When is there a “termination” of an auditor?

[Peter Gulia]

The instructions for Form 5500 Schedule C Part III state: “Complete Part III if there was a termination in the appointment of an accountant . . . during the 2015 plan year. This information must be provided on the Form 5500 for the plan year during which the termination occurred.”

Consider the following typical situation. A plan’s administrator and an accounting firm make engagement letters for only one year at a time. The accounting firm (which writes the engagement letter for the client’s adoption) never obligated itself to be available for anything more than one pending audit. The administrator never obligated itself to the accounting firm for anything more than one pending audit. During 2014, the accounting firm completed its work in auditing the plan’s 2013 financial statements and issued its report; and the administrator accepted the report as a satisfaction of the engagement. In 2015, the administrator invited several accounting firms, including the one that in 2014 audited the 2013 statements, to submit proposals. The administrator selected another accounting firm.

On those facts, was there “a termination in the appointment of an accountant”?

Which facts are significant in deciding whether there was or was not a termination?

Has EBSA published any guidance on this?

Has the AICPA published any professional literature on this?

[My 2 cents]

Attempting to think logically about this, it seems to me that the time to report the change in auditor is on the Schedule C that is part of the 5500 filing that will be showing an auditor on the Schedule H different from the auditor shown on the prior year's Schedule H. Nothing else makes any sense to me. if they decided to change auditors for the 2015 Form 5500 filing some time last week and the new auditor will be providing the auditor's report attached to the 2015 Schedule H and is listed on the 2015 Schedule H, last year's auditor should be shown on the 2015 Schedule C without pause for thought. I would treat "during" in the quote from the instructions as meaning "with respect to" and ignore when the change actually occurred.

[david rigby]

Peter's Q is illustrating a point about "termination" of the service provider. While his hypothetical situation is not the usual understanding of that phrase, IMHO that section of Schedule C should not be omitted when there is only a one-year service agreement. Note this sentence in the instructions:

"Include a description of any material disputes or matters of disagreement concerning the termination, even if resolved prior to the termination."

Thus, the point of this item on the Schedule C is not to identify the service provider, but to identify problems or disagreements between the service provider and the plan sponsor.

The timing, as described by My2Cents, seems appropriate.

[Peter Gulia]

My 2 cents, thank you for your helpful thinking.

Apart from considering which year, do you think it would be correct for an administrator to decide that there was no termination in the appointment of an accountant (so a Schedule C Part III disclosure is not called for)?

[ESOP Guy]

Peter you are over thinking it.

This is a simple notice that is easy to produce. I have never (and I mean NEVER) seen an issue from one of these notices. I will admit I have never had the prior auditor submit a comment regarding issues either.

Unless there is an issue that might be commented on if the name on the Sch H changes do the notice and move on.

If there is an issue I would think a better course of action is manage the problem with the prior auditor then hide it.

[jpod]

For what it's worth, the statute, Section 103©(4) of ERISA, does not use the term "termination." It uses the phrase "change in appointment." Does that influence the interpretation of "termination," or did DOL intentionally means something more severe than a mere "change in appointment" because it is not interested in hearing about scenarios like yours?

[Peter Gulia]

David Rigby, thank you for your further thinking.

I agree with your observation that the call to explain a dispute or disagreement suggests a possible purpose about why a termination of either kind of appointment is reported. But another way to consider the same observation is that the absence of a dispute or disagreement might support the idea that there was no termination in the appointment. (It's also unclear what "appointment" refers to.)

What if the only reason for the administrator's selection of a new IQPA is a lower fee or superior service?

Is a disclosure on Schedule H of the name and EIN of the IQPA that audited that year's financial statements sufficient to disclose a CHANGE of accountant?

I don't know what EBSA intends in its use of the phrase "termination of the appointment". If it refers to any end of an engagement, many administrators would be called to report a Part III every year. If it refers to a change from one year to the next in which accounting firm the administrator selected, I wish EBSA would say so. (Maybe someone did, and I just haven't read that guidance.)

I haven't yet decided what advice I'll render to any client (although I usually favor more disclosure). For now, I'm searching for more information in a hope that my advice might be grounded on something more than my guess about what EBSA seeks.

[Peter Gulia]

jpod, your question relates to one of several sources for modes of interpretation I've been thinking about.

ERISA section 103©(4) requires that an annual report include "[a]n explanation of the reason for any change in appointment of trustee, accountant, insurance carrier, enrolled actuary, administrator, investment manager, or custodian."

Why does Schedule C Part III refer to only two of those seven?

And if an administrator engaged (or "appointed") an accountant for only one audit, is there a "change in appointment"?

[david rigby]

Why does Schedule C Part III refer to only two of those seven?

Agreed, that is interesting. Likely, there is some practicality behind the reasoning, or some lobbying.

Nevertheless, it seems to be overkill to worry about "appointment" vs. "termination", etc. Hakuna Matata.

[Peter Gulia]

Thank you, everyone, for the good help.

While each client will make its own decisions, I'm inclined to suggest reporting Schedule C Part III, and using the "Explanation" element to state succinctly the facts.

In some situations those facts might be as simple as 'the administrator selected another accountant' or 'the accountant did not offer the next engagement'.

[ESOP Guy]

What if the only reason for the administrator's selection of a new IQPA is a lower fee or superior service?

FYI, I think you have to disclose such a switch for such a reason. In fact what you wrote above is the most common reason I write for this disclosure.

The next most common is the CPA firm was bought or merged with a larger one. In that case it is a little more grey in that the partner who did/ or was in charge the audit before and after is the same. It is just that person was getting close to retirement so they sold their smaller practice to a large firm as part of their plan to retire

At which time I typically write some version of what I said above. The firm was merged/bought and the same lead partner before and after is performing the audit. .

[My 2 cents]

jpod, your question relates to one of several sources for modes of interpretation I've been thinking about.

ERISA section 103©(4) requires that an annual report include "[a]n explanation of the reason for any change in appointment of trustee, accountant, insurance carrier, enrolled actuary, administrator, investment manager, or custodian."

Why does Schedule C Part III refer to only two of those seven?

And if an administrator engaged (or "appointed") an accountant for only one audit, is there a "change in appointment"?

My guess is that only the enrolled actuary and accountant are explicitly named within the 5500 package.

If the regulators wanted to receive documentation concerning changes in trustees, insurance carriers, administrators, investment managers, or custodians, they certainly could have arranged to require it.

If this year's 5500 shows a different accountant on the Schedule H or a different enrolled actuary on the Schedule SB, report it on the Schedule C and see to it that the explanation given is not an outright lie. Ideally, the letter notifying the prior accountant or enrolled actuary will show the same reason as the Schedule C (if there was anything possibly improper about the termination of services, putting a different reason on the letter from the one on the Schedule C, which is a matter of public record that the displaced professional can view at will, will only intensify the DOL's scrutiny when the displaced professional files a statement disputing the reason given).