GAQC Alert No. 244 


    GAQC Alert
     
    Important New Cost-Sharing Plan Guidance for Plans, Participating Governmental Employers, and Their Auditors Issued by AICPA
           
      AICPA
    February 27, 2014
    GAQC Alert #244
     
    AICPA
    In This Alert
    Background and High-Level Summary of SLGEP Efforts
    Whitepapers Released Relevant to Cost-Sharing Plans, Participating Employers, and Auditors
    Expected Issuance of Related Auditing Interpretations
    Status of Future Whitepapers and Auditing Interpretations on Agent Plan Issues and New SLG Guide Chapter
    New Section of GAQC Web Site Addressing GASB Pension Issues
    Resources on Pensions Currently Available
    Mark Your Calendars
    The GAQC will be hosting two Web events in May on pensions. May 6, 2014: The GASB's Pension Standards Part I: Considerations for Cost-Sharing Plans, Participating Employers, and Their Auditors. May 7, 2014: The GASB's Pension Standards Part II: Considerations for Agent Plans, Participating Employers, and Their Auditors. A future GAQC Alert will provide registration information.
    Register for GAQC Web Event on Fraud
    The next GAQC Web event, Don't be the Last to Know - Fraud in the Governmental Environment, will be held on Wednesday, March 12, 2014, from 1:00 PM - 3:00 PM (Eastern). Gain insight on what the auditing standards say about fraud, what clients can do to prevent fraud, and common fraud cases.
    Additional Resources
    GAQC Alerts

    Archived GAQC Web Events

    Audit Practice Aids and Tools

    HUD Information
    Dear Center Members
    The AICPA State and Local Government Expert Panel (SLGEP) has been engaged in numerous and complex discussions regarding accounting and auditing implementation issues facing governmental pension plans, the governmental employers that participate in those plans (employers or participating employers), and their auditors as a result of new pension accounting standards issued by Governmental Accounting Standards Board (GASB). The purpose of this GAQC Alert is to make you aware of the following:
      A background and high-level summary of the SLGEP's efforts;
      The release of two whitepapers relevant to cost-sharing multiple employer plans (cost-sharing plans), participating employers, and their auditors, that include critical information for a successful implementation of the standards;
      Related auditing interpretations to be issued and related timing;
      The status of future whitepapers and auditing interpretations on issues associated with agent multiple employer plans (agent plans), participating employers, and their auditors and a new chapter in process for the AICPA Audit and Accounting Guide, State and Local Governments (SLG Guide);
      A new section of the GAQC Web Site addressing GASB matters; and
      How to access audit and other resources on governmental pensions.
    Background and High-Level Summary of SLGEP Efforts
    In June 2012, the GASB issued two new standards that will substantially change the accounting and financial reporting of public employee pension plans and the state and local governments that participate in such plans. GASB Statement No. 67, Financial Reporting for Pension Plans, revises existing guidance for the financial reports of most governmental pension plans. GASB Statement No. 68, Accounting and Financial Reporting for Pensions, revises and establishes new financial reporting requirements for most governments that provide their employees with pension benefits. GASB Statement No. 67 is effective for financial statements for periods beginning after June 15, 2013. GASB Statement No. 68 is effective for financial statements for fiscal years beginning after June 15, 2014.

    There are numerous accounting and auditing issues facing governmental plans (both cost-sharing and agent) and participating employers that the SLGEP has been working very diligently to address. During this process, the SLGEP has had many discussions internally with representatives of the Auditing Standards Board, as well as with other key stakeholders including actuaries, plans, governmental employers, and the GASB. The remainder of this GAQC Alert discusses the status of the SLGEP efforts, guidance issued to date, and other additional guidance expected.
    Whitepapers Released Relevant to Cost-Sharing Plans, Participating Employers, and Auditors
    With the implementation of GASB Statement No. 68, employers will be required to recognize a liability as employees earn their pension benefits (that is, as they provide services to the government). For the first time, employers participating in cost-sharing plans will recognize their proportionate share of the collective pension amounts for all benefits provided through the plan. The SLGEP has released one whitepaper which addresses numerous issues from the employer and employer auditor perspective that will arise from the implementation of GASB Statement No. 68. These issues need to be addressed by employers sooner rather than later and will involve close coordination between employers and cost-sharing plans. In a separate whitepaper, the SLGEP has addressed responsibilities of the plan and its auditor regarding the completeness and accuracy of all census data underlying certain financial statement elements of the plan. Each of these papers is discussed in more detail below:

