DOL Updates Auditor Independence Rules for Employee Benefits Plans

The U.S. Department of Labor's (DOL's) Employee Benefits Security Administration issued Interpretive Bulletin (IB) 2022-01 on Sept. 6, updating its guidance on the independence requirement for accountants who audit employee benefits plans under the Employee Retirement Income Security Act (ERISA). IB 2022-01 took effect immediately on its publication in the Federal Register.

The DOL had issued an IB in 1975 that set forth guidelines for determining when a qualified public accountant is independent for purposes of auditing and rendering an opinion on the financial statements required in a benefits plan's Form 5500 annual filing. IB 2022-01 revises and restates the earlier guidance to remove certain outdated and unnecessarily restrictive provisions and to reorganize other provisions for clarity, the DOL said.

Ali Khawar, acting assistant secretary of labor for employee benefits security, said the DOL wanted to ensure that its guidance on benefits plan audits "continues to foster proper auditor independence while also removing outdated and unnecessary barriers to plans accessing highly qualified auditors and audit firms."

Audit Requirements

Under ERISA, plan administrators—subject to certain exceptions—are required to retain an "independent qualified public accountant" to conduct an annual examination of the plan's financial statements in accordance with generally accepted auditing standards.

The accountant also must render an opinion as to whether the financial statements are presented fairly in conformity with generally accepted accounting principles and whether the schedules required to be included in the plan's annual report fairly present the information in the financial statements taken as a whole.

Effects on Plan Auditor Selection

According to an analysis of IB 2022-01 by attorneys at Groom Law Group in Washington, D.C., the new guidance "should reduce the number of auditors that are inadvertently disqualified from initial engagements, thereby allowing plan sponsors more latitude in their auditor selection process." In addition, "plan sponsors may be able to choose from a wider pool of accountants due to the relaxed independence standards."

Another result of IB 2022-01 may be a greater concentration of plan audits being performed by a smaller number of auditors, the attorneys noted. They added that the DOL reports that auditors who perform more ERISA audits tend to make fewer errors.

Key Provisions

Among the areas revised by IB 2022-01 are the following:

Time period during which accountants are prohibited from holding financial interests in the plan or plan sponsor.

The 1975 IB set out the DOL's view that an accountant cannot conduct the ERISA-required audit of a plan's financial statements if the accountant, the accountant's firm or a member of the firm has a "direct financial interest or material indirect financial interest" in the plan or plan sponsor "during the period covered by the financial statements" or "[d]uring the period of professional engagement."

Under the revised IB, an accountant or firm is not disqualified from accepting a new audit engagement merely because of holding publicly traded securities of a plan sponsor during the period covered by the financial statements as long as the accountant, accounting firm, partners, shareholder employees, and professional employees of the accountant's accounting firm, and their immediate family, have disposed of any holdings of such publicly traded securities prior to the period of professional engagement.

In the new guidance, the DOL explained it was persuaded that the absence of a divestiture provision for certain financial interests in the 1975 IB made it "unnecessarily restrictive and may serve to unduly limit ERISA plans' access to the best qualified auditors."

In the DOL's view, requiring that an accountant (or a member of the accountant's firm) not have a financial interest in the publicly traded securities of the plan sponsor during the period covered by the financial statements (in contrast to the period of the engagement) was not necessary to ensure an accountant's independence. "By disposing of such publicly traded securities prior to the engagement, firms and accountants can readily eliminate concern about independence and give plans access to their audit services," the new guidance states.

Additionally, IB 2022-01 continues provisions in the current guidelines under which an accountant will not be treated as failing the independence requirement solely by reason of rendering professional or actuarial services during the period of audit engagement. However, the new guidance specifies that to retain recognition of this independence, existing prohibitions must not be violated.

The DOL further cautions that rendering multiple services by a firm may give rise to circumstances indicating a lack of independence with respect to the employee benefits plan, and that the DOL "will consider all relevant circumstances, including evidence bearing on all relationships between the accountant or accounting firm and that of the plan sponsor."

Definition of 'office' for determining who is a 'member' of the firm.

The 1975 IB defined "member" 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."

"In the years since the 1975 IB was published, the concept of an 'office' for workplace purposes has changed to focus more on workgroups than on physical locations," the DOL explained. Accordingly, the updated IB defines the term "office" to mean a reasonably distinct subgroup within a firm, "whether constituted by formal organization or informal practice, in which personnel who make up the subgroup generally serve the same group of clients or work on the same categories of matters regardless of the physical location of the individual."