After a one-year delay, Statement on Auditing Standards (SAS) No. 136 is quickly coming up on the employee benefit plan horizon. SAS 136 is effective for audits of ERISA plan financial statements for periods ending on or after December 15, 2021. Generally, employee benefit plans with more than 120 participants will be impacted. The look and feel of the audit and related communications will change significantly. This new standard is meant to improve the quality of employee benefit plan audits and provide greater value to plan participants and the Plan Sponsor.
In 2015, the Department of Labor (DOL) found that upwards of 39 percent of employee benefit plan audits contained major deficiencies leading to the Form 5500 filing being rejected. In their comments, the DOL said that such across-the-board deficiencies would put “$653 billion and 22.5 million plan participants at risk.”
SAS 136 was supposed to go into effect for plans with periods ending on or after December 15, 2020, but was delayed for one year due to COVID-19.
Implementing the new standards early is permitted; otherwise, plan sponsors will want to take this time to familiarize themselves with the changes so they can be fully compliant for periods after December 15, 2021.
Changes to Limited Scope Audits
Limited-scope audits, which will now be known as ERISA section 103(a)(3)(c) audits, are getting a complete make over. These types of audits provide Plan Sponsors with an affordable option for complying with the Plan’s audit requirement by allowing the auditor to exclude certain audit procedures over investments and investment income, as long as these items are certified by a qualifying institution. The biggest change, as the name change implies, is that these audits will no longer be considered scope limitations and auditors will opine on the Plan’s financial statements. In the past, auditors disclaimed an opinion due to the scope limitation.
In addition, SAS 136 increases certain Plan Sponsor responsibilities. Among several changes, Plan Sponsors will now be required to assess and confirm that the certifying institution is qualified and communicate to the auditor and management that the certification is proper.
Other changes include changes to the auditor’s report. The auditor’s report for these types of audits will now begin with a new paragraph that addresses the nature and scope of the audit as well as a two-part opinion concerning the certification.
Additional Changes Under SAS 136
The primary objective of SAS 136, is to increase transparency throughout all aspects of the employee benefit plan audit process. By focusing on transparency, the DOL is hopeful that employee benefit plan audits will provide more value to Plan Sponsors and participants. Changes under SAS 136 include improving transparency of auditor and Plan Sponsor communications, roles, and responsibilities. Once implemented, SAS 136 will result in a substantially revised audit report, revisions to the engagement letter and management representations, and certain other changes to auditing procedures and documentation for both regular employee benefit plan audits as well as ERISA section 103(a)(3)(c) audits. Plan Sponsors should expect increased communication from the auditor and overall more transparency throughout the audit process.
The Standard also has new requirements for the Plan Sponsor as well. This includes revised and expanded management representations relating to information regarding the plan instrument, participant records, and plan administration. It also includes additional responsibility to provide the auditor with a significantly completed draft Form 5500 prior to the completion of the financial statement auditor. This is so the auditor can assess any potential material misstatements or inconsistencies between the financial statements and Form 5500 before the audit report is issued.