New reporting requirements for state and local governments offering defined benefit pension plans significantly increase the extent to which government employers, pension plans, and the related auditors must coordinate their efforts. In some cases, governments that have never recorded a pension liability will now measure and report a liability based on the excess of the actuarial present value of projected pension benefits over the net resources available to pay those benefits. The changes affect both governments that sponsor their own pension plans and those governments that participate in such plans.
In response to the new reporting standards, the AICPA Auditing Standards Board approved pension-related audit interpretations, and the AICPA State and Local Government Expert Panel (SLGEP) issued three white papers to address reporting and auditing issues for governmental entities related to public-sector pensions. The interpretations and white papers are available on the AICPA website at tinyurl.com/lv6szzg.
The SLGEP examined issues related to implementing GASB Statements
No. 67, Financial Reporting for Pension Plans, and No. 68,
Accounting and Financial Reporting for Pensions, and
developed suggestions for management, actuaries, and auditors. This
article describes the issues facing preparers and auditors related to
the reporting of pension liabilities by state and local governments
and summarizes the SLGEP’s recommendations. Government officials,
pension plan managers, financial statement preparers, auditors (plan
and employer), and actuaries need to work together to meet the
information requirements of these new reporting standards. These
parties should be planning now to assure that processes are in place
to efficiently meet the disclosure and audit requirements.
GASB Statements No. 67 and No. 68
Statement No. 67 went into effect for periods beginning after June 15, 2013, and establishes reporting for government-administered pension plans. Statement No. 68 is effective for periods beginning after June 15, 2014, and establishes employer reporting. The key difference from earlier standards is that financial statement recognition is now divorced from pension funding.
Statement No. 68 requires governments to report the total pension liability, as well as the fair value of plan assets available to pay pension benefits. The difference between a participating government’s total pension liability and the fiduciary net position of the plan is the net pension liability (NPL) and is reported on the statement of net position of the governmentwide and proprietary fund statements.
The problem facing auditors and financial statement preparers for
state and local governments that provide their employees with defined
benefit plans is to obtain sufficient appropriate evidence to attest
to the fairness of the reported NPL, pension expense, and
pension-related deferred inflows of resources or deferred outflows of
resources. The SLGEP’s white papers provide recommendations specific
to the various types of pension plans.
As the name implies, single-employer pension plans provide pension
benefits to the employees of one government. The auditor’s
responsibilities in single-employer plans are to (1) obtain an
understanding of the process and controls used to assure the
completeness and accuracy of census data provided to the actuary
following the guidance provided in AU Section 336, Using the Work
of a Specialist; (2) test the underlying records for a sample of
plan participants as evidence that the census data reported to the
actuary are correct; (3) evaluate the actuary’s competence and
actuarial valuation report; and (4) examine the government’s pension
accrual and related disclosures with respect to plan (Statement No.
67) and employer (Statement No. 68) reporting standards. Given the
complexity of the actuarial valuation and the materiality of the
pension amounts, auditors may consider using their own specialist.
Additionally, it is important to determine that the actuary uses the
Cost-sharing multiple-employer plans
Many states have created multiple-employer retirement systems for both state employees and employees of local governments within the state. One type of multiple-employer plan is a cost-sharing plan, in which the participating governments pool their resources, risks, and obligations. A key feature of cost-sharing plans is that a single actuarial valuation report is performed for all plan members and is used to determine the contribution rate for participating employers. Close cooperation between the retirement system and the participating governments, as well as between those entities and their auditors, is essential to effectively meet the information needs of all parties.
Because cost-sharing plans make a single actuarial valuation and participating employers share proportionally in the liability, the retirement system (rather than the participating governments) is in the best position to calculate the system’s NPL. Further, the plan sets contribution levels for participating governments. These measures are based on local government census data provided to the plan and used by the plan’s actuary. To effectively manage the pension plan, best practices call for the retirement system to have procedures for verifying the accuracy and completeness of this information. Similarly, the retirement system’s auditor is required to obtain evidence that the census data are supported by underlying records.
