Posted by Saaib Uppal
Don’t you love those days when you wake up before your alarm clock only to see you can go back to sleep for another hour, or when your boss decides to push a deadline back on a project, or the moment you found out that the employee benefit plan you administer requires a limited scope audit instead of the full scope alternative? Wait…you didn’t know about a limited scope option? You’ve come to the perfect blog for clarification.
The Employee Retirement Income Security Act of 1974 (ERISA) allows employee benefit plan administrators to direct their auditors to exclude certain investment information from the scope of their engagement. If a qualified bank, insurance carrier, or a similar institution already certifies the information, the Department of Labor (DOL) will accept a limited scope audit.
Now, before you go to tear up that full scope audit engagement letter, it would behoove you to read the fine print. A qualified institution is one which is regulated, supervised and subject to periodic examination by a state or federal agency. Assets held by a broker or an investment company do not fall into this category and must be included in the auditor’s procedures. Additionally, plans that offer self-directed brokerage accounts as an investment option cannot exclude the assets in the self-directed accounts from the scope of the audit.
Because the auditors are not testing this investment information, they cannot give an unqualified opinion on the plan’s financial statements. They will instead give a Disclaimer of Opinion which the DOL will accept for a limited scope audit. It is important to note that the limited scope certification only eliminates audit procedures involving investment valuation and investment earnings. All other significant audit areas must still undergo audit procedures, including, but not limited to:
- Employee Contributions
- Employer Contributions
- Loan Processing
- Distributions (hardship, terminating, in-service, corrective, and deemed distributions)
- Participant Data
- Allocation to Participant Accounts
So, a limited scope certification will reduce audit fees for the time it would have taken to test the completeness and accuracy of investment values and investment earnings at the financial statement level, but the main focus of any retirement plan audit is the participant balances. Therefore, audit fees will not be significantly reduced, contrary to some service providers’ beliefs.
The option to get a limited scope audit is always available, so if your plan assets are held by a trust company, insurance company, or another regulated institution, and you did not take advantage of the limited scope certification in previous years, don’t lose sleep over it. There is always next year, so go back to sleep for that extra hour.