Independence of Employee Benefit Plan Accountants
[09/11/2006]
Volume 71, Number 175, Page 53348-53351
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DEPARTMENT OF LABOR
Employee Benefits Security Administration
29 CFR Part 2509
RIN 1210-AB09
Independence of Employee Benefit Plan Accountants
AGENCY: Employee Benefits Security Administration, DOL.
ACTION: Request for Information.
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SUMMARY: This document requests information from the public concerning
the advisability of amending Interpretive Bulletin 75-9 (29 CFR
2509.75-9) relating to guidelines on independence of accountants
retained by employee benefit plans under section 103(a)(3)(A) of the
Employee Retirement Income Security Act of 1974 (ERISA). Under ERISA,
unless otherwise exempt, the plan administrator is required to retain
on behalf of all plan participants an ``independent qualified public
accountant'' to examine the financial statements of the plan and render
an opinion as to whether the financial statements and schedules
required to be included in the plan's annual report are presented
fairly in conformity with generally accepted accounting principles
(GAAP). The purpose of this notice is to obtain information to assist
the Department of Labor in evaluating whether and to what extent
Interpretive Bulletin 75-9 provides adequate guidance to meet the needs
of plan administrators, other plan fiduciaries, participants and
beneficiaries, accountants, and other affected parties on when a
qualified public accountant is independent.
DATES: Written responses must be received by the Department of Labor on
or before December 11, 2006.
ADDRESSES: Responses should be addressed to the Office of Regulations
and Interpretations, Employee Benefits Security Administration (EBSA),
Room N-5669, U.S. Department of Labor, 200 Constitution Avenue, NW.,
Washington, DC 20210. Attn: Independence of Accountant RFI (RIN 1210-
AB09). Responses also may be submitted electronically to e-ori@dol.gov
or by using the Federal eRulemaking Portal http://www.regulations.gov (follow
instructions for submission of comments). EBSA will make all responses
available to the public on its Web site at http://www.dol.gov/ebsa. The
responses also will be available for public inspection at the Public
Disclosure Room, N-1513, EBSA, U.S. Department of Labor, 200
Constitution Avenue, NW., Washington, DC 20210.
FOR FURTHER INFORMATION CONTACT: Michael G. Leventhal, Office of
Regulations and Interpretations, Employee Benefits Security
Administration, U.S. Department of Labor, (202) 693-8523 (not a toll-
free number).
SUPPLEMENTARY INFORMATION:
A. Background
The Employee Retirement Income Security Act (ERISA) was enacted in
1974 to remedy certain abuses in the nation's private-sector employee
pension benefit plan and employee welfare benefit plan system. ERISA
contains provisions designed to protect the interests of plan
participants and beneficiaries by requiring the establishment of
effective mechanisms to detect and deter abusive practices. These
provisions include requiring annual reporting of financial information
and activities of employee benefit plans to the Department of Labor
(Department). An integral component of ERISA's annual reporting
provisions is the requirement that employee benefit plans, unless
otherwise exempt, be subjected to an annual audit performed by an
independent qualified public accountant (IQPA) and that the
accountant's report be included as part
[[Page 53349]]
of the plan's annual report filed with the Department.\1\
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\1\ Certain employee benefit plans are eligible for waivers or
limited exemptions from the IQPA audit requirements under
regulations issued by the Department. For example, regulation
section 2520.104-44 provides a limited exemption for welfare plans
which are either unfunded, insured or partly unfunded-partly
insured. If a plan does not comply with ERISA's annual reporting
requirements, including failure to satisfy the requirement to have
an audit report and opinion of an IQPA, the Department may reject
the plan's annual report. If a satisfactorily revised report is not
submitted, the Department may under section 104(a)(5) of ERISA
retain an independent qualified public accountant on behalf of the
participants to perform a sufficient audit, bring a civil suit for
whatever relief may be appropriate, or take any other enforcement
action authorized under Title I.