    Whitepaper on Employer and Related Auditor Issues. This whitepaper titled, Governmental Employer Participation in Cost-Sharing Multiple-Employer Plans: Issues Related to Information for Employer Reporting, addresses issues related to how employers participating in cost-sharing plans obtain all necessary information to properly recognize and disclose pension amounts in their financial statements and how their auditors obtain sufficient appropriate evidence to support their opinions on employer financial statements. It should be of interest to cost-sharing plans, participating employers, and their auditors. In the whitepaper, the SLGEP recommends that cost-sharing plans calculate and disclose in two schedules each employer's allocation percentage and pension amounts. The SLGEP further recommends the plans engage their auditors to obtain reasonable assurance and report on the schedules in accordance with AU-C section 805, Special Considerations — Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement. The employer and employer auditor have their own responsibilities with regard to the information provided by the plan, as further discussed in the whitepaper, but the plan auditor's report on the schedules provides evidence that the pension amounts allocated to the employer and included in the employer's financial statements are not materially misstated. Most importantly, the whitepaper concludes that if a cost-sharing plan issues financial statements, but does not prepare the above described schedules or if it does prepare the above described schedules but does not engage its auditor to opine on them as recommended by the SLGEP, it is unlikely that employer auditors will be able to accumulate sufficient appropriate audit evidence necessary to provide unmodified opinions on opinion units of the government financial reporting entity that have material allocated pension amounts. It is important to emphasize that unaudited information provided by the plan to its employers to support allocations or pension amounts would not be sufficient appropriate audit evidence for their auditors to base their opinions. Read the whitepaper for much more detail.

    Whitepaper on Plan Census Data Issues. The whitepaper titled, Single-Employer and Cost-Sharing Multiple-Employer Plans: Issues Associated with Testing Census Data in an Audit of Financial Statements, addresses the role of census data in single-employer and cost-sharing plan financial statements and the plan auditor's responsibility for such census data. It should be of primary interest to cost-sharing plans and their auditors. However, participating employers may also wish to review the whitepaper as it could have ramifications for them. In the whitepaper, the SLGEP addresses the responsibility of the cost-sharing plan to obtain all necessary information and the plan auditors to obtain sufficient appropriate evidence regarding the completeness and accuracy of all census data underlying certain financial statement elements of the plan. From an audit perspective, the whitepaper describes the plan auditor's responsibility to identify and assess the risks of material misstatement of these elements. For this purpose, the plan auditor should:
      1. Obtain an understanding of the processes and controls used by the plan's management to support the completeness and accuracy of census data provided to the actuary.
      2. Consider the likelihood of misstatement and whether the potential misstatement is of such a magnitude that it could result in a material misstatement of the total pension liability, contribution revenue, or contributions receivable.
    The nature, timing, and extent of substantive procedures to be performed over the census data and the underlying payroll records of employers will depend on the assessed risk of material misstatement of the relevant elements and whether management has effective processes to determine the completeness and accuracy of census data provided to the actuary. Note that in order to obtain sufficient appropriate audit evidence the whitepaper explains that it is necessary to select a representative group of contributing employers each year on a rotating basis for testing underlying payroll records of employees who are potentially eligible for participation in a cost-sharing plan. A risk-based approach for selecting the employers to test each year is also described. Read the whitepaper for more detail.
    Expected Issuance of Related Auditing Interpretations
    In addition to the above described whitepapers, the SLGEP, working with the AICPA Audit and Attest Standards Team, is currently developing a series of auditing interpretations that will address specific questions pertaining to both the auditors of the cost-sharing plans and employers. These interpretations will support certain of the conclusions reached in the SLGEP whitepapers and include interpretations of AU-C 500, Audit Evidence, AU-C 600, Special Considerations—Audits of Group Financial Statements (Including the Work of Component Auditors), and AU-C 805, Special Considerations—Audits of Single Financial Statements and Specific Elements, Accounts, or Items of a Financial Statement. The clearance process for these interpretations is currently underway and they are expected to be released no later than late March. A future GAQC Alert will announce the issuance of these interpretations.
    Status of Future Whitepapers and Auditing Interpretations on Agent Plan Issues and New SLG Guide Chapter
    The SLGEP continues to work on developing a similar series of whitepapers and auditing interpretations related to agent plans and participating employers which are further from completion because the issues are so much more complex. Like cost-sharing plans, once GASB Statement No. 68 is implemented employers participating in agent plans will need to recognize their specific pension amounts. A major challenge faced by each employer participating in an agent plan is how they will obtain sufficient appropriate evidence to recognize their individual pension amounts including net pension liability, deferred outflows of resources, deferred inflows of resources, and pension expense. The SLGEP believes that in order to determine these pension amounts, the employer and employer auditor will have to rely on the controls and processes of the plan and its actuary who calculate these amounts for each individual employer. Similarly, employer auditors will be challenged in terms of obtaining sufficient appropriate evidence in order to opine on the pension amounts included in employer financial statements. The SLGEP is still working to develop recommended best practices and related auditing interpretations to address these areas. The SLGEP is continuing discussions with representatives of the Auditing Standards Board and its goal is to issue the whitepapers and interpretations related to agent plans in May.