In the white paper Single-Employer and Cost-Sharing
Multiple-Employer Plans: Issues Associated With Testing Census Data
in An Audit of Financial Statements, the SLGEP suggests the
retirement system’s auditor select a sample of contributing employers
each year for testing underlying payroll records. Since cost-sharing
plans can have thousands of participating employers, the selection of
specific employers for testing may follow a risk-based approach,
taking into consideration the size, past experience, and changing
conditions of the employers. The auditor would then visit the
employer’s site to conduct tests of the census data. Alternatively, in
lieu of the retirement system’s auditor going to the local government,
the participating employer could engage its auditor to perform these
tests and communicate the results to the system’s auditor.
With the implementation of Statement No. 68, employers participating in cost-sharing plans are required to recognize their proportionate share of the NPL, pension expense, deferred inflows of resources, and deferred outflows of resources.
The audited financial statements of cost-sharing plans include only the NPL for the plan as a whole, so they are not sufficient for employer reporting purposes. Therefore, in the white paper Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting, the SLGEP recommends that cost-sharing retirement systems prepare schedules showing each employer’s allocation percentage and proportionate share of the plan’s NPL, pension expense, deferred inflows of resources, and deferred outflows of resources. Doing so would minimize the overall effort required to meet participant reporting requirements of Statement No. 68 and assure consistency in the calculations.
Further, the SLGEP recommends the retirement system engage its auditor to obtain appropriate assurance and express an opinion on these schedules so that participating governments and their auditors could use them as audit evidence to support pension amounts. This does not relieve the participating government or its auditor of all responsibility. The government’s auditors would still have to evaluate the plan auditor’s competence and independence, as well as examine the pension financial statement disclosures specific to the participating government.
Agent multiple-employer plans
Agent multiple-employer retirement systems are established by state governments to assist local governments in providing pension benefits to their employees. An agent plan may be thought of as a collection of single-employer plans with shared administrative and investment functions. Separate accounts are maintained for each participating government, and contributions to the plan may be used only to provide benefits to the contributing government’s employees. Actuarial valuations are required for each participating employer, and employers vary in the extent of funding.
GASB concluded the overall pension liability for agent multiple-employer plans is not meaningful, and Statement No. 67 does not require its disclosure in the financial statements of such plans. However, Statement No. 68 requires governments participating in agent plans to report the same measures as other pension plans: NPL, pension expense, deferred inflows of resources, and deferred outflows of resources. Unlike cost-sharing plans, these amounts cannot be derived by applying a single percentage to the overall totals for the plan. A third white paper, Governmental Employer Participation in Agent Multiple-Employer Plans: Issues Related to Information for Employer Reporting, provides suggestions for efficiently satisfying both the reporting requirements of governments participating in agent multiple-employer plans and the needs of their auditors.
While the retirement system calculates the values for each participating government, the government officials still assume reporting responsibility and must understand the report and underlying assumptions. Again, the participating government’s auditor evaluates the competence and objectivity of the actuary and the retirement system auditor. However, simply verifying that the amounts reported in the local government’s financial statements are the same as those provided by the retirement system is not evidence that the amounts are fairly stated. Auditors of the participating government are required to obtain assurance that the census data are reliable and the pension reporting is fairly stated.
Pension elements based on census data. Testing the data can be complicated since the data on current employees are provided by the participating government, and the retirement system maintains the census data for retired and inactive employees and generates the census data file that the actuary uses in the valuation. The participating government’s auditor tests the census data that are provided annually to the retirement system at the employer. However, the system’s auditor is in the best position to test ongoing maintenance of the census data. The SLGEP suggests the retirement system engage its auditor to perform one of two alternatives for meeting the needs of participating governments.
The first option is for the retirement system auditor to issue a Service Organization Control (i.e., SOC 1, Type 2) report on the census data maintained by the system to provide assurance that the retirement system’s controls over census data are suitably designed and operating effectively for the year during which the actuarial valuation was performed. This option will be most desirable if the system has effective controls in place, the controls are documented, and the system’s auditor is able to test the controls and determine that they were operating effectively during the year.
An alternative is to engage the system’s auditor to perform an examination-level engagement. This is, in effect, an audit of the contents of the census data provided to the actuary. The report would address relevant management assertions, such as that (1) employee information (e.g., age, years of service, marital status, and gender) is accurate; (2) benefit provisions are current; and (3) deceased members have been identified and removed from the data.
Pension reporting. The system actuary will issue a separate valuation report addressed to the employer that provides employer-specific amounts for the total pension liability, pension expense, deferred inflows of resources, deferred outflows of resources, and other information necessary to meet pension disclosures. The employer’s auditor will need to evaluate this report following the guidance of AU Section 336. Given the complexity of actuarial valuations, the employer’s auditor may consider using his or her own specialist rather than relying solely on the work of the plan actuary.