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The IQPA requirements in ERISA were intended to provide
participants, beneficiaries, plan administrators, other plan
fiduciaries, and the Department with reliable information about an
employee benefit plan and its financial soundness. The precursor to
ERISA, the Welfare and Pension Plan Disclosure Act of 1958 (WPPDA),
required a certified audit only when the Secretary of Labor found
reasonable cause to investigate a plan. Legislative history of ERISA
indicates that Congress found this requirement to be insufficient, and
specifically replaced it with the annual certified audit requirements
in section 103(a)(3)(A) of ERISA.
Section 103(a)(3)(A) of ERISA sets forth the requirements governing
the IQPA's annual audit. The administrator of an employee benefit plan
is required to engage, on behalf of all plan participants, an IQPA to
conduct an examination of the plan's financial statements, and other
books and records of the plan, as the accountant deems necessary to
allow the accountant to form an opinion as to whether the financial
statements and schedules required to be included in the plan's annual
report are presented fairly in accordance with generally accepted
accounting principles (GAAP) applied on a basis consistent with that of
the preceding year. The accountant's examination must be conducted ``in
accordance with generally accepted auditing standards (GAAS), and shall
involve such tests of the books and records of the plan as are
considered necessary by the independent qualified public accountant.''
The accountant's report must contain certain opinions with respect to
the financial statements and schedules covered by the report and the
accounting principles and practices reflected in such report. Further,
the accountant's report must identify any matters to which the
accountant takes exception, whether the matters to which the accountant
takes exception are the result of Department's regulations and, to the
extent practicable, the effect on the financial statements of the
matters to which the accountant has taken exception. If the auditor's
independence is considered to have been impaired after the audit is
completed, a new audit by another accountant may be required.
Section 103(a)(3)(D) of ERISA states that the term ``qualified
public accountant'' means--(i) a person who is a certified public
accountant, certified by a regulatory authority of a State; (ii) a
person who is a licensed public accountant, licensed by a regulatory
authority of a State, or (iii) a person certified by the Secretary as a
qualified public accountant in accordance with regulations published by
the Secretary for a person who practices in States where there is no
certification or licensing procedure for accountants. ERISA does not,
however, define what would constitute ``independence'' for purposes of
the audit requirements.
In the Department's view, an accountant's independence is at least
of equal importance to the professional competence he or she brings to
an engagement in rendering an opinion and issuing a report on the
financial statements of an employee benefit plan. Pursuant to the
authority provided to the Department by section 103(a)(3)(A), the
Department issued Interpretive Bulletin 75-9 in 1975 to provide
guidelines for determining when an accountant is independent for
purposes of ERISA's annual reporting requirements. The bulletin
explains that the Department will not recognize any person as an
independent qualified public accountant with respect to an employee
benefit plan who is not in fact independent.
The rule also specifically describes three kinds of relationships
that will cause an accountant not to be independent. During the audit
engagement and during the period covered by the audit, the accountant,
his or her firm, and any member of the firm cannot: (1) Have or be
committed to acquire any direct financial interest or any material
indirect financial interest in the plan or the plan sponsor; (2) have a
connection to the plan or plan sponsor as a promoter, underwriter,
investment advisor, voting trustee, director, officer or employee of
the plan or plan sponsor; and (3) maintain financial records for the
employee benefit plan. The Interpretive Bulletin defines ``member'' of
an accounting firm 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. The Interpretive Bulletin provides that independence is required
during the period of professional engagement, at the date of the
opinion, and during the period covered by the financial statements. In
addition to the specific proscriptions, the Bulletin cautions that the
Department will give appropriate consideration to all relevant
circumstances in determining whether an accountant or accounting firm
is not, in fact, independent with respect to a particular plan,
including evidence bearing on all relationships between the accountant
or accounting firm and that of the plan sponsor or any affiliate. In
that regard, Interpretive Bulletin 75-9 notes that an accountant will
not fail to be recognized as independent merely because the accountant
or his or her firm is retained or engaged on a professional basis by
the plan sponsor, provided none of the three specific proscriptions are
violated. Further, the Interpretive Bulletin states that the rendering
of services to the plan or plan sponsor by an actuary associated with
the accountant or accounting firm will not impair the accountant's
independence.
In addition to ERISA's annual reporting requirements, accountants
and accounting firms are subject to independence requirements of other
governmental agencies and accounting industry self-regulatory bodies.
