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Employee Benefit Plan Audit Peer ReviewsEmployee Benefit Plan Audit Peer ReviewsPreparing for Risk Assessment, Control Document Inspection, and Other Peer Reviewer Concerns

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

THURSDAY, JUNE 14, 2012

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific

Crystal Ekanayake, Partner, Assurance Services, Gallina, Sacramento, Calif.y y , , , , ,

Christopher Etheridge, Partner, Frazier & Deeter, Alpharetta, Ga.

James Smolinski, Partner, Baker Tilly Virchow Krause, Madison, Wis.

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E l  B fit Pl  A dit P  Employee Benefit Plan Audit Peer Reviews Seminar

June 14, 2012

James Smolinski, Baker Tilly Virchow Krausejames.smolinski@bakertilly.com

Crystal Ekanayake, Gallina LLPcekanayake@gallina.com

Christopher Etheridge, Frazier & Deeter chris.etheridge@frazierdeeter.com

Today’s Program

Preparing For The Peer Review[Crystal Ekanayake]

Slide 7 – Slide 10

Documentation Issues[James Smolinski]

Slide 11 – Slide 18

Areas Of Common Error And Deficiency[Crystal Ekanayake]

Slide 19 – Slide 25

Review Team Approach[Christopher Etheridge]

Slide 26 – Slide 45

PREPARING FOR THE PEER Crystal Ekanayake, Gallina LLP

PREPARING FOR THE PEER REVIEW

EBP audits: Specialty audit area

DOL continues to find audit deficiencies. Commitment to training and quality control Commitment to training and quality control

EBP audits: Combine financial statement auditing and li diticompliance auditing

Example: Contributions Example: Benefit payments

8

EBP audits: Unique reporting requirements

GAAP financial statements DOL reporting requirements DOL reporting requirements IRS supplemental schedule requirements

EBP audits: Increased scrutiny

Example: DOL enforcement initiativesp Example: Peer review requirements

9

Two schools of thought for structure

Stand-alone niche EBP audit practice Dedicated team members Dedicated team members Increased depth of knowledge Training from both CPA sources and industry

Extension of the corporation audit team Corporate audit team performs engagement Refresher training each year Emphasis on high-level reviewer

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DOCUMENTATION ISSUESJames Smolinski, Baker Tilly Virchow Krause

DOCUMENTATION ISSUES

D i  E h iDocumentation Emphasis

I. Written audit programs A. No written audit programs = “kiss of death” = modified

opinionopinion

B. Important to note that “one size does not fit all”

1. Tailor for specific types of plans

> Definied contribution

> Health and welfare

> Defined benefit> Defined benefit

2. Tailor for specific scope of plan

> Limited-scope

> Full-scope

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D i  E h i  (C )Documentation Emphasis (Cont.)

II. System of quality controlsA. How does the firm ensure quality of engagement meets

professional standards?

1. Do you have an internal inspection program?

2. CPE requirements. C equ e e ts

3. Technical review

4. AICPA quality control standards QC Sect. 10A: A firm’s system of quality controlsystem of quality control> Lays out requirements for quality control> Independence checks> Client acceptance and re‐acceptance procedures> Client acceptance and re‐acceptance procedures

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D i  E h i  (C )Documentation Emphasis (Cont.)

II. System of quality controls (Cont.)

B. How does the firm measure that quality of engagement meets professional standards?

1 Are inspection results disseminated to improve quality?1. Are inspection results disseminated to improve quality?

2. Are CPE requirements tracked and compliance ensured?

3 Is there a second partner or reviewer who does an 3. Is there a second partner or reviewer who does an independent review?

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D i  E h i  (C )Documentation Emphasis (Cont.)

III. Tools and templatesA. Audit progams

B. Standardized testing templates B. Standardized testing templates

Examples:

Sampling

Participant data testing

EligibilityEligibility

Loans

Distribution

Full-scope investment

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D i  E h i  (C )Documentation Emphasis (Cont.)

IV. EBPAQC membership requirements

A. Designated audit partner. es g ated aud t pa t e

B. Partners are members of AICPA

C. System of QC (CPE compliance)

D. Monitoring program (Inspection)

E. Peer review report made public

F EBP l t d f iF. EBPs selected for peer review

G. Periodically file info

H. Pay duesH. Pay dues

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D i  E h i  (C )Documentation Emphasis (Cont.)

