1. Well, Now That That's Over... What We Learned and What to Communicate About Pension Auditing Year 1 is ____ V Plan V NSAA 2015 Annual Conference June 10, 2015 Gerry Boaz, CPA, CGFM (TN) Randy Roberts, CPA, CGFM (AZ)

2. What’s the scope of pensions? 2 3,985 Plans $3.3 Trillion Assets 14.2M active members Contributed $44.9M Employers contributed $89.1M 9.3M annuitants Benefit payments $242.4B * NASRA.org (As reported by US Census Bureau as of Fiscal Year 2013) *

3. Our focus today... 3 234 total plans -134 cost sharing -79 single employer -21 agent multiple employer ~ 27% audited by state auditors Plan reporting -Plan CAFRs -Within state/ local govt CAFRs Preparation for GASB 68 -AICPA White Papers -AICPA SLG Accounting & Audit Guide

4. Our objectives for you... 4 1.Understand how the implementation of GASB 67 is going 2.Be able to brief constituents about what all this means 3.Understand the best practices and lessons learned moving forward

5. Cost Sharing Plan CAFR GASB 67 Schedule of employer allocations Schedule of selected pension amounts Auditor: Opinion on CAFR Tests of census data Opinion on each schedule Participating employers’ financial statements 5

6. Cost Sharing Plan CAFR GASB 67 Schedule of employer allocations Schedule of selected pension amounts Auditor: Opinion on CAFR Tests of census data Opinion on each schedule Participating employers’ financial statements 6 Cost Sharing Plans – obligations of more than 1 employer are pooled and assets can pay benefits to employees of any employer in plan Single measure of pension liability (not in the plan level financial statements) Single actuarial valuation

7. Cost Sharing Plan CAFR GASB 67 Schedule of employer allocations Schedule of selected pension amounts Auditor: Opinion on CAFR Tests of census data Opinion on each schedule Participating employers’ financial statements 7 Participating employers need to know their share of the plan’s pension amounts Plans in best position to provide that information One schedule to provide the pro rata percentage of each participating government One schedule to provide the relevant pension amounts

8. Example cost sharing plan schedule of employer allocations 8

9. Example cost sharing plan schedule of collective pension amounts 9

10. Example cost sharing plan schedule of pension amounts by employer 10

11. Cost Sharing Plan CAFR GASB 67 Schedule of employer allocations Schedule of selected pension amounts Auditor: Opinion on CAFR Tests of census data Opinion on each schedule Participating employers’ financial statements 11 Plan auditor opines on the plan’s financial statements, which follow GASB 67 Plan auditor tests census data of retired and inactive members Plan auditor designs tests of census data for active members o Options for who tests this Plan auditor opines on schedules o Using AU-C 805 (Elements of Financial Statements) standard o Establishes materiality at level lower than financial statement materiality

12. Single Employer Plan CAFR GASB 67 Auditor: Opinion on CAFR Tests of census data Participating employer’s financial statements 12 Communicate selected pension amounts

13. Single Employer Plan CAFR GASB 67 Auditor: Opinion on CAFR Tests of census data Participating employer’s financial statements 13 Communicate selected pension amounts Single Employer Plans – pensions provided to employees of 1 employer Single measure of pension liability (not in the plan level financial statements) Single actuarial valuation

14. Single Employer Plan CAFR GASB 67 Auditor: Opinion on CAFR Tests of census data Participating employer’s financial statements 14 Communicate selected pension amounts Plan auditor opines on the plan’s financial statements, which follow GASB 67 Plan auditor tests census data of retired, inactive, and active members o Decentralized governments may call for cost sharing approach

15. Single Employer Plan CAFR GASB 67 Auditor: Opinion on CAFR Tests of census data Participating employer’s financial statements 15 Communicate selected pension amounts Governments still need to obtain selected information from plan auditor Decentralized governments may need to apply cost sharing approach to decentralized accounting funds

16. Agent Multiple Employer Plan CAFR GASB 67 Separate actuarial reports Schedule of changes in net fiduciary position Auditor: Opinion on CAFR Report on census data Opinion(s) on schedule Participating employers’ financial statements 16

17. Agent Multiple Employer Plan CAFR GASB 67 Separate actuarial reports Schedule of changes in net fiduciary position Auditor: Opinion on CAFR Report on census data Opinion(s) on schedule Participating employers’ financial statements 17 Agent-Multiple Employer Plans – pooled for investments, but otherwise separate accounts for each employer such that only an employer’s share of pooled assets can be used to pay benefits of that employer’s employees Measure of pension liability for each employer (not in the plan level financial statements) Separate actuarial valuation for each employer

