DOL and AICPA Independence Rules – Restrictions on Financial Interests of Auditors
Plan sponsors face many different issues as they navigate the rules and regulations imposed by the Employee Retirement Income and Security Act (“ERISA”). The topic of employee benefit plan auditor independence is a unique challenge given that there are up to three bodies imposing independence restrictions on employee benefit plan sponsors seeking plan auditors. These bodies include the American Institute of Certified Public Accountants (“AICPA”), the U.S. Securities and Exchange Commission (“SEC”), and the U.S. Department of Labor (“DOL”). All plans are subject to the AICPA and DOL independence rules, and public companies are additionally subject to the SEC independence rules if employer securities are offered as an investment option. The DOL regulations are particularly troublesome for public company sponsors and compliance with the independence rules is more easily compromised.
The DOL auditor independence rule is outlined in 29 CFR 2509.75-9, dating back to 1975. This mandates that a qualified plan (covered by Title 1 of ERISA) required to engage an auditor annually to audit its plan’s financial statements engage an “independent” plan auditor. The independence of a plan auditor helps ensure that the plan is receiving unbiased, effective and accurate audit results. While the rationale for independence seems reasonable and acceptable, it is the DOL’s definition of an “independent accountant” that is restrictive, especially for public company plan sponsors. When it comes to the rules regarding members/employees of an audit firm having a financial interest (owning stock), the DOL independence rules are the most restrictive and often cause a delay in changing auditors. A public company that is changing both company and plan financial statement auditors may often find itself in a position where it engages a new company auditor a year prior to engaging that same auditor to audit its employee benefit plan.
According to ERISA, an accounting firm is not independent if “during the period of professional engagement to examine the financial statements being reported, at the date of the opinion or during the period covered by the financial statements, the accountant or his or her firm, or a member thereof had, or was committed to acquire, any direct financial interest in such plan, or the plan sponsor …”
For example, if public company XYZ, Inc. is looking to hire an independent auditor for the plan year January 1, 2018, to December 31, 2018, the firm that it hires must ensure that none of its partners or employees in the office performing the work held any stock in XYZ from January 1, 2018, through December 31, 2018. If XYZ does not start its audit search process until May 2019, any firm with partners or employees holding stock during the 2018 year will not be deemed independent. If a firm requires the sale of all XYZ stock immediately, that firm will be independent to the XYZ employee benefit plan for the plan year January 1, 2020, through December 31, 2020.
For large, well-known public companies, this DOL standard poses significant issues when selecting an accounting firm to prepare the annual benefit plan audit, since its corporate stock is likely to be held by partners and employees of the accounting firm. In order to identify a truly independent firm, the public company plan sponsor must begin its search before the year it intends to have audited. In the aforementioned example of XYZ Company, it must start searching for an auditor during 2018 in order to allow the firm time to sell any stock its partners and employees have prior to January 1, 2019.
The financial interest rules are merely one aspect of the independence regulations, and one must pay close attention to all of the restrictions in order to ensure an audit firm is and remains independent each year.
The AICPA affiliate rules can further complicate the assessment of auditor independence. Consideration of the affiliates of an employee benefit plan can be cumbersome when the plan sponsor has multiple plans, perhaps with multiple audit firms, when the plan sponsor has entities that control it, or when there are multiple entities under the control of the plan sponsor.
It is the plan sponsor’s responsibility to engage an independent accounting firm. When selecting an audit firm, plan sponsors must inquire about the firm’s knowledge of, and compliance with, the DOL, AICPA and, if applicable, SEC independence requirements. Firms that are knowledgeable of all such requirements should have quality control procedures in place to ensure their firm’s initial and ongoing compliance.