1. Jeff Markert, KPMG LLP June 11, 2014
2014 NSAA Annual Conference The Audit Implications of the GASB’s New Pension Standards
Jeff Markert, KPMG LLP
June 11, 2014

2. Speaker Biography
Jeff Markert, CPA, is a partner with KPMG LLP (KPMG) with more than 24 years of experience serving not-for-profit and state and local organizations. In April of 2010, Jeff transferred to KPMG’s Department of Professional Practice in New York City. In this role, he devotes significant time to emerging issues related to government organizations, including providing technical assistance and training to KPMG personnel throughout the United States. Jeff is currently the Chair of the AICPA State and Local Government Expert Panel and is also the chair of their task force on pension accounting and audit issues. Prior to joining KPMG’s Department of Professional Practice, Jeff spent 20 years in KPMG’s Chicago office and was the practice leader for KPMG’s Midwest public sector audit group. In this role, Jeff was responsible for not- for-profit and government services and also served as the engagement partner for many of their larger and more complex clients.

3. Agenda
Issues Related to Cost-Sharing Multiple-Employer Plans
Issues Related to Agent Multiple-Employer Plans
Common Questions/ Issues
Next Steps

4. Issues Related to Cost- Sharing Multiple- Employer Plans

5. Cost-Sharing Plan Issues
Audited financial statements of the plan only include disclosure of the collective net pension liability for the plan as a whole. They do NOT include:
Deferred outflows/inflows of resources by category
Pension expense
Each participating employer’s share of collective pension amounts
Standard is silent on who (plan or each individual participating employer) should calculate allocation percentages
Audited financial statements of the plan may not include necessary information to calculate allocation percentages
Standard provides flexibility in approach to determining allocations
Standard encourages an allocation method would be extremely difficult to audit as it is based on projected future contributions

6. Cost-Sharing Plan Issues
GAAP financial statements of the plan and additional unaudited information from the plan will NOT provide sufficient appropriate audit evidence for the governmental employer auditor.
Absent additional audit evidence from the cost-sharing plan, the employer auditor would not likely be able to accumulate sufficient appropriate audit evidence.
If unable to accumulate sufficient appropriate evidence, the employer auditor should modify the audit opinion.
(AU-C section 9500, Question 2)

7. Cost-Sharing Plans—Current Status of AICPA Recommendations
Whitepapers
Government Employer Participation in Cost-Sharing Multiple Employer Plans: Issues Related to Information for Employer Reporting
Single-Employer and Cost-Sharing Multiple-Employer Plans: Issues Associated with Testing Census Data
Issued interpretations to 3 AU-C sections
AU-C 500
AU-C 600
AU-C 805
Links to Papers & Interpretations on GAQC “GASB Matters” website:
Auditing Interpretations

8. Cost-Sharing Plans—AICPA Recommendations
Plan prepares “schedule of employer allocations” for which plan auditor is engaged to provide opinion
Plan prepares “schedule of pension amounts by employer” for which plan auditor engaged to provide opinion
Plan auditor needs to consider the appropriateness of the materiality used in the audit of plan financial statements
For audit of a public employee retirement system (PERS) plan financial statements, the audit opinion is provided on the system as a whole (which often includes more than one plan)
Audit of plan financial statements effectively has to be performed at a lower level consistent with the “allocation” pool

9. Example Schedule of Employer Allocations
EXAMPLE COST SHARING PENSION PLAN
Schedule of Employer Allocations
6/30/20X5
20X5
Actual
Employer
Allocation
Contributions
Percentage
Employer 1 $
2,143,842
36.376 %
Employer 2
268,425
4.554
Employer 3
322,142
5.466
Employer 4
483,255
8.199
Employer 5
633,125
10.742
Employer 6
144,288
2.448
Employer 7
95,365
1.618
Employer 8
94,238
1.599
Employer 9
795,365
13.495
Employer 10
267,468
4.538
Employer 11
403,527
6.847
Employer 12
165,886
2.815
Employer 13
68,454
1.161
Employer 14
6,240
0.106
Employer 15
2,144
0.036
Total
5,893,764

10. Example Schedule of Pension Amounts by Employer

11. Cost-Sharing Plans: Employer Auditor Responsibilities
Determine
Sufficiency and appropriateness of audit evidence
Whether plan auditor’s report on schedules are adequate and appropriate for auditor purposes (e.g., evidence)
Review plan auditor’s report and any related modifications
Evaluate whether plan auditor has necessary competence and independence
Determine whether named as specified user
Amounts in schedules specific to employer
Employer amount used in allocation percentage (numerator)
Recalculate allocation percentage of employer
Recalculate allocation of pension amounts based on allocation percentage of employer
Census data submitted to plan
Evaluate
Verify & Recalculate
Test

12. Cost-Sharing Plans —Testing Underlying Census Data of Active Employees
Risk-based approach by plan auditor to select employers to test
Individually important employers (e.g. > 20% of plan) tested annually
Plan auditor performs risk assessment on remaining employers using tiered approach
For example:
Employers between 5 and 20% tested to approximate a 5-year cycle
Employers less than 5% tested to approximate a 10-year cycle
Many small employers will never be tested (e.g. 400 employers represent 2% in aggregate of plan)

13. Cost-Sharing Plans —Testing Underlying Census Data of Active Employees
Employer auditor may perform procedures under examination engagement in accordance with AT (Attest) Section 101
Employer auditor engaged to provide opinion on relevant assertions related to census data reported to plan during period
Consider the actuarial valuation date in determining which period to be covered by opinion
Most plans will likely be using beginning of year actuarial valuation date
Relevant census data for actuarial valuation will be prior year information reported to plan
Relevant census data for contributions and benefit payments will be current year information reported to the plan

