Communication between pension plans, government employers, and their auditors is essential in implementing GASB’s new pension standards, Statements No. 67 and No. 68, according to Jeffrey Markert, CPA, partner at KPMG LLP’s Department of Professional Practice and chairman of the AICPA State and Local Government Expert Panel.
This communication may be challenging because of the complexity of the standards and the potential lack of awareness about some of the more difficult provisions. Nonetheless, timely communication is key, Markert said.
Here are Markert’s tips on key areas of focus for auditors related to the new standards:
Timing and availability of required information
Employers and their auditors need to understand what information and associated audit assurance the plan will provide and the expected timing. Employers should not take for granted that the plan will provide the necessary information and associated audit assurance as discussed in the applicable AICPA white papers, Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting and Governmental Employer Participation in Agent Multiple-Employer Plans: Issues Related to Information for Employer Reporting. As a best practice, plans should provide a communication to employers and auditors about what they intend to provide, along with the expected timing. In the absence of timely communication from the plan, employers should request such information. Auditors should be part of the planning and communication process, as it impacts both the audit’s scope and timing.
Employer’s selection of the measurement date
The measurement date must be within 12 months and one day of the employer’s year end. Employers need to understand the measurement date guidance in the new standards and select the date based on an evaluation of their ability to receive required information from the plans on a timely basis. Typically, the measurement date will coincide with the plan’s year end. However, employers that have plans with the same year end may choose the current year end or the prior year end as the measurement date.
Many employers are selecting the prior year end based on the availability of the necessary information and the ability to get required audit assurance from the plan. Once a measurement date is selected, it cannot be changed in future periods; if the current year end is selected, employers are forever locked into that date, which can be more difficult for multiple-employer plans.
Employers participating in agent plans
Valuation reports and actuarial certification letters. Each employer’s management should receive its own valuation report with an actuarial certification letter (actuarial assumptions and a statement as to the methods specific to the employer). Historically, the actuarial certification letter was addressed to the plan, and the valuation report summarized the collective valuations of the individual employers and did not consider the appropriateness of assumptions for each employer. This results in a change in the level of effort by the actuary, and the actuarial report is a key piece of audit evidence for the employer’s auditor.
Some actuaries may not be aware of the change or believe they cannot issue a separate certification letter because they have not been engaged by the employer. It is important for auditors to consider this change in their planning, including the guidance of AU-C Section 500, Audit Evidence, for reliance on the actuary as a management specialist, and to communicate what audit evidence they need to receive.
New communications with plan actuaries create new security risks. A presumed audit procedure is that the employer’s auditor will get the census data directly or confirm that the data were used to perform the valuation. Employers’ auditors need to determine early their ability to communicate with the plan actuary, including obtaining a confirmation from the plan actuary related to the census data file.
This is a change from current practice to be handled carefully because new communications between actuaries and employers and their auditors create new levels of security risk over sharing sensitive personal information. The plans should lead the effort to identify potential security risks and to develop security protocols, including how information is transferred between the parties, encryption of files, and communication vehicles such as shared websites.
Employers participating in cost-sharing plans
Basis for allocating pension amounts. Plans should evaluate which is the most appropriate basis for allocating pension amounts under the new standards and provide a schedule of allocation percentages to employers. A number of methods are acceptable, and the chosen method should be representative. Plan auditors need to evaluate the appropriateness of the allocation method and provide assurance on the allocated pension amounts.
Testing census data. The timely selection by the plan auditor of the employers’ census data to test and the communication to the selected employers of how the data will be tested is critical to issuance of the financial statements. The census data white paper, Single-Employer and Cost-Sharing Multiple-Employer Plans: Issues Associated With Testing Census Data in an Audit of Financial Statements, indicates that the plan’s auditor or employer’s auditor may perform the test work.
The test work must be completed under Statement No. 67 before the plan issues financial statements. If the employer’s auditor performs the test work, he or she should be engaged to perform an engagement under AT Section 101, Attest Engagements, that expresses an opinion on management’s assertion. The assertion should typically include a statement that the significant elements of census data reported to the plan during the relevant 12-month period are accurate and complete based on the plan document or state statute.
The employer’s auditor, employer, and plan management should agree on what management assertions should be and define the meanings of “significant” and what is “reported.” This is an area where there may be confusion about responsibilities and the potential for delays in completing required audit procedures.
— Maria L. Murphy (firstname.lastname@example.org), is a freelance writer.