Council Finds Misunderstandings about Limited Scope Audits

In its report, the Council explained that with the Employee Retirement Income Security Act’s authorization of the limited scope audit, a plan administrator may choose to have the plan audited in a manner that would not otherwise be consistent with Generally Accepted Accounting Standards (GAAS). The limited scope audit allows plan administrators to instruct the auditor not to perform any auditing procedures with respect to investment information prepared and certified by a bank or similar institution or by an insurance carrier that is regulated, supervised, and subject to periodic examination by a state or federal agency and that holds plan assets. Proper certifications must address both the accuracy and the completeness of the information submitted. 

Concerns were raised by those that testified before the Council that limited scope audits are not well understood by some users, and maybe by some auditors, and that they might be employed in inappropriate situations.   

The report said potential misunderstandings relate to: 

• What is covered by a limited scope audit;  
• What entities can offer asset certifications;  
• The significance of the certifications with regard to asset valuation and the audit; and  
• What is the importance of a limited scope audit.  

The Council concluded that the limited scope audit should not be repealed, but the quality of the limited scope audits and the required certifications should be reinforced and strengthened. The primary rationale for the Council’s conclusion that the limited scope audit should not be repealed was a deficiency of specific material evidence of participant harm caused by limited scope audits and the concern for possible increased costs that could result from a full scope audit.  

Witnesses expressed concern about entities – such as retirement plan recordkeepers – that issue limited scope certifications, but who in reality might not be the kinds of entities that should issue certifications.  

The Council recommended that: 

• The Department of Labor should clarify the kinds of entities that are qualified to issue certifications under existing regulations and guidance and reiterate that only qualified entities may issue certifications; 
• The Department should amend the limited scope audit regulations to require that the certification of investment information include a disclaimer that investment values may not have been subject to independent verification of fair value by the certifier; 
• The Department should require plan administrators to include any certification issued in connection with a limited scope audit in the plan’s Form 5500 filing or other annual report; and 
• The Department should issue informal education materials targeted to plan sponsors and plan auditors that would assist them in understanding their respective obligations with respect to limited scope audits.