Plan fiduciaries are more vulnerable than ever on a lot of legal and regulatory fronts, including the financial statements included with their 5500 filings. In an era when 5500 forms and their attachments quickly enter the public domain online via E-fast 2, available to anyone -- including an enlarged army of DOL inspectors hunting for anomalies, “fiduciaries need to be on the top of their game,” warns Dave Dacey, CPA, a partner with the WithumSmith+Brown and leader of the firm’s Employee Benefit & Pension Plans Group.

But there are a few potential trouble spots that can be checked immediately before doing a deeper dive into all of the possible financial reporting errors that can occur, he says.  He described what he calls the “low-hanging fruit” in a recent letter communication to retirement plan clients.

First a quick reminder from WithumSmith+Brown of when financial statements must be audited:

  • The mandatory audit requirement begins when the number of eligible participants reaches 121 at the beginning of the plan year.
  • Upon reaching 121 eligible participants, the mandatory audit requirement continues as long as there are more than 100 eligible participants.
  • The audit requirement is no longer mandatory when the number of eligible participants decreases below 100.

Example #1: Using the wrong auditor’s report.

A new set of auditing standards must be used for plan years after Dec. 15, 2012. Known as the “clarity” standards, they require, among other things, that both full-scope and DOL limited scope audit engagements each will require a new independent auditor’s report using these standards.

The new standard includes some new subject headings and other changes that will make it immediately clear to the DOL whether the audit has been conducted according to the new standard. “Using the incorrect auditor report could raise questions about the expertise of the plan’s auditor, which in turn could raise questions about the fiduciary’s prudence in selecting the auditor,” Dacey warns.

Indeed, the DOL “has stated that they are concerned that ‘dabblers’” -- CPAs that lack the proficiency to do plan audits correctly -- are causing some problems, Dacey says.

Example #2: Incorrectly disclosing certified contributions/distributions.

Most financial statements submitted to the DOL can be subject only to the “limited scope audit engagement” standard which does not require the audit of certified plan investments. But in order for plan investments to be deemed “certified” and acceptable to the auditor, that certification that the investment data is complete and accurate must be received from a bank, trust company or insurance company. Also, the exemption allowing for limited-scope audits “does not extend to any other non-investment assets or activities,” such as plan contributions and distributions, Dacey warns. Thus any financial statements disclosing contribution and distributions as “certified” violate the rules and demonstrate a lack of prudence over financial reporting.

Example #3: Partial termination.

When a significant number of employees are laid off (a rule of thumb: 20%, over a period that could span two plan years), the event can be deemed a “partial termination” of the retirement plan. When that happens, all employees would immediately and fully vest in whatever employer contributions have been made to the plan for them.

“Plans that do not properly account for partial terminations could erroneously overstate their plan’s forfeitures and understate the vested retirement plan balances for the terminated participants,” Dacey warns. There is a formula fiduciaries can use to determine for sure whether a partial termination has occurred (known to plan technical experts). Using it can preclude missing the fact that a partial termination has occurred.

The bottom line from Dacey on ensuring that plan financial statements are constructed properly and that fiduciaries are meeting their obligations boils down to three basic steps:

  • Actively review the plan’s publicly reported documents
  • When in doubt, ask questions of the people who prepared them; don’t take anything for granted, and
  • Document your quality control processes.


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