be necessary, to enable him or her to form an opinion as to whether the financial statements and schedules conform to generally accepted accounting principles and standards.

Under ERISA Section 103(a)(3)(C) and DOL Reg. 2520.103–8, plan sponsors may instruct the IQPA not to perform any auditing procedures with respect to investment information prepared and certified by “qualified institutions.”  A qualified institution could be a bank, trust company or similar institution, or an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency that acts as trustee or custodian for the investments. This option is referred to as a “limited scope audit,” and is available only if the certification by the qualified institution includes a statement that the information is complete and accurate. Limited-scope audits are typically less expensive that full scope audits.

Brokerage firms and investment companies generally would not meet the eligibility requirements for a limited scope audit. However, if those types of firms have established separate trust companies, such trust companies, potentially, could meet the requirements to be a qualified institution for this purpose. A 2002 DOL information letter provides more insight into what constitutes a qualified institution. It is the responsibility of the plan sponsor to determine whether the conditions for limiting the scope of an IQPA’s examination have been satisfied, and only the plan sponsor can request the IQPA to limit the scope of the audit. The American Society of Certified Public Accounts has put together a “Limited Scope Audits Resource Center” to help plan sponsors satisfy their fiduciary responsibility in this area.

The DOL attributes the overall increase in noncompliant plan audits with the corresponding increase in the number of limited-scope audits performed.[1] According to a DOL report, “Assessing the Quality of Employee Benefit Plan Audits,” of the plans studied, 81 percent had limited scope audits and of those limited-scope audits, 60 percent contained major deficiencies. In fact, as a result of the study, the DOL recommended that Congress amend ERISA to repeal the limited-scope audit exemption.

Conclusion

While Form 5500 limited-scope audits may be less costly and time consuming up front, if inappropriately used or incorrectly done, they could result in a greater expenditure of money and time in the long run.

[1] DOL, “Assessing the Quality of Employee Benefit Plan Audits,” 2015

© Copyright 2020 Retirement Learning Center, all rights reserved