Audit Quality Leader

EBSA’s chief accountant discusses major changes afoot in employee benefit audits.

Ian Dingwall is the chief accountant of the Department of Labor’s Employee Benefits Security Administration (EBSA). Dingwall is EBSA’s primary adviser on accounting and auditing issues stemming from the agency’s responsibilities under the Employee Retirement Income Security Act of 1974 (ERISA), the Federal Employee Retirement Security Act, and the Pension Protection Act of 2006 (PPA).

Dingwall and his staff of more than 40 reach out to a broad array of plan professionals including plan sponsors, plan administrators, attorneys, auditors and other service providers to ensure they have the information they need to fulfill their responsibilities to the plans and their participants.

Dingwall recently answered the JofA’s questions about employee benefit plan accounting and auditing.

JofA:You’ve been the chief accountant for the Department of Labor’s Employee Benefits Security Administration since 1988. What significant changes have you seen over the past 20 years?

Dingwall: Obviously, there have been many, many changes over the last 20 years. It would be hard to put together a list of all of those changes. Certainly, the changes we’re seeing now with implementation of the Pension Protection Act would be high on the list. We’ve also over this time period established the Office of the Chief Accountant as a vibrant and viable organization within the Department of Labor

I also believe we’ve been instrumental in helping the profession establish the Employee Benefit Plan Audit Quality Center and in ensuring that peer reviewers are focused on employee benefit plans. These are important initiatives because they are being undertaken by the profession itself.

JofA: What are the biggest challenges facing pension plans in the near future?

Dingwall: In the immediate future, one of the more significant changes involves new filing requirements for 403(b) plans. Due to the newly imposed audit requirement, these plans will now have to put together plan documents and recordkeeping systems that will be subject to the scrutiny of a financial statement audit. This new requirement is for the 2009 plan year, with reports being filed with the DOL in 2010.

Other challenges for the profession include: implementing the new audit risk standards for audits of employee benefit plans, and the changes mandated by the Pension Protection Act.

JofA: The Pension Protection Act made a number of changes to pension accounting. How are these changes impacting plan sponsors and their auditors?

Dingwall: Automatic enrollment and default investment should increase the number of people saving for retirement. I think the disclosure part of the PPA, which includes requiring the Form 5500s to be available on Web sites and the electronic filing of the forms, will create more transparency for plan participants who want to see how their plans are operated.

JofA: What is the most significant accomplishment the accounting and auditing profession has made in recent years in the employee benefit plan area?

Dingwall: Maybe the most significant accomplishment is the profession is no longer viewing these audits as “commodity-type” audits. I think the profession has gotten serious in terms of looking at these audits from a business perspective. Many firms have decided not to do these audits because it does not make economic sense to perform only a few employee benefit plan audits. It is significant that so many firms have become members of the Audit Quality Center and are investing in training their staffs so that the audits are done in accordance with generally accepted auditing standards.

JofA: Your office is responsible for inspecting CPA firms that audit more than 100 employee benefits plans. What do you look for when you do inspections, and what trends are you seeing?

Dingwall: Our inspection program is both a top-down and bottom-up review of a firm, to see how it operates its employee benefit plan practice. Frankly, we try to do it much like the PCAOB inspections and look to see what the tone at the top is. Is this something that the firm carefully monitors? Do they have an internal review process? Do they have somebody in charge of the practice? Is this a firm where partners who perform poorly have their compensation impacted? Are people rewarded in that there is promotion potential to the partner level and that this is not just a dead-end job? How does the firm govern itself to make sure it’s independent when it’s doing these audits? So we look at the firm from kind of a macro perspective.

And then from the bottom up, we’re always looking at work papers, asking staff do they feel like they have the right tools? Are they given the resources they need to conduct these audits in accordance with professional standards?

It’s fair to say that we’ve seen two trends. First, we’ve seen that members of the AICPA Employee Benefit Plan Audit Quality Center perform this work much better than firms who are not members of the Audit Quality Center. I really attribute this to the high standards that are set by the Audit Quality Center itself. We’ve also seen that the larger firms have improved their quality with respect to doing these audits. As a group, they perform much better than they previously did.

JofA: You’ve stated in speeches that some auditors of employee benefit plans do not adhere to their responsibilities under the AICPA’s Statement on Auditing Standards (SAS) no. 112, Communicating Internal Control Related Matters Identified in an Audit. Could you briefly explain the DOL’s position on SAS 112 letters?

Dingwall: Well, when we look at an audit, we are looking to see whether or not the audit was performed in accordance with generally accepted auditing standards. One of the requirements of doing an audit under Statement no. 112 is that these communications are made when necessary.

Unfortunately, we’ve heard that some plan sponsors have tried to negotiate these letters even in advance of the audit. They’ve tried to figure out whether an auditor would give a SAS 112 letter or not. In other words, it becomes a condition of employment. That, of course, we take as a very bad practice.

