Reviewing Your Independent Auditor’s Report—Where to Start

An auditor’s report can be challenging to read, but when I attended the Essentials of Multiemployer Trust Fund Administration class held here at the International Foundation last month, I learned a helpful tip: Break the process down into three steps. Start with the auditor’s opinion, move on to review the footnotes and finish by looking for trends in the financial data. This order can bring to light the key points you need to know.

Keep reading to learn more about the insights I gained from presenter Lawrence R. Beebe, partner with WithumSmith+Brown, PC, on auditing pension or health and welfare plans, specifically on the independent auditor’s report of a fund’s financial statements.

Reviewing Your Independent Auditor’s Report – Where to Start

Employee benefit plan financial statements provide information about the plan’s current and future ability to pay benefits. Generally, most qualified plans with 100 or more participants are required to have a financial statement audit performed annually and filed with Form 5500. The primary purposes of a full scope financial statement audit are to:

  • Give reasonable assurance that the financial statements as a whole are fairly presented and provide reliable information
  • Provide insight about the plan’s ability to pay benefits
  • Detect material misstatements, whether caused by fraud or error. 

The auditor performs the audit and issues an audit report.

Read the Auditor’s Report in This Order

The auditor’s report can be a daunting document. Breaking the process down into three steps can make the task more manageable and help you discover the important takeaways.

1. Auditor’s Opinion

First, look at the auditor’s opinion about the fair presentation of the financial statements. The different types of opinions are:

  • Unmodified opinion
    • Best possible outcome of an audit
    • Contains the phrase “present fairly, in all material respects”
    • Auditors believe there are no material misstatements in the financial statements
  • Modified opinion—usually results in the Department of Labor (DOL) rejecting the Form 5500 filing. The three types of modified opinions are:
    • Qualified opinion
      • Contains the phrase “except for” or “with the exception of” and states the exception(s) that cause a material effect 
      • Issued because there is lack of appropriate audit evidence to support management’s assertions, there are restrictions on the scope of the audit, or the financial statements depart from generally accepted accounting principles  
    • Adverse opinion
      • Contains the phrase “do not present fairly”
      • Issued when the financial statements do not fairly represent the financial position, results of operations or cash flows     
    • Disclaimer of opinion
      • Contains the phrase “do not express an opinion”
      • Issued as the result of a limited-scope audit or when the plan lacks sufficient accounting records to perform an audit

2. Notes to Financial Statements (aka Footnotes)

Annual Employee Benefits Conference

Next, read the Notes to Financial Statements section. The auditor’s report can have any number of footnotes that provide detail about the fund and its financial statements. Common footnotes that are worth spending additional time examining include:

  • Summary of significant accounting policies
  • Fair value measurement
  • Related party transactions
  • Actuarial information
  • Subsequent events (e.g., significant matters such as plan mergers, large employer going out of business or DOL investigations occurring after the end of the fiscal year)
  • Reconciliation of financial statements to Form 5500.

3. Financial Statements

Third, examine the financial statements themselves for trends in the financial data. Look more closely at the employer contributions, expenses, participant data, investments (for pension plans), and benefits paid and denied (for health and welfare plans), where fraud is more commonly hidden. Plan administrators should ask themselves:

  • Are the amounts for the same line item close to or the same as past years? Or do the amounts differ widely?
  • Do any dollar amounts surprise you?
  • Are there significant changes in investment categories?

If there are any red flags, investigate further, and talk to your auditor about your concerns.

Looking Ahead

The 2019 ERISA Advisory Council is exploring how to improve the financial statement audit process and help plan administrators fully engage in this important task. The American Institute of Certified Public Accountants (AICPA) released Statements on Auditing Standards (SAS) to improve auditors reports (SAS No. 136) and clarify auditors responsibilities (SAS No. 137). The audit report will change for audits ending on or after December 15, 2020.

Stay tuned! We will keep you posted of any new developments regarding financial statement audits.

Resources

Cathe Gooding
Reference/Research Specialist at the International Foundation 

Collection Procedures Institute

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