Magazine article The National Public Accountant

Auditing Employee Benefit Plans

Magazine article The National Public Accountant

Auditing Employee Benefit Plans

Article excerpt

Many significant changes have occurred in accounting for employee benefit plans during the past decade. These changes have already had and will continue to have a significant impact on accountants' responsibilities for employee benefit plans. Statement of Financial Accounting Standards (SFAS) No. 87, "Employers' Accounting for Pensions," [1] standardized the method for measuring net periodic pension expense and expanded reporting requirements. Furthermore, SFAS No. 106, "Employers' Accounting for Post-retirement Benefits other than Pensions," issued in December 1990 [2] attempts to provide better uniformity and comparability in financial reporting of entries offering other post-retirement employee benefits (OPEB) such as health care and life insurance benefits. The Statement requires accrual accounting for OPEB costs rather than the currently used "pay-as-you-go" cash basis method.

All of these changes have contributed to the dawning of a new age for auditors. Though much has been written on accounting for pensions and OPEB, little attention has been placed on auditing employee benefit plans. The primary purpose of this paper is to discuss the audit ramifications of the new accounting rules on employee benefit plans and to present a systematic approach to auditing these plans. Auditing employee benefit plans should have broad interest to the accounting profession, especially academicians and practitioners because of current changes and developments in this area as well as the significance of employee benefit plans and lack of sufficient coverage in the present auditing textbook and professional pronouncements.

Significance of Employee Benefit Plans For


Independent auditors should establish audit programs and procedures relevant to the new developments and changes in accounting for employee benefit plans for the following important reasons. First, if the auditor does not establish expertise in this area, the client will approach another CPA firm who has already established such expertise.

Second, the rapid growth of health care costs, the multi-trillion-dollar magnitude of pension and OPEB assets and the possibility of large-scale pension and OPEB fraud necessitate the establishment of a strong internal control structure by management and consideration by the auditor. [3] Third, employee benefit plans including pensions and OPEB are part of employee compensation. This implies that employees assign a value to pension and OPEB promises and are willing to accept smaller current wages because of these promises. Therefore, the auditor's examination of pension and OPEB promises is an integral part of auditing labor and salary expenses.

Fourth, both the Department of Labor and Congress have criticized the quality of the Employee Retirement Income Security Act (ERISA) auditing. The Labor Department proposed legislation that would strengthen enforcement of rules governing pensions and OPEB. [4] The proposed changes in ERISA make pension and OPEB plans more accountable to the Department of Labor and Congress. This proposal also requests that the American Institute of Certified Public Accountants (AICPA) revise its audit and accounting guide pertaining to pensions and OPEB.

The revised AICPA audit and accounting guide would expand the auditor's responsibility in the following areas: assessing risks, providing reasonable assurance of detecting and reporting material errors and irregularities, searching for the possibility of illegal acts by a client, obtaining and evaluating sufficient competent evidence to support significant accounting estimates, the form of the auditor's report, the ability of employee benefit plans to continue as a going concern, and finally the communication with audit committees and management regarding audit findings. [5] These expanded areas are directly related to the nine Statements on Auditing Standards issued in 1988 as part of "expectation gap agenda" and will be discussed in the remainder of this article. …

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