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DOL Updates Guidance on Employee Benefit Plan Auditor Independence

Government Affairs

As expected, the Department of Labor (DOL) has just released updated guidance addressing the “independence” requirements for accountants auditing employee benefit plans. 

More specifically, Interpretive Bulletin 2022-01, released Sept. 2 by the DOL’s Employee Benefits Security Administration (EBSA), sets forth updated guidelines under section 103(a)(3)(A) of ERISA for determining when a qualified public accountant is independent for purposes of auditing and rendering an opinion on the financial statements required to be included in the annual Form 5500 report filed with the DOL.

The DOL had last issued an Interpretive Bulletin in 1975 that set forth guidelines for determining when a qualified public accountant is independent for these purposes. 

As background, EBSA notes that in 2006 it issued a Request for Information on possibly amending Interpretive Bulletin 75-9. The department did not open a rulemaking project after its 2006 RFI, but continued to engage with accounting industry stakeholders. Based on that continuing engagement, the DOL says that it is persuaded that certain changes to the 1975 guidelines can be implemented. 

“Our goal in updating the Interpretive Bulletin is to make sure the Department of Labor’s interpretations in this area continue to foster proper auditor independence while also removing outdated and unnecessary barriers to plans accessing highly qualified auditors and audit firms,” stated Ali Khawar, who is the Acting Assistant Secretary of Labor for EBSA. 

Key Changes 

Accordingly, the new IB revises and restates that 1975 IB to remove certain provisions and to reorganize other provisions for clarity, according to the DOL’s announcement. 

The following are among the key changes to the DOL’s new guidance. 

Period During Which Accountants Are Prohibited from Holding Financial Interests in the Plan or Plan Sponsor: Subject to certain limitations, the DOL is revising its independence guidelines to provide an exception for new audit engagements from the condition on holding disqualifying financial interests during the period covered by the financial statements being audited. 

Under this approach, the DOL explains that 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.”

The updated IB also includes a definition of the “period of professional engagement” providing that the term means “the period beginning when an accountant either signs an initial engagement letter or other agreement to perform the audit or begins to perform any audit, review or attest procedures (including planning the audit of the plan’s financial statements), whichever is earlier, and ending with the formal notification, either by the member or client, of the termination of the professional relationship or the issuance of the audit report for which the accountant was engaged, whichever is later.” 

The DOL notes that this exception provides accountants with a “divestiture window” between the time when there is an oral agreement or understanding that a new client has selected them to perform the plan audit and the time an initial engagement letter or other written agreement is signed or audit procedures commence, whichever is sooner.

Definition of “Office” for Purpose of Determining Who a “Member” of the Firm Is: Here, the DOL notes that it is persuaded that its definition of “member” would be improved by including a definition of “office” for purposes of determining when an individual is “located in an office” of the firm participating in a significant portion of the audit. 

The DOL’s view is that “substance should govern the office classification, and the expected regular personnel interactions and assigned reporting channels of an individual may well be more important than an individual’s physical location.” 

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. The DOL further notes that this definition of the term “office” is modeled on the one used in the AICPA independence standard.

The guidance will become effective on the date it is published in the Federal Register, which is currently scheduled for Sept. 6.