When the plan administrator instructs the auditor to perform a limited scope audit, the auditor has no responsibility to test the accuracy or completeness of the investment information certified by the plan’s trustee or custodian, obtain an understanding of internal control maintained by the certifying institution over investments held and investment transactions executed for the plan, or assess control risk associated with assets held and transactions executed by the institution.
The limited scope exemption applies only to the investment information certified to by the qualified certifying institution and does not extend to:
Required financial statement disclosures
Other information, regardless of whether it is included in the certified information
Plan investments held by the certifying institution or investment income information that are not specifically included in the certification
Plan investments not held by a qualified institution, such as real estate, leases, and mortgages
Self-directed brokerage accounts or participant loans that are not held by the qualified institution
When ERISA established the limited scope audit exemption in 1974, most plan investments were held in common stocks, mutual funds, bonds, and other instruments that were either directly held by the plan, or held in trust or custodial accounts at banks, insurance companies, or similar institutions regulated by a Federal or state agency. Since ERISA was enacted, many plans have shifted their investments into more complex, hard-to-value Investments. In today’s environment, such investments are not necessarily held directly, but rather may be held in a multi-layered investment, thus making them more difficult to identify and value.
If the plan is invested solely in assets with readily determinable fair values the trustee or custodian typically obtains fair values from nationally recognized pricing services. However, in cases where the plan invests in other types of assets, and where the trustee or custodian may have been engaged only to provide custodial services, the values in the trust statement may be a pass-through of the values provided by the fund issuer or general partner, or by a boutique vendor or broker for non-marketable securities.
In those cases, the reported values are based on the best information available to the trustee and custodian at the time the trustee or custodial report is prepared, which may or may not be the appropriate values for financial statement and Form 5500 reporting purposes as of the plan’s year end. As such, it is important that plan administrators evaluate whether these limited scope audit exemptions continue to make sense for their plan audits.