18. Agent Multiple Employer Plan CAFR GASB 67 Separate actuarial reports Schedule of changes in net fiduciary position Auditor: Opinion on CAFR Report on census data Opinion(s) on schedule Participating employers’ financial statements 18 Participating employers need to receive their own actuarial valuation report Plans in best position to provide employers’ pension amounts o Pension liability less fiduciary net position by employer o Amounts for deferred items and pension expense Schedule provides changes in fiduciary net position by employer

19. Example agent-multiple employer schedule of changes in fiduciary net position by employer 19

20. Agent Multiple Employer Plan CAFR GASB 67 Separate actuarial reports Schedule of changes in net fiduciary position Auditor: Opinion on CAFR Report on census data Opinion(s) on schedule Participating employers’ financial statements 20 Plan auditor opines on the plan’s financial statements, which follow GASB 67 Plan auditor tests census data of retired and inactive members; either – o Opinion on effectiveness of controls over plan census data (SOC1Type2), or o Opinion directly on census data (attestation engagement) Employer auditor tests census data for active members o Use plan auditor reports as evidence Plan auditor opines on schedule o Using AU-C 805 (Elements of Financial Statements) standard o Establishes materiality at level lower than financial statement materiality o Either – o Opinion on schedule as a whole plus SOC1Type2 opinion on effectiveness of controls over changes to employer accounts, or o Opinion on each employer column

21. What are we seeing? Plan financial statements (as of May) Most plans have issued their GASB 67 CAFRs Exceptions – December CY2014 plans close to being issued (a couple of CY2013 early implementations) Most are audited by public accounting firms However, about 16 state auditors comprising almost 30% of the individual plans audited Have not become aware of any plan financial statements with modified opinions Very few state auditors said they used specialists Only 4 states included GASB 68 schedules with plan CAFRs 21

22. Approaches to census data testing Based on the surveys we’ve received... Most indicated following the AICPA White Papers Many plan auditors tested census data of all members – retired, inactive, and active Some sent their auditors to employer government locations A couple used plan’s internal auditors to gather employer government evidence 22

23. Approaches to census data testing Based on the surveys we’ve received... Several plan auditors required employer auditors to audit active member census data Report under attestation standards One state used organization staff and firm staff to do specific work Didn’t need organization staff from other division to issue attest reports Working papers available to plan audit team 23

24. Challenges we noted – census tests Based on the surveys we’ve received... Challenges validating data Inadequate support/documentation at plan or employer Differences between plan and employer In general, original hire date, marital status, date of birth, gender, wage adjustments Specific situation – one retirement system’s IT conversion treated every original hire date as of the date of conversion One state noted age of some personnel records for long-time employed individuals posed challenges 24

25. Challenges we noted – census tests Based on the surveys we’ve received... Challenge providing sufficient detail for employer auditors To ensure consistent work across employers To understand application of plan provisions To ensure completeness of populations tested by employers Challenge obtaining timely audit reports from employer auditors 25

26. Challenges we noted – census tests Based on the surveys we’ve received... Challenge addressing confidentiality concerns From plan to employers From employers to auditors Challenges addressing errors noted Going through the process of analyzing Normally didn’t affect overall accuracy (not systemic) 26

27. Best practices we noted – census tests Work with plan actuaries, before testing, to confirm key census data elements and assumptions Work with plan and employer governments, before testing, to arrange for documentation needed Be specific with employer auditors about what data elements or audit procedures are important 27

28. Best practices we noted – census tests Use plan’s practices to economize tests needed Leverage internal controls when plan has good ones Use plan’s internal auditors’ results, either To help perform tests When internal auditors are involved in testing plan data/controls during the year, or Use web portal to accumulate employer documentation about census data and internal controls 28

29. What to expect from the state and local government accounting & audit guide For plans (Chapter Part I) ◦Accounting and reporting for single employer, cost sharing, and agent plans ◦Statements, note disclosures, required supplementary information, and recognition standards ◦Auditing considerations for single employer, cost sharing, and agent plans ◦Census data, investments, contributions/related receivables, benefit payments/payables, investment & admin expenses/liabilities, and pension liabilities amounts 29

30. What to expect from the state and local government accounting & audit guide For employers (Chapter Parts II and III) ◦Accounting and financial reporting considerations ◦Recognition, measurement, note disclosures, required supplementary information, and special funding situations ◦Auditing considerations for single employer, agent, and cost sharing plans ◦Census data, net pension liabilities, deferred outflows and inflows 30

31. What to expect from the state and local government accounting & audit guide Important new guidance for plan and employer auditors (included in Chapter Parts I, II, and III) ◦Relevant assertions ◦Examples of what can go wrong ◦Example audit procedures to consider Our Advice... Remember the Risk Assessment Standards – we identify risks of material misstatement and we test and gather evidence to address them Use this concept when implementing this chapter – for effective and efficient auditing! 31