14. Issues Related to Agent Multiple-Employer Plans

15. Agent Plan Issues
Audited financial statements of the plan do not include actuarial information or each employer’s “interest” in the fiduciary net position
Allocation of fiduciary net position reported by plan to employer is unaudited
Employers need the following elements to record as of the measurement date:
Net pension liability
Deferred outflows/inflows of resources by category
Pension expense

16. (AU-C section 9500, Question 3)
Agent Plan Issues
GAAP financial statements of the plan and additional unaudited information from the plan will NOT provide sufficient appropriate audit evidence for the governmental employer auditor.
Absent additional audit evidence from the agent plan, the employer auditor would not likely be able to accumulate sufficient appropriate audit evidence.
If unable to accumulate sufficient appropriate evidence, the employer auditor should modify the audit opinion.
(AU-C section 9500, Question 3)

17. Agent Plans —AICPA Recommendations and Guidance
Whitepaper
Government Employer Participation in Agent Multiple Employer Plans: Issues Related to Information for Employer Reporting
Issuing interpretations to 3 AU-C sections
AU-C 500
AU-C 600
AU-C 805
Auditing Interpretations
June

18. Total Pension Liability, Deferred Outflows/Inflows, and Pension Expense—AICPA Recommendations
Less: Plan’s fiduciary net position
Net Pension Liability
Plan actuary issues separate actuarial report for each participating employer which includes net pension liability, deferred outflows/inflows by category and year, pension expense, and discount rate calculation
Individual actuarial certification letters addressed to each employer
Employer management and employer auditor rely on actuary as management specialist for total pension liability for individual employer

19. Total Pension Liability, Deferred Outflows/Inflows, and Pension Expense—AICPA Recommendations
Option 1:
Plan auditor engaged to issue a SOC 1 (type 2) report on census data controlled by the plan
Internal controls are suitably designed and operating effectively
Option 2:
Plan auditor engaged to issue examination report on plan management’s assertions related to census data controlled by the plan in accordance with AT (Attest) section 101

20. Total Pension Liability, Deferred Outflows/Inflows, and Pension Expense—AICPA Recommendations
Employer and employer auditor responsible for validating deferred outflows/inflows and pension expense related to individual employer
Deferred outflows/inflows resulting from current year can be recalculated from condensed statement of changes in fiduciary net position (by employer) included as supplemental information in plan financial statements
Rely on actuarial report for deferred outflows/inflows related to actuarial experience

21. Fiduciary Net Position—AICPA Recommendations
Total Pension Liability
Less: Plan’s fiduciary net position
Net Pension Liability
Option 1:
Plan prepares “schedule of changes in fiduciary net position by employer ” for which plan auditor is engaged to provide opinion on schedule as a whole (and an in-relation-to opinion on each individual employer column)
Plan auditor engaged to issue SOC 1 (type 2) report on allocation of inflows (i.e., contributions, investment income, etc.) and outflows (i.e., benefit payments, administrative expenses, etc.) of plan to individual employer accounts

22. Fiduciary Net Position—AICPA Recommendations
Total Pension Liability
Less: Plan’s fiduciary net position
Net Pension Liability
Option 2:
Plan prepares “schedule of changes in fiduciary net position by employer ” for which plan auditor is engaged to provide opinion on schedule as a whole and on each individual employer column

23. Example Schedule of Changes in Fiduciary Net Position by Employer

24. Agent Plans: Employer Auditor Responsibilities
Sufficiency and appropriateness of audit evidence
Whether plan auditor’s report on schedule and SOC 1 (Type 2) report are adequate and appropriate for auditor purposes (e.g., evidence)
Review plan auditor’s report and any related modifications
Evaluate whether plan auditor has necessary competence and independence
Determine whether named as specified user
Competence, capabilities, and objectivity of the actuary
Appropriateness of the actuary’s work as audit evidence
Whether underlying census data is sufficiently reliable
Census Data
Determine
Evaluate
Test

25. Commons Questions/ Issues

26. Common Questions/Issues
Allocation to departments for separately issued financial statements
Allocation to funds
Allocation methodology
Changes in proportion
Timing of actuarial valuation
Recommended use of beginning of year valuation
Auditing the discount rate calculation
Funding assumptions
Application of cost-sharing guidance to single employer plans

27. Common Questions/Issues
Determination of special funding situation and audit evidence needed
Reconsideration of type and number of plans
Lack of communication by plans

28. Common Questions/Issues
Cost-Sharing Plans:
Level of detail provided in schedule of pension amounts
Period tested for census data (12 months prior to valuation)
Procedures to be performed at employer
Separate attribute samples selected for each employer
Agent Plans:
Interaction between employer auditors and plan actuary
Obtaining census data file directly from actuary, or
Confirm census data file with actuary
Actuarial certification letter addressed to employer
Amend contract/engagement letter with plan actuary
Involvement of employers in establishing actuarial assumptions

29. Next Steps

30. Next Steps
Guidance on audit procedures to be performed on census data at employer level.
Incorporation of whitepapers into AIGPA SLG Audit Guide.
Pension chapter in AICPA SLG Audit Guide
Identification of other implementation issues.
Training, training, and more training.
OPEB Exposure Drafts – 60-day comment period.

31. Thank you for participating.
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