As a plan sponsor, what does electing an ERISA Section 103(a)(3)(C) audit mean to you?

In July 2019, the AICPA Auditing Standards Board (ASB) issued a standard, Statement on Auditing Standards, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA (SAS 136). The effective date for SAS 136 is for periods ending on or after December 15, 2021. The most significant impact of this SAS is the effective replacement of the “limited scope audit” provisions with new Section 103(a)(3)(C) audit rules.

As permitted under ERISA, a plan administrator can instruct their auditor not to perform auditing procedures with respect to any information related to assets held for investment of the plan which are prepared and certified by a qualified institution.  A qualified institution is a bank or similar institution or an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency.

When performing an ERISA Section 103(a)(3)(C) audit of the financial statements (previously referred to as a limited scope audit), the auditor need not perform any auditing procedures with respect to information that was certified which includes investments and investment income, as well as participant loans and the related interest income.  With an ERISA Section 103(a)(3)(C) audit, the auditor will continue to test participant data, including the allocation of investment income/losses to individual participant accounts, contributions, benefit payments and other information that was not certified.

As the plan administrator, it is your responsibility to verify that the conditions of the ERISA Section 103(a)(3)(C) audit exemption has been met.  This includes determining if the certification is from a qualified institution and signed by an authorized person, and that the investment information is certified as both complete and accurate.  If the certification is unacceptable, an ERISA Section 103(a)(3)(C) audit would not be permissible.

In addition, you would need to determine that all investments have been covered by the certification.  If certain investments were not included in the certification, audit procedures would need to be performed on those investments and related income but the ERISA Section 103(a)(3)(C) audit exemption would still apply to those investments covered under the certification.

Previously with limited scope audits, the auditor was prohibited from providing an unqualified opinion on the plan’s financial statements. The limited scope auditor’s opinion was called a Disclaimer of Opinion because sufficient work had not been performed to form an overall opinion on the financial statements. The ERISA Section 103(a)(3)(C) audit will allow auditors to issue an opinion, however, it will not extend to the certified assets. The auditor will provide an opinion on whether the information not covered by certification is presented fairly and whether the certified investment information in the financial statements agrees with or is derived from the information prepared and certified by the certifying entity.  This opinion will not have any adverse consequences, as it is acceptable to the Department of Labor.

Plan administrators often believe that once they have contracted with an auditor to perform an ERISA Section 103(a)(3)(C) audit that their obligations are satisfied.  But as part of their fiduciary duty, it is very important that the plan administrators understand the requirements of an ERISA Section 103(a)(3)(C) audit and verify that these requirements have been met.