Auditor or TPA responsibility?

[Brenda Wren]

I am a TPA. We have a plan filing as a large plan filer for the first time for 2002. This is a PSP, trustee-directed balance forward plan with 10 managed accounts held at two brokerage houses. At the client's request, several years ago we stopped providing a full accounting of the trust assets due to the exhorbitant trust accounting costs. Instead, we prepared a condensed version of the accounting to produce the financial statements. We reduced the time involved from 20 hours to about 4. We treated each managed account as a single investment. We accounted for all monies coming into the trust, out of the trust and transfers in between the managed accounts, but made no distinction between unrealized and realized gains. After all, this was no longer required on the new Schedule I. Knowing that 2002 was an audit year, we discussed the issue with both the client and the auditor and asked if this condensed method of trust accounting would be enough to complete the audit. The auditor said it would be, but cautioned us that since the 5500 Sch H did require a distinction between the unrealized and realized gains on the 5500 which was our responsibility, that the decision to perform the full accounting would need to be made by us and the client. The client decided that they were not willing to spend $2,000 to come up with an accurate distinction of these numbers since it all comes out in the wash anyway. All that said, now we have the issue of the Schedule H attachments referring to Assets Held for Investment and Reportable Transactions. The auditor is looking to us to provide those schedules. I attended a session at the ASPA Summer Conference on this issue and specifically asked the speaker whose responsibility this was. He said it was part of the audit and therefore the auditors responsibility. But the auditors are claiming that they are engaged to audit the 5500, not prepare it, and these are 5500 attachments. Well, I would argue that the audited financial statements are also part of the filing...should I be responsible for those, too? Certainly not. I have also asked other TPA practioners and they all indicated that these schedules are normally provided by the auditor.

Any thoughts or opinions on this issue would be most appreciated, particularly from experienced auditing firms. By the way, the reason this has escalated to such a big issue is because there are literally thousands of stock and bond positions held at year end.

[Guest ElKH]

I work as a TPA within an accounting firm. I complete the 5500s for the large plans, but the auditors reconcile the assets, put together the Accountant's Opinion, the Schedule of 5% Transactions, and yes, the Assets Held for Investment. It is my understanding that these reports are all the by-products of an audit.

[rcline46]

Have the auditor's read the AICPA guide again. They DO NOT AUDIT the 5500, they are required to audit the PLAN, meaning participants and assets. As an asset audit, they determine the r/ur G/L.

YOU prepare the 5500. Guess what? It is the auditor's problem to reconcile their audit to your 5500!!!

Reality says you change your 5500 to match the audit, especially if you goofed. We always change because the auditor said so (right or wrong!)

[E as in ERISA]

The auditors should NOT be preparing anything. They are reviewing the financial statements prepared by the client -- and or its other service providers. They are supposed to be independent of the reports they are reviewing. (Remember Enron -- the whole issue of the client being too involved in advising clients how to structure and report transactions while simultaneously auditing the financial statements?) After Sarbanes Oxley they are probably more adamant about NOT doing the prep -- or at least they should be. The client or other service provider should prepare the schedules.

The auditors can't sign the audit report if the audited financials and Form 5500 are inconsistent. So either the client has to change the financial statements or add a footnote saying why the audited financials are inconsistent with the Form 5500. Or the service provider has to change the Form 5500. Guess who loses that one?

[Guest bmaverick2]

Brenda

I used to present for the AICPA on how to audit pension plans. could you tell me who the speaker was at the seminar.

you seem to be in the rock/hard place- it is the plan's obligation to report on realized v. unrealized gains and losses. Generally this should not be difficult as the unrealized is only the mark to market gains or losses.

I agree with Katherine, the auditors are reviewing not preparing the schedules as part of the audit.

drop me a private note and I am happy to share some guidance.

Brett

[Guest KristinaGK]

IMHO, the attachments have been a part of every plan audit report I have ever seen. The auditor's prepared them as part of auditing the plan assets. These auditors would then provide a separate copy of said attachments to be attached to the Sch H.

[E as in ERISA]

Kristina --

You are correct -- the auditors often prepare those schedules. However, it is NOT their responsibility. The standard audit report would say something like, "These supplemental schedules are the responsibility of the PLAN's MANAGEMENT. The supplemental schedules have been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, are fairly stated in all material respects in relation to the financial statements taken as a whole."

After Enron, there should be much more reluctance for the auditors to be involved in both the preparation (which they should not be doing) and the review (which is the only part that they should be doing).

[bdeancpa]

I am part of a firm that does a good deal of plan audits, as well as a lot of TPA work (not for the same plans). It is definitly the plan management's responsibility to prepare the supplemental schedules. Usually they hire the TPA to do this work. As TPA's we usually tell the clients we will prepare the 5500. The instructions fort he 5500 indicate these supplemental schedules are required to be attached to the Schedule H.

For the plans we audit in our firm, it is always the outside TPA that prepares these schedules.

Accounting principals do not require these statements of part of an audit report. It is the Deparment of Labor's Rules for Reporting Under ERISA that requires the independent accountant to issue a report on these schedules which are part of the 5500. Since an accountant does not want to issue a report that covers schedules that are not included with the report, they include the same schedules that are required to be attached to the Schedule H as supplemental information in their audit report. They are required (by the DOL) to issue an opinion on them, not prepare them.

There is only one hard thing about preparing these scheduls and unfortunitly it applies in your case. That is tracking the cost of the assets. For self-directed plans the DOL allows you to omitt the cost information, but not for trustee directed plans.

Brett indicates it is an easy calculation because the unrealized gain/loss is obtained by must marking the investments to market. This is correct for the Schedule H, as the realized gain/loss is determined by comparing the sales price to beginning of the year value. However, the DOL has consistently indicated at conferences which I have attended that for the supplemental schedules, when it indicats "cost" or "gain/loss" the numbers should reflect the original pruchase price of the assets. This is the number that may not be tracked when doing an abreviated trust accounting.

Like you, we account for most of our brokerage accounts as one investment for our smaller plans, and it does cut trust accounting time by 60-80%. However, for the larger plans we do the TPA work for we inform the client that extra accounting work is required to track the historic cost basis of the assets.

One final note. Many brokerage firms have enhanced statements they provide to their more important clients that track historic cost. In your sitiation, this may allow for completing the schedules without incurring the time required for a full blown trust accounting.

[Guest Chaffee]

I agree with Katherine, as the AICPA has reiterated that CPA's should not be auditing their own work.

However, one issue that may make this a little easier. You indicated that there are thousands of stock and bond positions. Given this, it is highly unlikely that any individual or series of transactions in a security will rise to the 5% threshhold for a Schedule of Reportable Transactions. Of the two supplemental schedules, this is definitely the most potential trouble.

As for the Schedule of Assets Held, I would think that is fairly easy by obtaining your Trust Statements and simply attaching them to the financial statements, rather than re-inputting them in a schedule. As long as the statements have the required info (issuer, description, cost, market), you should be all set. My firm often adds a cover sheet (with Plan Name, EIN, & Plan No.) to the "Asset Position" or similar report of the Trust Statements and includes that as an attachment.