DOL Releases Updated Guidance on Independence of Employee Benefit Plan Accountants
September 13, 2022
On September 6, 2022, the DOL published an updated Interpretive Bulletin (the updated IB) setting forth guidelines for determining when a qualified public accountant is independent for purposes of auditing and providing an opinion on the financial statements required to be included in the Form 5500 filing for an ERISA employee benefit plan. According to the DOL, a primary purpose of the updated IB was to remove outdated and unnecessarily restrictive provisions from prior guidance, Interpretive Bulletin 75-9 (the 1975 IB), to ensure access of employee benefit plans to highly qualified auditors and audit firms.
Unless otherwise exempt, an ERISA plan administrator is generally required to retain an “independent” qualified public accountant to conduct an annual examination of the plan's financial statements and provide an opinion as to whether the statements conform to generally accepted accounting principles and whether the Form 5500 schedules present fairly, and in all material respects, the required information when considered with the financial statements. In 1975, the DOL issued the 1975 IB to determine when an accountant is independent for the Form 5500 audit requirement. The 1975 IB set forth three specific circumstances that would conclusively render the accountant not to be independent: the first based on certain roles and statuses, the second based on financial interests and the third based on engaging in management functions related to financial records subject to the audit. In each situation, a general facts and circumstances approach is applied.
The updated IB reorganizes and makes certain changes to the 1975 IB. First, the updated IB modifies the time period during which accountants are prohibited from holding financial interests in the plan or plan sponsor. Under the 1975 IB, a newly retained accountant cannot conduct the ERISA-required audit of a plan's financial statements if the accountant, the accountant's firm, or a member of the firm has a direct or material indirect financial interest in the plan or plan sponsor during the period covered by the financial statements (generally, the prior plan year) or during the period of professional engagement. The DOL illustrates the application of the 1975 IB with the example of a new accountant ineligible to audit a plan's 2020 financial statements in 2021 if one partner of the accountant’s firm held a single share of the publicly traded stock of the sponsor at any time during 2020. Upon review and consultation with accounting regulatory bodies, the DOL recognized this requirement was unnecessarily restrictive and not aligned with other accounting rules.
As a result, the updated IB provides an exception for new audit engagements from the prohibition on holding disqualifying financial interests during the period covered by the financial statements being audited. This exception is limited to publicly traded securities. Under the new rule, an accountant or firm is not disqualified from accepting a new audit engagement merely because of holding publicly traded securities of a plan sponsor during the period covered by the financial statements provided such securities are disposed of prior to the period of professional engagement. The exception provides accountants with a divestiture window between the time when there is an oral agreement or understanding that a new client has selected them to perform the plan audit and the time an initial engagement letter or other written agreement is signed or audit procedures commence, whichever is sooner.
Second, the updated IB also modifies the definition of “office” for the purpose of determining who is a “member” of an accounting firm. The 1975 IB defined member as “all partners or shareholder employees in the firm and all professional employees participating in the audit or located in an office of the firm participating in a significant portion of the audit.” However, the DOL recognized that the concept of an “office” for workplace purposes has since changed to focus more on workgroups, illustrated by expected regular personnel interactions and assigned reporting channels rather than physical locations. Accordingly, the updated IB defines the term “office” to mean a reasonably distinct subgroup within a firm, whether constituted by formal organization or informal practice, in which personnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters regardless of the physical location of the individual.
Employers that sponsor ERISA employee benefit plans subject to the Form 5500 audit requirements should be aware of the updated guidance, which became effective on September 6, 2022.
Federal Register: Interpretive Bulletin Relating to the Independence of Employee Benefit Plan Accountants »