    In addition, a new governmental pension chapter for the SLG Guide is under development. The chapter will cover various plan and employer auditor considerations, including ramifications when an employer auditor is not able to obtain sufficient appropriate evidence in order to opine on the pension amounts included in employer financial statements. Future GAQC communications will be sent as the matters discussed in this section are finalized.
    New Section of GAQC Web Site Addressing GASB Pension Issues
    The SLGEP devotes significant time and resources toward addressing accounting and auditing issues related to audits of state and local governmental entities. The issuance of the guidance described in this GAQC Alert is one example of its work. Additionally, the SLGEP issues comment letters in response to GASB due process documents on a regular basis. To more clearly highlight the work of the SLGEP, the GAQC has added a new Resource Center titled "GASB Matters" to the GAQC Web site to consolidate issues, resources, and communications from the AICPA and the SLGEP on GASB matters. You can access this new Resource Center by clicking on the "Resources" link on the upper left hand corner of the GAQC home page. On the Resources page click on the "GASB Matters" link in the upper left hand corner. This new Resource Center will continue to expand as additional guidance is issued. Bookmark this new page to easily access it in the future.
    Resources on Pensions Currently Available
    If you are an auditor of a governmental pension plan or participating government and need additional resources in advance of the implementation of the new standards, there are numerous resources available which are highlighted below.
      GASB Pronouncements. The GASB has made available the following pronouncements on its Web site: Statements of Governmental Accounting Standards (including GASB Statement Nos. 67 and 68); Concepts Statements; GASB Interpretations; and GASB Technical Bulletins.
      GASB Educational Resources. The GASB has made available numerous resources on its Web site that include podcasts, fact sheets, articles, and more which are all available to the public.
      GAQC Archived Web Events on Pensions (available now to GAQC members). The GAQC offered a two-part series of Web events on the GASB pension standards. The first titled, An Overview of the New GASB Pension Accounting Standards: Part I, addresses the new accounting. The second titled, New GASB Pension Standards - An Auditor's Perspective: Part II, addresses some of the auditing challenges related to the new standards.
      GAQC Upcoming Web Events on Pensions in May. In anticipation of the release of the SLGEP whitepapers and related guidance, the GAQC has planned two Web events in May. Mark your calendars and watch for a GAQC Alert regarding registration information for the following programs:
     
    • May 6, 2014: The GASB’s Pension Standards Part I: Considerations for Cost-Sharing Plans, Participating Employers, and Their Auditors.
    • May 7, 2014: The GASB’s Pension Standards Part II: Considerations for Agent Plans, Participating Employers, and Their Auditors
      AICPA Governmental Conferences. Anticipating the significant effect the new GASB pension standards will have on plans, employers, and their auditors, the AICPA will provide extensive coverage of pension matters in the 2014 governmental conference agendas. Consider attending one or more of the following events:
     
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    Sincerely,

    AICPA Governmental Audit Quality Center
     
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