Welcome Changes in Employee Benefit Plan Audit Independence
February 10, 2023
By Denise Finney
The American Institute of Certified Public Accountants ("AICPA"), the U.S. Department of Labor ("DOL"), and the U.S. Securities and Exchange Commission ("SEC") are the three authorities that impose independence limits on audit engagement. All plans must adhere to the AICPA and DOL independence regulations, and if employer securities are given as an investment option, public companies must also follow the SEC independence rules, making it difficult for auditors of employee benefit plans to be independent.
Employee Benefit Plan Audit Independence Rule
According to the DOL auditor independence rule, effective since 1975, an accountant was not permitted to perform an ERISA-required audit of a plan's financial statements if they had a direct financial interest or a material indirect financial interest in the plan or plan sponsor during the period covered by the financial statements or of the professional engagement.
For instance, the plan sponsor is a publicly listed firm that wants to employ an independent auditor firm for the plan year, January 1, 2022, to December 31, 2022. The independent auditor firm must ensure that none of its partners or employees own any of the plan sponsor’s shares from January 1, 2022, through December 31, 2022. Even if the accountant disposed of the plan sponsor’s stock immediately, the firm would be disqualified from auditing the 2022 and 2023 plan years. The 2024 plan year end, which wouldn't happen until June 2025, would be the earliest year the firm could perform the audit. It would take more than two years to hire an independent auditing firm in this situation. Due to this limitation, accountants were not permitted to accept new audit engagements, and it was challenging for plan sponsors to locate an independent, qualified accountant. When selecting an independent accounting firm, large well-known public companies faced additional challenges due to the possibility of corporate stock being held by accounting firm partners and employees.
Updated Independence Rules in 2022
In September 2022, to much relief, the Employee Benefits Security Administration of the DOL released Interpretive Bulletin (IB) 2022-01. It specified employee benefit plan sponsors can engage an independent auditing firm immediately after the accountant disposes of the publicly traded securities of the plan sponsor.
For example, if the accountant sells the publicly traded securities on March 1, 2023, the plan sponsor can engage the auditor on March 2, 2023, and perform the audit for the engagement period of January 1, 2022, to December 31, 2022. Firms and accountants can ease concerns about independence and provide plans with access to their audit services by disposing of such publicly listed shares before the engagement.
This is welcome news for publicly traded employee benefit plan sponsors and independent auditing firms with practices specializing in the audits of employee benefit plans. The DOL listened to the industry’s concerns and eliminated the unnecessary restrictions, enabling plan sponsors to hire highly skilled auditors.