JofA: For plans that have never been audited, how will the new audit requirement for 403(b) plans that are subject to Title I of ERISA affect the plan sponsors and auditors?

Dingwall: On an immediate level, 403(b) plans will have to start creating records for the 2008 plan year, so that comparative financial information will be available for the beginning of the audit cycle in 2009. There is a real need to construct an opening balance that will pass review during the initial audit. And that date has already passed. For most plans it would have been Dec. 31, 2007, so that the 2008 year will be comparable to the 2009 year.

JofA: What advice would you give a sponsor that has missed the Dec. 31 date?

Dingwall: Well, they need to get in touch with their service provider and figure out how they’re going to create these beginning of the year cutoffs. I think all of the big third-party administrators who deal with 403(b) plans have put together helpful Web sites. The AICPA’s Employee Benefit Plan Audit Quality Center has a very useful Web site (www.aicpa.org/ebpaqc) that includes 403(b) plan reporting and audit requirements.

JofA: What is the biggest challenge for plan auditors with this new requirement?

Dingwall: There are a number of technical issues that relate to whether or not plan assets have been properly accounted for. Many of the 403(b) annuity programs do not necessarily account for plan assets. Now we’re getting into a very technical area that will have to be dealt with, which is whether or not plan assets have been fully allocated and whether or not participant loans conform to the regulatory requirements.

JofA: Is this any different from what auditors typically see in other types of plans such as 401(k)s, or is it simply that these are plans that have never been audited before?

Dingwall: It’s the latter. It’s that these are first-time audits for many of these plans, and these technical issues have not necessarily been addressed well. Plan sponsors of these 403(b)s basically open their doors to any service provider. Some of these educational organizations have offered their teachers 40-plus vendors to go to, and the complexity that they’ve created by doing that is just enormous. These are very expensive plans to run. The expenses on these plans can run three times the amount of 401(k) plan expenses.

So really a lot of abuses exist in 403(b) plans, and frankly the DOL’s reaction is to send in the auditors to help clean up these plans. Participant education needs to better focus on “decumulation” (taking money out), not just on accumulation of assets. Some annuity products are just not good financial deals.

JofA: As auditors implement the new risk assessment standards, what are some of the risks in employee benefit plans based on the deficiencies you find?

Dingwall: Certainly, at this particular time, some of the risks to the employee benefit plan community are that many of the employee benefits plans are investing in hard-to-value assets, which present some unique risks in this very changing economic environment. Auditors who are doing full-scope audits of plan assets are going to find it very difficult. They’re going to have to spend a lot more time, it seems to me, to audit some of these esoteric investments. So the risk assessment standards basically ask auditors to evaluate risk. One of the risks, obviously, is that these assets are not properly valued in the financial statements. Auditors are going to have to assess as best they can whether or not the plan management have used methodologies that they’re comfortable with to fair value these assets. I think that the risk assessment standards together with [FASB Statement no. 157, Fair Value Measurements] has really put a spotlight on these esoteric investment vehicles that plans have been investing in. We tell CPAs they need to understand the investments as plans increasingly are chasing these higher yields.

JofA: What is the possibility of the DOL proposing a safe harbor rule for employee contributions to large pension and welfare plans similar to the proposal for small plans released earlier this year?

Dingwall: We are currently asking people to write to us and tell us what they believe a good safe harbor would be for large pension plans. Frankly, we do not want to write a safe harbor that is more permissive than is practiced. We believe that pension plans, large pension plans in particular, are very aware of the department’s rules and make their participant contributions as soon as they can reasonably be segregated from the assets of the employer.

JofA: What do you expect the DOL’s regulatory agenda to look like in 2009?

Dingwall: Well, obviously we’ll be continuing to write regulations and guidance with respect to the Pension Protection Act. Many of those things are mandated by the new law. The new election will obviously produce for us a new secretary of Labor and a new assistant secretary in EBSA, and obviously a new president. We will look to them to figure out what the department’s new regulatory agenda will be in 2009.

JofA: Is there anything else you would like to point out to the CPA profession?

Dingwall: Historically, my office has participated in national training programs, regional training programs. We have now kind of refined our thinking in terms of offering training more at the local level. We’re more focused at the local level through state societies of CPAs. What we’re trying to do is foster the development of daylong seminars, kind of a boot camp for auditors, that are conducted locally throughout the states. We’re trying to get each of the state societies of CPAs to establish an employee benefit plan committee. Frankly, we see throughout different state societies of CPAs different educational programs being offered. There are best practices that need to be shared.

JofA: If a state society is interested in working with the DOL on training, who would they contact?

Dingwall: Probably the best person to contact is Michael Auerbach, who is on my staff. Contact him by e-mail, which is auerbach.michael@dol.gov.

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