Fiduciary net position. To address the fiduciary net position component of the NPL, the SLGEP recommends the retirement system issue a schedule of changes in net fiduciary position by employer. The schedule would show changes in net position (e.g., contributions, investment income, and pension benefit) as well as the beginning and ending net position for each government participating in the system. Once this information is obtained, the participating government’s auditor needs evidence supporting the amounts appearing in the schedule. Again, the system’s auditor is in the best position to verify these amounts, and the SLGEP suggests two options.
The first option is for the retirement system auditor to issue a report on the schedule of changes in net fiduciary position by employer as a whole, attesting on the elements in the schedule as a whole, not each individual employer’s amounts. Further, the system’s auditor would provide each employer with a report under AU-C Section 725, Supplementary Information in Relation to the Financial Statements as a Whole, pertaining to that employer’s column in the schedule of net fiduciary position by employer, which would state that no opinion is being expressed on the single government’s disclosures in the schedule. Accompanying these reports, the retirement system’s auditor would issue a SOC 1, Type 2 report on the controls over the calculation of individual employer amounts.
The second option is to engage the retirement system’s auditor to express an opinion on each individual employer’s information in the schedule of changes in net fiduciary position by employer. In this case, materiality would be determined separately for each employer.
Steps to take now
Government officials, pension plan management, preparers, and auditors should work closely to meet Statement No. 68’s reporting requirements. They should take the following steps now:
- Review and enhance documentation of controls over census data, both at the participating government and retirement system.
- Prepare a memorandum of understanding with the state retirement system to prepare employer schedules for use by participating governments.
- Modify auditor engagement letters clarifying that the retirement system auditor is to prepare relevant reports as needed by the participating governments’ auditors.
The reporting requirements of Statements No. 67 and No. 68 are challenging. Since the costs of compliance with governmental reporting standards are ultimately borne by the public, all parties have an interest in assuring the transition is performed in the most cost-effective manner. This will best be accomplished through advance planning and early action
Significant changes to state and local government pension reporting are coming as a result of new standards contained in GASB Statements No. 67 and No. 68. Significant coordination will be needed among government preparers, pension plan administrators, and auditors to facilitate proper reporting under the new standards.
Auditing interpretations issued by the AICPA Auditing Standards Board and white papers issued by the AICPA State and Local Government Expert Panel can assist with implementation.
Early steps for successful implementation include reviewing and enhancing documentation of controls over census data; preparing a memorandum of understanding with the state retirement system to prepare employer schedules for use by participating governments; and modifying auditor engagement letters to clarify the retirement system auditor’s responsibility for preparing reports needed by the government auditors.
Paul Copley (firstname.lastname@example.org) is a KPMG professor of accounting and director of the School of Accounting at James Madison University in Harrisonburg, Va. Brad Roof (email@example.com) is a professor of accounting and wine studies at James Madison University.
To comment on this article or to suggest an idea for another article, contact Ken Tysiac, editorial director, at firstname.lastname@example.org or 919-402-2112.
- “Additional ASB Interpretations Address GASB Pension Issues,” June 26, 2014
- “ASB Interpretations Address GASB Pension Issues,” April 22, 2014
- State and Local Governmental Developments—Audit Risk Alert (#ARASLG14P, paperback; #ARASLG14E, ebook)
State and Local Governments—Audit and Accounting Guide
(#AAGSLG15P, paperback; #AAGSLG15E, ebook) (coming soon)
- GASB Statement No. 68 Audit and Accounting Workshop (#CL4GA68, text)
For more information or to make a purchase, go to cpa2biz.com or call the Institute at 888-777-7077.
- Governmental Employer Participation in Agent Multiple-Employer Plans: Issues Related to Information for Employer Reporting, tinyurl.com/loel7ah
- Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting, tinyurl.com/lfvpewz
- Single-Employer and Cost-Sharing Multiple-Employer Plans: Issues Associated With Testing Census Data in an Audit of Financial Statements, tinyurl.com/k6qk848
- AICPA Governmental Audit Quality Center webcast, “GASB Pensions: Are You Ready for June 30, 2015, Audit Implementation?” Scheduled for March 4, 2015, tinyurl.com/plfcfek