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Employee Benefit Plans Review Task Force

2016 Findings

Volunteer as a reviewer 

by Wendy S. Keenan, CPA, chair, MNCPA Employee Benefit Plan Review Task Force

I have been auditing employee benefit plans since my first summer in public accounting 12 years ago. Every year, it seems I come across something new and learn from it. Similar to other practice areas, the rules and regulations of employee benefit plan audits are continuously changing, often becoming more complex with each passing year. But unlike other practice areas, employee benefit plan audits have not always been given the time and attention they deserve, because many auditors believed these were simple audits with little risk.

This way of thinking, however, has evolved. The CPA community at large seems to finally agree that employee benefit plan audits are high-risk engagements. The complex nature of these engagements is, in essence, why the MNCPA Employee Benefit Plan Review Task Force was created in 2009.

The task force is made up of volunteers who are MNCPA members with experience in performing, reviewing and/or supervising employee benefit plan audits. Our primary goal is to improve the quality of financial reporting for employee benefit plans by providing feedback on anonymously submitted audited financial statements. These financial statements are voluntarily submitted by MNCPA member firms, whose identities are kept confidential by MNCPA staff.

This year's task force was composed of 19 (including six new!) volunteers from 16 different accounting firms. Member firms submitted a total of 52 sets of financial statements, which were divided among the volunteers to individually review in advance of the review day. After completing our initial review, we came together for an entire morning to discuss results, raise issues and come to a consensus on recurring findings. I must say, there was a lot of brainpower in that room.

Because many of the volunteers have participated in the task force for several years, we also discussed the trend in quality. Overall, we agreed that financial statement reporting for employee benefit plans has improved, but that some reporting areas still suffered from misunderstanding. This, of course, often results in missing, incomplete or improper reporting and disclosure.

What follows are the reporting areas in which we uncovered opportunities for improvement, as well as tips for avoiding common errors in each.

Investments and fair value disclosures

Reporting and disclosure for investments continue to provide challenges. The first step should be to gain an understanding of the plan's underlying investments. Without this understanding, the reporting and disclosure is likely to be incorrect or incomplete. At least a quarter of the reports we reviewed had some kind of missing or incomplete information related to investments. Here are some of the most common errors we found related to investments:

  • Missing or incomplete net asset value disclosures for plans that carry investments in pooled separate accounts and common collective trusts.
  • Missing net appreciation/depreciation by asset type.
  • Missing or incomplete disclosures for investments classified as level 3 within the fair value hierarchy.
  • Missing or incomplete disclosures for fully benefit-responsive investment contracts.

Supplemental schedules

We identified a variety of issues within the reporting on the supplemental schedules required by the Department of Labor:

  • Missing column D on the Schedule of Assets Held.
  • Lack of identification of parties-in-interest on the Schedule of Assets Held.
  • Incorrect titles on the supplemental schedules.

Income taxes

Often employee benefit plans do not incur income taxes. However, certain disclosures, such as what tax years are open and whether the plan is relying on a determination or opinion letter, are required. Don't forget that plans using a prototype plan are often relying on the prototype opinion letter rather than its own determination letter.

Other notable issues

  • Make sure the policy for using or allocating forfeitures is disclosed, along with the forfeiture balance and forfeitures used for the periods presented.
  • Identify whether the plan is utilizing a custodian or trustee and be consistent when referencing this throughout the report.
  • If the plan has engaged in any prohibited transactions, consider whether the appropriate disclosures and required supplemental schedules have been included.

Overall, read financial statements for consistency and comparability. The AICPA's "Audit and Accounting Guide for Employee Benefit Plans" is a great resource for general information, presentation and disclosure examples.

Changes to come

Fortunately, there is relief in sight for some of the complexity surrounding employee benefit plan financial reporting. As part of its Simplification Initiative, the Financial Accounting Standards Board issued Accounting Standards Update 2015-12, Parts I, II and III in July 2015.

Part I amends current GAAP so that fully benefit-responsive investment contracts are measured, presented and disclosed only at contract value. This eliminates the need for plans to report fully benefit-responsive investment contracts at both fair value and contract value.

Part II will eliminate the current requirements for plans to disclose (1) individual investments that represent 5 percent or more of net assets available for benefits and (2) the net appreciation or depreciation for investments by general type. These disclosures will be eliminated for both participant-directed investments and nonparticipant-directed investments. Net appreciation or depreciation in investments will still be required to be presented in the aggregate, but will no longer be required to be disaggregated and disclosed by general type.

Part III provides a practical expedient to permit plans to measure investments and investment-related accounts as of a month-end date that is closest to the plan's fiscal year-end when the fiscal period does not coincide with a month-end.

All three parts of ASU 2015-12 are effective for fiscal years beginning after Dec. 15, 2015; however, earlier application is permitted. The amendments should be read in their entirety to ensure compliance with new regulations.

Wendy Keenan is a manager at Abdo, Eick & Meyers, LLP and has more than 12 years of public accounting experience. She provides audit and attest services to businesses, nonprofit organizations and employee benefit plans. Wendy is also heavily involved in her firm's quality control process. She enjoys training new staff and helping others within her firm research complex GAAP issues. You can reach her at wendy.keenan@aemcpas.com or 507-625-2727.