Form 5500 Audit

[Guest PJMAK]

Our client has failed to respond to critical data questions pertaining to the 2001 ADP/ACP test. Therefore, we have not yet completed the final test for the 2001 plan year. We are working out the details and expect to have the test completed by the end of October so that if the tests fail, returns will be made before December 31, 2002.

We prepared the Form 5500. The plan has over 100 lives so it was audited. The auditor insists that the ADP/ACP tests must be completed before the audit report can be completed. Our client filed the Form 5500 without the audit.

The auditor is insisting that we provide a Regulation or reference that confirms that the ADP/ACP test results do not have to be included in the audit.

Any suggestions?

[E as in ERISA]

My understanding is that the auditor wants confirmation that the tests has been passed in order to provide assurances that the plan remains qualified. If there is significant risk of disqualification, then the auditors might have to request the client to book a tax provision on the financial statements before they can issue their opinion. The IRS rarely disqualifies a plan. The main risk is that there are penalties or corrective amounts that should be booked on the employer's (not the plan's) financial statements. So many times the auditors will allow the client to promise to perform the test and take any corrective action within a specified time period. But if they come back the next year and find that the client never did that, then they will be unlikely to issue the audit until it is actually completed!

[2muchstress]

Seems a little extreme. This is probably something that the auditor can include in a footnote. I don't think it is any reason to hold up the 5500.

What if the test fails? Are they going to wait until they see the correction before they finish the audit?

[Brian Gallagher]

and who's gonna pay the $1000 a day fine? (going back to july 31!)

[BeckyMiller]

The auditor's responsibility with regards to the tax attributes of a plan are outlined in Chapter 12 of the AICPA Audit and Accounting Guide - "Audits of Employee Benefit Plans." Paragraph 12.03 b encourages the auditor to "inquire" regarding the applicable tests.

Since the Form 5500 can be extended to 9 1/2 months after year-end, the auditor may be justified in his or her questions regarding the plan's internal control procedures when the testing is not completed in sufficient time to allow the auditor to make these "inquiries."

Typically, the auditor will require the plan administrator to sign a representation letter that the plan is substantially in compliance with the law and its terms. Getting that representation letter is typically requires before the audit report can be delivered.

The failure of the ADP/ACP test may require correction that is either a distribution to high paids or an additional contribution. Either event would have impact on the financial statements and depending upon the nature of the plan, the impact may be material. So, though I agree that it is rare that plans are disqualified and the penalties fall on the plan sponsor, the auditor can't just issue a report when there are concerns regarding either internal control matters, receivables or disbursements.

[E as in ERISA]

I think that the past year's events should make it clear that we want auditors to stick to their guns and require that clients comply with the rules in order to get favorable opinions.

When the IRS or DOL is performing the audit, the client can't get a closing agreement without first demonstrating satisfaction of the requirements.... The same should be true of independent accountants' audits. But the clients pay their fees, so there is signficant pressure to buckle under and issue reports even when all the requirements have not been satisfied.