V. Inspection requirements

A. Review of specific engagements

B. Review of CPE records

C. Review of training program (if applicable)

D. Summarize and evaluate the findings

E C i t i ti ltE. Communicate inspection results

F. Remediate issues as needed

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D i  E h i  (C )Documentation Emphasis (Cont.)

VI. Inspection considerations

A. Internal inspections are required in the year of the firm’s peer review.

B. Can be modified to avoid duplication

C Sole practitioners can satisfy the inspection requirement C. Sole practitioners can satisfy the inspection requirement following the AICPA quality control standards in QC Sect. 10.

D C t i i f ti i l d i th EIPA’ bli filD. Certain information is already in the EIPA’s public files.

E. If not avaiable, you can send in your peer review report, and the EBP AQC will coordinated publishing in the peer review public file.

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AREAS OF COMMON ERROR Crystal Ekanayake, Gallina LLP

AND DEFICIENCY

Compile list of EBP engagements

Classify by size, risk, complexity

Identify engagement staff

Conduct internal inspection

CPE credit: AICPA Audit Quality Center CPE credit: AICPA Audit Quality Center

20

Applying new accounting principles through the accounting standards updates (ASUs)

Fair value measurement and disclosures (valuation of Fair value measurement and disclosures (valuation of investments is incorrect)

Untimely remittance of employee contributions Untimely remittance of employee contributions

Incorrect participant data DOH, hours worked, compensation, etc.

21

Allocation of contributions and earnings (i.e., wrong %)

Incorrect vesting provision applied Incorrect vesting provision applied

Using correct definition of “compensation” when calculating EE and ER contributions

22

Valuation of investments

Participant data: Test the items that actuary uses in calculation (gender, DOB, DOH, wages, etc.)

Qualifications of actuary (document as required by SAS 73)

Assumptions used by actuary: Discount rates

23

Incorrect calculation of benefits

Consider independent review of actuarial report Consider independent review of actuarial report

Need Form 5500, Schedule SB to agree employer contributionscontributions

24

Accounting challenges

Value of assets

Qualifications of TPA and actuary

Unrecorded liabilities for TPA fees

Not as common so may be more difficult to gather info to Not as common, so may be more difficult to gather info to understand the plan basics

25

REVIEW TEAM APPROACH Christopher Etheridge, Frazier & Deeter 

Understanding The FirmUnderstanding The FirmUnderstanding The FirmUnderstanding The Firm

• Synthesize the information gathered during the review

• Understand the causes of deficiencies noted in the firm’s U de sta d t e causes o de c e c es oted t e sperformance

• Develop practical recommendations for changes in the firm’s system• Develop practical recommendations for changes in the firm s system of quality control

27

Interviews With Firm PersonnelInterviews With Firm PersonnelInterviews With Firm PersonnelInterviews With Firm Personnel

• Managing partner

• Head of audit departmentead o aud t depa t e t

• Head of quality control

• Head of EBP practice

• Various levels of staff

28

What Review Team Wants To LearnWhat Review Team Wants To LearnWhat Review Team Wants To LearnWhat Review Team Wants To Learn

• Risk assessment within firm’s A&A/EBP quality control environment

• Competitive conditions contributing to significant risksCo pet t e co d t o s co t but g to s g ca t s s

• Client dependency in terms of fees generated

• Firm’s monitoring of A&A and EBP practice and delegation to specific individuals

• Firm’s commitment to CPE and acceptance and continuance policies

29

Understanding Quality ControlUnderstanding Quality ControlUnderstanding Quality ControlUnderstanding Quality Control

• How are quality control policies and procedures documented?• Any major changes during the last couple of years? • Are quality control materials used by the firm developed internally, e qua ty co t o ate a s used by t e de e oped te a y,

or are they third-party practice aids?• How does the firm monitor the quality of engagements prior to

issuance?• Does the firm perform monitoring procedures or internal

inspections?• Any significant organizational changes that might affect operations• Any significant organizational changes that might affect operations

during the review year?

