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  6.  » Department of Labor Updates Guidance on Independence of Qualified Plan Accountants

Department of Labor Updates Guidance on Independence of Qualified Plan Accountants

by | Sep 15, 2022 |

Plan sponsors of large employee benefit pension plans are familiar with the requirement of audited financial statements for annual reporting purposes.  That requirement is discussed in the DOL’s 2018 guidebook “Selecting an Auditor for Your Employee Benefit Plan,” and is set forth in ERISA Section 103(a)(3)(A), which provides that the plan must retain an independent qualified public accountant to audit and render an opinion on the financial  statements and schedules contained in the plan’s annual report.

ERISA Section 103(a)(3)(D) defines “qualified public accountant,” but does not define independence.  However, since the DOL regards an accountant’s independence as of at least equal importance with the accountant’s competence, in 1975 the DOL issued Interpretive Bulletin 75-9, 29 CFR 2509.75-9, to provide guidelines for determining when an accountant is independent for purposes of ERISA’s annual reporting requirements. The 1975 guidance, based on principles that paralleled the SEC’s independence requirements for auditing publicly traded companies, set forth three specific sets of circumstances that would conclusively show that an accountant was not independent – one based on certain roles and statuses, a second based on financial interests, and the third based on engaging in management functions relate to financial records that would be the subject of the audit.  IB 75-9 also set forth a facts and circumstances test to be applied in all other cases.

In 2006, the DOL issued a Request for Information seeking advice from the public as to whether the 1975 IB provided adequate guidance for all affected parties. No rulemaking project resulted from that request for information, but the DOL has continued to engage with accounting industry stakeholders, to ensure that the 1975 guidance was not drafted in such a fashion as to preclude plans from engaging high-quality auditors and to reflect the differences in which large accounting firms operate. Based upon that ongoing discussion with stakeholders, on September 6, 2022, the DOL removed IB 75-9 from CFR, and published in the Federal Register an updated Interpretive Bulletin, IB 2022-01, to be codified at 29 CFR 2509.2022-01. The updated Interpretive Bulletin is focused on three areas:

  1. The time period during which accountants and firms are prohibited from financial interests in the plan or plan sponsor.

 For purposes of determining independence, there is no de minimis rule.  Under IB 75-9, the holding of even a single share of plan sponsor stock by an accountant, the firm, or any member of the firm during the period to be audited, can be a “direct interest,” or “material indirect interest” in the plan sponsor, disqualifying an otherwise qualified public accountant. Under the updated guidance in IB 2022-01, the accountant or firm will not be disqualified from accepting a new audit engagement if the interest is disposed of prior to the period of the professional engagement. Under this guidance, accountants will have 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 that an initial engagement letter or other written agreement is signed or audit procedures commence, whichever is sooner.

This new audit engagement exception is limited to publicly traded securities, appears to include options to purchase, and expands the group who must divest to include the accountant, his or her firm, shareholder employees, partners, professional employees and the immediate families (spouse and dependents) of each of the foregoing.

  1. Other services an accountant or firm may provide to a plan or plan sponsor.

 The New IB continues the current guideline that prohibits an accountant or firm from certain plan or plan sponsor related employment but that permits an accountant, firm, or its members to engage in certain professional services to the plan or plan sponsor that are not connected to an audit or review of a plan’s financial statements.  The new IB gives as an example, that an accountant will not be regarded as failing the independence requirement solely by reason of the rendering of actuarial services by an actuary associated with the accountant or firm, or retention or engagement by the plan or plan sponsor of the accountant, the firm or its members for non-plan work. However, the DOL cautions that certain positions or connections, originally enumerated in IB 75-9, are still prohibited, that the independence test is a facts and circumstances test, and that the DOL would give appropriate consideration to all relevant circumstances in determining whether an accountant or accounting firm is  independent. Additionally, the DOL continues to warn of the necessity to avoid prohibited transactions in connection with multiple services arrangements.

  1. Definition of office for purposes of determining who is a member of a firm for an “independence” analysis.

Under the 1975 IB, one part of the definition of “member” was an accountant, shareholder employee, or professional employee participating in an audit or “located in an office” of the firm “participating in a significant portion of the audit.”  In recognition of the fact that the concept of office for workplace purposes has been changed to focus more on workgroups than on physical locations, the updated IB guidelines in IB 2022-01 define “office” as “ 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 updated IB guidelines also provide, for the first time, although without preamble explanation, that the definition of “member” includes “. . . the firm’s employee benefit plans; or an entity whose operating, financial, or accounting policies can be controlled by individuals or entities [within the general definition of “member”], or by two or more individuals or entities acting together.”

Conclusion

 It may be of interest that this guidance, as with its predecessor IB, is issued as an interpretive bulletin, guidance that is not required to be issued with notice and opportunity for public comment, but will be entitled to deference by courts as an agency’s interpretation of its enabling statute under Skidmore v. Swift, 323 U.S.134 (1944).  This new IB guidance will be effective as an interpretation immediately, and should be taken into account by plan sponsors of pension plan requiring audited financial statements for the 2022 plan year, perhaps by requesting an independence verification statement in an audit agreement.

In the coming months, we will continue to review and explain the new IB guidance as needed.  Should you have any questions about the new IB 2022-01, you may contact Susan Rees, Barry Salkin, or Sholom Fine.

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