For example, the Securities and Exchange Commission (SEC) has
independence guidelines for auditors reporting on financial statements
included in SEC filings. Those guidelines were for many years contained
in Rule 2-01 of Reg. S-X, Qualifications and Reports of Accountants. On
January 28, 2003, the SEC adopted final rules regarding independence
for auditors that file financial statements with the SEC implementing
Title II of the Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act also
authorized the establishment of the Public Company Accounting Oversight
Board (``PCAOB'') which itself has established ethics and independence
requirements for registered public accounting firms. The United States
Government Accountability Office (GAO) has auditor independence
requirements under Government Auditing Standards \2\ that cover Federal
entities and organizations receiving Federal funds. The American
Institute of Certified Public Accountants (AICPA) sets GAAS
requirements
[[Page 53350]]
including standards by which the auditor must abide to avoid impairment
of independence.\3\ Many States have an independence component in their
requirements for licensed public accountants. Some have adopted the
AICPA's Code of Conduct, including its independence guidelines. Others,
however, have adopted specific rules, including limitations on offering
or rendering services under a contingency fee arrangement as well as
limitations on ownership interests in the enterprise being audited.\4\
Further, the nature and complexity of the business environment in which
accountants perform services has changed in ways that have led many
accounting firms to develop expertise in an array of activities
peripheral to audit services, for example, business consulting,
valuation and appraisal services, applications programming, electronic
data processing and recordkeeping. The Department has received public
comments indicating that these developments have made it a more
complicated process for accountants and accounting firms to monitor
compliance with the different independence standards that apply in the
different business sectors in which they provide audit services.
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\2\ Information about Government Auditing Standards (commonly
referred to as ``Generally Accepted Government Auditing Standards,''
or ``GAGAS'') is available on the GAO Web site at http://www.gao.gov/govaud/ybk01.htm
.
\3\ Information about AICPA's standards is available at
http://www.aicpa.org/about/code/index.html.
\4\ See section 29.10(a)(5), (6), and (7) of New York State's
Education Department's Office of Profession's Rules of the Board of
Regents (Special provisions for the profession of public
accountancy) (http://www.op.nysed.gov/part29.htm#cpa).
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B. Request for Information
The purpose of this Notice is to obtain information to assist the
Department in evaluating whether and to what extent the guidelines in
Interpretive Bulletin 75-9 provide adequate guidance regarding the
independence of accountants who audit employee benefit plans to meet
the needs of plan officials, participants and beneficiaries,
accountants, and other affected parties. Given the changes that have
taken place with respect to employee benefit plans and auditing
practices and standards, as well as changes in the industry since the
issuance of the guidelines in Interpretive Bulletin 75-9, EBSA is
inviting interested persons to submit written comments and suggestions
concerning whether and to what extent the current guidelines should be
modified.
In order to assist interested parties in responding, this document
contains a list of specific questions. The Department recognizes that
these questions may not address all issues relevant to the independence
of accountants who audit employee benefit plans. Accordingly,
interested parties are invited to submit comments on other issues
relating to Interpretive Bulletin 75-9 that they believe are pertinent
to the Department's consideration of new or additional independence
guidelines.
1. Should the Department adopt, in whole or in part, current rules
or guidelines on accountant independence of the SEC, AICPA, GAO or
other governmental or nongovernmental entity? If the Department were to
adopt a specific organization's rules or guidelines, what adjustments
would be needed to reflect the audit requirements for or circumstances
of employee benefit plans under ERISA?
2. Should the Department modify, or otherwise provide guidance on,
the prohibition in Interpretive Bulletin 75-9 on an independent
accountant, his or her firm, or a member of the firm having a ``direct
financial interest'' or a ``material indirect financial interest'' in a
plan or plan sponsor? For example, should the Department issue guidance
that clarifies whether, and under what circumstances, financial
interests held by an accountant's family members are deemed to be held
by the accountant or his or her accounting firm for independence
purposes? If so, what familial relationships should trigger the
imposition of ownership attribution rules? Should the ownership
attribution rules apply to all members of the accounting firm retained
to perform the audit of the plan or should it be restricted to
individuals who work directly on the audit or may be able to influence
the audit?
