Posted by Chris Ciminera, CPA, QKA
As a plan sponsor, you may know that, generally, if your plan covers 100 employees or more, your plan is considered a large plan and requires audited financial statements to be attached to the 5500 filing. You may also know that you are required to hire an independent qualified plan auditor (IQPA) to express an opinion as to the completeness and accuracy of the financial statements according to Generally Accepted Accounting Principles (GAAP). However, when you receive the audit report and financial statements, you may not understand the opinion given by the IQPA. Often, clients and service providers who have seen the final audit report still don’t know how to answer the Form 5500 questions on Part III of Schedule H, which asks what kind of audit opinion the plan received. Because of this, I want to explain the different types of opinions and how to tell the type of opinion on your plan’s audit report.
What Information Does the Auditor Report Provide?
Let’s start with the information that you will find in an auditor’s report. The report details the specific financial statements and years covered by the opinion, management’s responsibilities for the preparation and fair presentation of the financial statements, the auditor’s responsibility to express an opinion on management’s financial statements, the auditor’s opinion, and any other matters that require an emphasis-of-matter or to be included in the report.
Types of Auditor Opinions
There are four types of opinions that may be provided by an IQPA. Those opinions are:
What Each Type of Opinion Represents
An unmodified opinion means that the financial statements are presented fairly in accordance with GAAP or a special purpose framework. A special purpose framework may be a basis of accounting other than GAAP, such as a cash basis or modified-cash basis (where the plan reports accrued income and expenses on some accounts, while reporting other accounts on a cash basis). A qualified opinion means that the financial statements are presented fairly in accordance with GAAP or a special purpose framework, with certain exceptions. If the exceptions are material, but not pervasive, then a qualified opinion will be expressed. In instances where the exception is material and pervasive, then an adverse opinion may be expressed. An adverse opinion is given when there is a material and pervasive departure from GAAP in the financial statements. A disclaimer of opinion is given when there is a scope limitation on the audit procedures that precludes the auditor from performing the audit in accordance with Generally Accepted Auditing Standards (GAAS). For example, in a limited scope audit, the auditor is instructed not to test the investment values as required by GAAS. The auditor’s opinion will be a disclaimer due to the limited procedures performed on certified assets. The distinction between full scope and limited scope audits is discussed further in in the next section.
Full-Scope Audit – In a full-scope audit, the auditor performs investment testing, so an unmodified opinion may be expressed if there are no other GAAP departures or other GAAS limitations.
Limited-Scope Audit – When an auditor performs a limited-scope audit, he or she does not perform audit procedures on testing investments and investment transactions. The Department of Labor has allowed this type of audit to occur when a limited-scope certification is provided by a regulated financial institution such as a bank, trust company, or insurance company. The limited-scope audit is a form of scope limitation because the auditor is instructed not to perform the required auditing procedures on these investments. As such, the auditor must issue a disclaimer opinion, since a material number on the financial statements was not tested in accordance with GAAS. The good new is that Section 29 CFR 2520.103-8 of the DOL’s Rules and Regulations for Reporting and Disclosure under ERISA allows this limited-scope audit. Therefore, the DOL will not reject a 5500 filing, because an IQPA disclaims an opinion on the financial statements due to a limited-scope audit.
Excluded Contracts for 403(b) Plans – 403(b) plan sponsors can choose to exclude pre-2009 contracts as a result of regulatory relief provided by the DOL under Field Assistance Bulletin 2009-02. This transition relief became necessary as a result of a new requirement for 403(b) plans to maintain books and records for the plan and to include audited financial statements with large Form 5500 filings. When these reporting requirements were added for 403(b) plans in 2009, there was concern among many sponsors about the ability to track individual contracts issued prior to the effective date of the rules, since participants had the ability to move the money without the employer’s involvement. In response to this concern, the DOL issued FAB 2009-02 to allow certain pre-2009 contracts to be excluded from plan assets if they met four criteria. When contracts are permissibly excluded as a result of this relief, the IQPA must issue a disclaimer opinion, since otherwise required audit procedures were unable to be performed on these contracts. However, the DOL communicated that it would not reject a filing with a disclaimer of an opinion, if the only reason for the disclaimer is the existence of excluded pre-2009 contracts.
How Can You Tell What Type of Opinion Your Plan Received?
The IQPA report has headings that describe the contents of each section:
- management’s responsibility over the financial statements,
- the auditor’s responsibility,
- the IQPA opinion
- Basis for a qualified or disclaimer of opinion
- Qualified or disclaimer of opinion, and
- other matters that require an emphasis of a matter or other matters.
If you received a standard unmodified opinion, the report has an opinion section which reads:
“In our opinion, the financial statements present fairly, in all material respects, the net assets and changes in net assets available for benefits in accordance with accounting principles generally accepted in the United States of America.”
If you received a qualified opinion, the report has an opinion section which reads:
“In our opinion, except for [material departures], the financial statements present fairly, in all material respects, the net assets and changes in net assets available for benefits in accordance with accounting principles generally accepted in the United States of America.”
If you received a disclaimer of opinion, the report has an opinion section which reads:
“Because of the significance of the matter described in the Basis for Disclaimer of Opinion paragraph, we have not been able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion. Accordingly, we do not express an opinion on these financial statements.”
If you received an adverse opinion, the report has an opinion section which reads:
“In our opinion, because of the significance of the matter described in the Basis for Adverse Opinion paragraph, the financial statements referred to in the first paragraph do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the net assets and changes in net assets available for benefits.”
If you want to get to the bottom line, understanding the meaning of the language in the last section as explained above is the key to knowing what type of audit opinion your plan’s financial statements received, and whether you can rest easy, or the DOL is coming.