Academic journal article Journal of Accountancy

Beyond ERISA: The Auditor's Responsibilities

Academic journal article Journal of Accountancy

Beyond ERISA: The Auditor's Responsibilities

Article excerpt


An advance look at revisions to the AICPA guide on auditing employee benefit plans

When Congress passed the Employee Retirement Income Security Act of 1974 (ERISA), it required, for the first time, auditing employee benefit plan financial statements on a broad scale. This was an event as significant in the history of auditing as adoption of the Securities Act of 1933. In many respects, the accounting and financial reporting standards for benefit plans--be they defined benefit, defined contribution or health and welfare benefit plans--are dictated by ERISA and by Financial Accounting Standards Board Statement no. 35, Accounting and Reporting by Defined Benefit Pension Plans, issued in 1980.

In response to ERISA, the American Institute of CPAs in 1983 issued the audit and accounting guide Audits of Employee Benefit Plans. For independent auditors, it has become our stock in trade for conducting audits of the financial statements of employee benefit plans.


In 1988, in light of auditing and accounting standards issued by the AICPA and FASB since 1983 (particularly the AICPA's "expectation gap" auditing standards), amendments to ERISA passed in various tax acts plus other developments, the AICPA employee benefit plans committee was reestablished to revise the guide. A draft of the new guide will be exposed for comment in the spring of 1990.

Both the Department of Labor and Congress have been taking a hard look at the accounting profession's role under ERISA. This scrutiny is largely due to audit failures unrelated to health and welfare or pension programs. It also is due to perceived weaknesses in the DOL's ERISA enforcement process. To address these weaknesses, the DOL appointed its first chief accountant for pension and welfare benefits programs. The DOL's inspector general (IG) recently audited certain aspects of the ERISA enforcement activities. The DOL also recently has decided to add another 100 persons to its enforcement program.

Professionals serving as advisers, auditors and participants in plans today need to understand new, more sophisticated types of benefit programs. For example, 401(k) plans weren't even a concept in 1980 when the guide was being developed. These plans will be discussed in the new guide. Older types of plans have disappeared because of tax law changes.

The revised guide will identify new types of investments appearing in plan portfolios, such as futures and options contracts, collateralized mortgage obligations (CMOs), real estate mortgage investment conduits (REMICs) and bank investment contracts (BICs)--new types of contracts issued by banks that may appear similar to guaranteed insurance contracts (GICs) and other investment contracts issued by insurance companies.


Accounting and reporting guidance for health and welfare plans found in chapter 4 of the 1983 guide is taken from an AICPA guide published in the 1960s. In the late 1970s, when the FASB was proposing new accounting by defined benefit pension plans, it decided not to add the subject of health and welfare benefit plan accounting to its agenda because of more pressing agenda items. It is unlikely a revised chapter 4 will be in the new guide when it is exposed for comment because its revision may depend on the conclusions reached by the FASB on its current project on accounting for the employer's cost of other postemployment benefits (OPEB), scheduled for completion at the end of 1990.

Benefit plan professionals are seeing more emphasis by unions and employers on issues related to health and welfare programs, specifically those providing postemployment-type benefits. This is not surprising, given the effect the FASB's OPEB project will have on the employer's accounting for benefit plans.


The new guide will help the auditor focus on areas of possible audit risk in benefit plans. …

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