3. Should the Department issue guidance on whether, and under what
circumstances, employment of an accountant's family members by a plan
or plan sponsor that is a client of the accountant or his or her
accounting firm impairs the independence of the accountant or
accounting firm?
4. Interpretive Bulletin 75-9 states that an accountant will not be
considered independent with respect to a plan if the accountant or
member of his or her accounting firm maintains financial records for
the employee benefit plan. Should the Department define the term
``financial records'' and provide guidance on what activities would
constitute ``maintaining'' financial records. If so, what definitions
should apply?
5. Should the Department define the terms ``promoter,''
``underwriter,'' ``investment advisor,'' ``voting trustee,''
``director,'' ``officer,'' and ``employee of the plan or plan
sponsor,'' as used in Interpretive Bulletin 75-9? Should the Department
include and define additional disqualifying status positions in its
independence guidelines? If so, what positions and how should they be
defined?
6. Interpretive Bulletin 75-9 defines the term ``member of an
accounting firm'' 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. Should the Department revise and update the definition of
``member?'' If so, how should the definition be revised and updated?
7. What kinds of nonaudit services are accountants and accounting
firms engaged to provide to the plans they audit or to the sponsor of
plans they audit? Are there benefits for the plan or plan sponsor from
entering into agreements to have the accountant or accounting firm
provide nonaudit services and also perform the employee benefit plan
audit? If so, what are the benefits? Should the Department issue
guidance on the circumstances under which the performance of nonaudit
services by accountants and accounting firms for the plan or plan
sponsor would be treated as impairing an accountant's independence for
purposes of auditing and rendering an opinion on the financial
information required to be included in the plan's annual report? If so,
what should the guidance provide?
8. Interpretive Bulletin 75-9 requires an auditor to be independent
during the period of professional engagement to examine the financial
statements being reported, at the date of the opinion, and during the
period covered by the financial statements. Should the Department
change the Interpretive Bulletin to remove or otherwise provide
exceptions for ``the period covered by the financial statements''
requirement? For example, should the requirement be changed so that an
accountant's independence would be impaired by a material direct
financial interest in the plan or plan sponsor during the period
covered by the financial statements rather than any direct financial
interest?
9. Should there be special provisions in the Department's
independence guidelines for plans that have audit committees that hire
and monitor an auditor's independence, such as the audit committees
described in the Sarbanes-Oxley Act applicable to public companies?
10. What types and level of fees, payments, and compensation are
accountants and accounting firms receiving from plans they audit and
sponsors of plans they audit for audit and nonaudit services provided
to the plan? Should the Department issue
[[Page 53351]]
guidance regarding whether receipt of particular types of fees, such as
contingent fees and other fees and compensation received from parties
other than the plan or plan sponsor, would be treated as impairing an
accountant's independence for purposes of auditing and rendering an
opinion on the financial information required to be included in the
plan's annual report?
11. Should the Department define the term ``firm'' in Interpretive
Bulletin 75-9 or otherwise issue guidance on the treatment of
subsidiaries and affiliates of an accounting firm in evaluating the
independence of an accounting firm and members of the firm? If so, what
should the guidance provide regarding subsidiaries and affiliates in
the evaluation of the independence of an accountant or accounting firm?
12. Should the Department's independence guidance include an
``appearance of independence'' requirement in addition to the
requirement that applies by reason of the ERISA requirement that the
accountant perform the plan's audit in accordance with GAAS?
13. Should the Department require accountants and accounting firms
to have written policies and procedures on independence which apply
when performing audits of employee benefit plans? If so, should the
Department require those policies and procedures be disclosed to plan
clients as part of the audit engagement?
14. Should the Department adopt formal procedures under which the
Department will refer accountants to state licensing boards for
discipline when the Department concludes an accountant has conducted an
employee benefit plan audit without being independent?
15. Should accountants and accounting firms be required to make any
standard disclosures to plan clients about the accountant's and firm's
independence as part of the audit engagement? If so, what standard
disclosures should be required?
Signed at Washington, DC, this 5th day of September 2006.
Ann L. Combs,
Assistant Secretary, Employee Benefits Security Administration.
[FR Doc. E6-14913 Filed 9-8-06; 8:45 am]
BILLING CODE 4510-29-P
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