30

Risk AssessmentRisk AssessmentRisk AssessmentRisk Assessment

• Risk factors include: – Results of prior peer review– EBP engagements and hours to total A&A engagement and e gage e ts a d ou s to tota & e gage e t a d

hours– Types of EBP engagements performed– Hours and fees per engagementHours and fees per engagement– Initial engagements

31

HighHigh Risk EngagementsRisk EngagementsHighHigh--Risk EngagementsRisk Engagements

• ESOPs

• 403(b) plans03(b) p a s

• Health and welfare plans

• Defined benefit plans

32

Peer Review ProceduresPeer Review ProceduresPeer Review ProceduresPeer Review Procedures

• AICPA EBP audit engagement checklist– Report and related disclosures– General audit proceduresGe e a aud t p ocedu es– Working paper areas– Functional areas

“No” answers– No answers

33

Categorizing IssuesCategorizing IssuesCategorizing IssuesCategorizing Issues

• Importance of a matter is all down to professional judgment

• Categories of issuesCatego es o ssues– Matter– Finding

Deficiencies– Deficiencies– Significant deficiencies

34

MatterMatterMatterMatter

• Result of evaluating whether an engagement submitted for review was performed and/or reported on in conformity with applicable professional standards

• Typically, one or more “no” answers

• If only matters are found, a report rating of “pass” is appropriate

35

Matter (Cont )Matter (Cont )Matter (Cont.)Matter (Cont.)

• Documented on a matter for further consideration (MFC) form

• Types of mattersypes o atte s– Review team questions of whether a necessary procedure was

performed– Whether a required footnote was disclosedWhether a required footnote was disclosed– Documentation and minor disclosure-type items

36

FindingFindingFindingFinding

• One or more matters that the review captain has concluded result in financial statements or information, procedures, documentation, etc. are not in conformity with the requirements of applicable

f i l d dprofessional standards

• Review captain will conclude whether one or more findings are a deficiency or significant deficiency

37

Finding (Cont )Finding (Cont )Finding (Cont.)Finding (Cont.)

• If TC concludes not a deficiency or significant deficiency, documented on a findings for further consideration (FFC) form, and a report rating of “pass” is appropriate

• Types of findings– Multiple documentation matters noted (some of which may be of p ( y

a similar nature but not deemed a material issue; risk and uncertainties footnote)

38

DeficiencyDeficiencyDeficiencyDeficiency

• One or more findings that the review captain concludes are material to the understanding of the financial statements or that information, procedures, documentation, etc. are not in conformity with the

i f li bl f i l d drequirements of applicable professional standards

• No evidence that deficiencies occur on all engagements and no other deficiencies; report rating of “pass with deficiencies” is appropriate

39

Deficiency (Cont )Deficiency (Cont )Deficiency (Cont.)Deficiency (Cont.)

• Example: More than one EBP engagement is submitted for review, and the exact same deficiency occurs on each engagement

• Example: One EBP engagement had a deficiency, but other EBP engagements were okay

40

Significant DeficiencySignificant DeficiencySignificant DeficiencySignificant Deficiency

• Deficiencies are evident on all the engagements submitted for review, the engagements were not performed and/or reported in conformity with applicable standards in all material respects, and a

i f “f il” i ireport rating of “fail” is appropriate

• Example: Financials not materially correct, missing key disclosures, audit programs not completed and insufficient work performed

41

Practice TipsPractice TipsPractice TipsPractice Tips

• Address each “No” answer thoroughly

• Professional standards vs. personal preferenceso ess o a sta da ds s pe so a p e e e ces

• Read, review and respond to each MFC and FFC carefully

• Read draft report; pass with deficiencies and fail reports describe the deficiencies and highlight if related to ERISA audits

42

Selecting A ReviewerSelecting A ReviewerSelecting A ReviewerSelecting A Reviewer

• AICPA Web site has a database of reviewers

• If reviewed firm is a member of EBAQC, then reviewer must also be e e ed s a e be o QC, t e e e e ust a so bea member

• Reviewer must have experience in same EBP areas of the reviewed• Reviewer must have experience in same EBP areas of the reviewed firm

• Consider selecting a reviewer whose practice is similar to your firm’s• Consider selecting a reviewer whose practice is similar to your firm s practice

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Selecting A Reviewer (Cont )Selecting A Reviewer (Cont )Selecting A Reviewer (Cont.)Selecting A Reviewer (Cont.)

• Consider selecting a reviewer from a larger firm

• Check reviewer referencesC ec e e e e e e ces

• Want a reviewer that is knowledgeable in your practice areas, but reasonable and fairreasonable and fair

• Ask for value; add insights from the reviewer

44

Next Review ReadinessNext Review ReadinessNext Review ReadinessNext Review Readiness

• Correct findings immediately; avoid repeat findings

• Communicate findings to your teamCo u cate d gs to you tea

• Consider using outside professionals to perform internal inspections

• Consider specialize ERISA training for your team

• Hire a consultant to do a more in-depth review of your ERISA practice and engagements

45