SAS 136: Preparation before year end

As previously communicated, Statement on Auditing Standards (SAS) 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, will bring significant changes for employee benefit plans and their auditors effective for audits of periods ending on or after December 15, 2021. As a result, before year end, plan administrators or trustees and their auditors should consider discussing certain preconditions of the audit, including the following:

• The requirement to provide a current plan instrument, including all plan amendments to the auditor.
• Plan management’s responsibility for determining whether an Employee Retirement Income Security Act of 1974 (ERISA) Section 103(a)(3)(C) audit is permissible, if elected, and how management will determine that an ERISA Section 103(a)(3)(C) audit is permissible in the circumstances, including that the investment information is (a) prepared and certified by a qualified institution, (b) the certification meets the regulatory requirements, and (c) the certified investment information is appropriately measured, presented and disclosed.
• The plan administrator’s responsibility to provide a substantially complete draft Form 5500 to the auditor prior to the dating of the auditor’s report as required by SAS 136. A draft of Form 5500 that is substantially complete includes the forms and schedules that could have a material effect, involving both qualitative and quantitative considerations, on the information in the financial statements and ERISA-required supplemental schedules. Plan management should work with the plan’s third-party administrator and Form 5500 preparer early to set a timetable for the receipt of the draft Form 5500. Also, the plan sponsor should be sure to complete related compliance questionnaires timely so as to not delay preparation of the draft Form 5500.

In addition, SAS 136 defines a new term, reportable findings, identified during the ERISA audit as a result of testing relevant plan provisions that affect the risk of material misstatement. (The relevant plan provisions will vary for each type of plan and the circumstances of each engagement.) Reportable findings are matters that are one or more of the following:

• An identified instance of noncompliance or suspected noncompliance with laws or regulations in accordance with AU-C section 250, Consideration of Laws and Regulations in an Audit of Financial Statements.
• A finding arising from the audit that is, in the auditor’s professional judgment, significant and relevant to those charged with governance regarding their responsibility to oversee the financial reporting process in accordance with AU-C section 260, The Auditor’s Communication With Those Charged With Governance.
• An indication of deficiencies in internal control identified during the audit that have not been communicated to management by other parties and that, in the auditor’s professional judgment, are of sufficient importance to merit management’s attention in accordance with AU-C section 265, Communicating Internal Control Related Matters Identified in an Audit.

Therefore, it will be important for the auditor and plan management to discuss this definition, related criteria (e.g., significance, relevance, etc.) and examples of what would be considered a reportable finding that would be required to be communicated, in writing, with those charged with governance. This will allow management to properly consider its internal control process with respect to addressing potential findings in a timely manner. There also should be discussion about who is charged with governance over the plan and the appropriate person(s) with whom the auditor should communicate reportable findings.