For many retirement plan sponsors, Form 5500 preparation season is underway.  Plan sponsors should be aware that things have changed with the Form 5500 audit requirements and procedures.  These changes push more responsibility to plan sponsors and require plan sponsors to better understand the representations they are making to the auditors as part of the 2021 plan audit (and beyond). So what has changed?

The American Institute of Certified Public Accountants (AICPA) issued Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA.  SAS 136 applies to audits for plans with a plan year ending on or after December 15, 2021 and has a particular impact on limited scope audits.   Limited scope audits are what most retirement plan sponsors use to evaluate the financial health of retirement plans.  These audits permit the auditors to rely on certain investment information provided by the plan’s financial institution (i.e., plan trustee or custodian), thus limiting the amount of audit work needed and the level of involvement from the plan sponsor with respect to plan investments. This passive involvement by the plan sponsor is now a thing of the past.

Now as part of the audit process, plan sponsors will be required to represent in writing to the auditors that the plan sponsor is in control of plan administration.  e.g., sponsor will need to represent to the auditor that the plan is properly and timely updated, is being administered in accordance with its terms and is adequately tracking employee benefit obligations to plan participants.

Plan sponsors will also be required to certify to the auditor that the plan may elect a limited scope audit (now called ERISA Section 103(a)(3)(C) audit) and identify how it qualifies for the ERISA Section 103(a)(3)(C) audit.  In order to do this, management must evaluate whether the financial institution providing the financial information to the auditor qualifies to provide this data, that the plan’s investment types are the sort of investments that may fall within the scope of a limited scope audit, and that the investment information provided to the auditor properly measures, presents and discloses the investment.

While this may sound a lot like the limited scope audit of the past, these requirements are intended to make plan sponsors responsible for providing written representations that the information the auditor is receiving from the plan sponsor regarding the administration of the plan and its investments is complete and accurate.

Plan sponsors should consider educating management and benefits committees on these new requirements. Managers and benefits committees in charge of plans should create a process to investigate the information required in the representations to the auditor so that the representations are thoughtful and verified.