Management’s Election of a 103(a)(3)(c) Audit
The Auditing Standard SAS No. 136 is bringing significant changes and additional requirements for plan administrators subject to audits of employee benefit plans (EBPs) covered by the Employee Retirement Income Security Act of 1974 (ERISA). The changes are effective for the 2021 plan year, audited in 2022. It is vital to understand and prepare for these changes now, to be in compliance as of the 2021 plan year end.
Management’s Responsibility
In the past, plan administers could elect for limited-scope audits, reducing the scope of the audit if qualified institutions certify the completeness and accuracy of investment balances and investment income. These audits are now referred to as 103(a)(3)(c) audits. The new standard specifically states it is the responsibility of plan administers to determine the conditions for a 103(a)(3)(c) audit have been satisfied. As such, management should take steps to make sure they understand what is required for a 103(a)(3)(c) audit to be permissible.
Obtaining Proper Certification
Under the new standard, to elect a 103(a)(3)(c) audit, management is required to confirm the investment information is prepared and certified by a qualified institution.
The Department of Labor (DOL) requires that the investment information be prepared and certified by a bank or similar institution or by an insurance company that is regulated, supervised, and subject to periodic examination by a state or federal agency. Broker dealers and investment companies are not qualified institutions; however, some of those institutions may have established separate trust companies that could meet the requirements to be a qualified institution. The DOL also requires the certification be in writing and signed by a person authorized to represent the qualified institution.
It is management’s responsibility for determining that this certification is prepared and certified by a qualified institution and the certification is signed by an authorized person.
The new regulation also requires that the institution certify both the accuracy and completeness of the investment information. If the institution does not certify both, the certification is not adequate to elect a 103(a)(3)(c) audit.
Certified Investment Information is Appropriately Measured
In addition to determining the certification is appropriate and a 103(a)(3)(c) audit is permissible, the plan administrator is required to verify the certified investment information is appropriately calculated and reported in compliance with the applicable financial reporting framework.
Although the qualified institution may certify that the investment information is accurate and complete, it does not necessarily mean that the certified investment information actually represents the appropriate values to be reported in the plan’s financial statements. It is important that the plan administrator review the certified investment information to determine that the investments have been valued as of the plan’s year end, and that the method for determining their values is in conformity the applicable financial reporting framework.
One of the best sources to verify this information is from the plan custodians or trustees. The plan sponsor’s contract or service agreement with the trustee or custodian will usually indicate how investments are to be valued and accounted for in periodic and annual reporting.
However, it is important to note that qualified institutions generally do not perform fair values analyses as part of the asset valuation and certification process. It is management’s responsibility to perform a fair value measurement analysis.