2014 NSAA Annual Conference The Audit Implications of the GASB’s New Pension Standards Jeff Markert, KPMG LLP June 11, 2014 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 notfor-profit and government services and also served as the engagement partner for many of their larger and more complex clients. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 2 Agenda Issues Related to Cost-Sharing Multiple-Employer Plans Issues Related to Agent MultipleEmployer Plans Common Questions/ Issues Next Steps © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 3 Issues Related to CostSharing MultipleEmployer Plans 4 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 5 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) © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 6 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 Auditing Interpretations Issued interpretations to 3 AU-C sections – AU-C 500 – AU-C 600 – AU-C 805 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs Links to Papers & Interpretations on GAQC “GASB Matters” website: www.aicpa.org/GAQC 7 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 8 Example Schedule of Employer Allocations EXAMPLE COST SHARING PENSION PLAN Schedule of Employer Allocations 6/30/20X5 20X5 Actual Employer Contributions Employer Employer 1 Employer 2 Employer 3 $ 2,143,842 268,425 322,142 Employer Allocation Percentage 36.376 % 4.554 5.466 Employer 4 Employer 5 Employer 6 Employer 7 Employer 8 Employer 9 483,255 633,125 144,288 95,365 94,238 795,365 8.199 10.742 2.448 1.618 1.599 13.495 Employer 10 Employer 11 Employer 12 Employer 13 Employer 14 267,468 403,527 165,886 68,454 6,240 4.538 6.847 2.815 1.161 0.106 Employer 15 2,144 0.036 Total © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs $ 5,893,764 100.000 % 9 Example Schedule of Pension Amounts by Employer EX A M P LE C OS T S HA R IN G P EN S ION P LA N Sched ule o f Pens io n Amo unts b y Emp lo yer As o f and fo r the year end ed 6 /3 0 /2 0 X5 D e f e rre d Out f lo w s o f R e s o urc e s D e f e rre d Inf lo w s o f R e s o urc e s P e ns io n Ex p e ns e N e t A mo rt iz a t io n o f D e f e rre d A mo unt s f ro m D if f e re nc e s Ent it y C ha ng e s in C ha ng e s in N e t D if f e re nc e P ro p o rt io n P ro p o rt io n P ro p o rt io n B etween a nd D if f e re nc e s a nd D if f e re nc e s a nd D if f e re nc e s P ro je c t e d B etween a nd A c t ua l Emp lo y e r To t a l C ha ng e s in B etween D if f e re nc e s B etween Emp lo y e r To t a l P ro p o rt io na t e Emp lo y e r B etween Inv e s t me nt C o nt rib ut io ns D e f e rre d B etween C o nt rib ut io ns D e f e rre d S ha re o f Ex p e c t e d Ea rning s o n a nd P ro p o rt io na t e Out f lo w s Ex p e c t e d a nd P ro p o rt io na t e Inf lo w s P la n C o nt rib ut io ns To t a l N e t P e ns io n a nd A c t ua l P e ns io n P la n C ha ng e s o f S ha re o f of a nd A c t ua l C ha ng e s o f S ha re o f of P e ns io n S ha re o f P e ns io n Lia b ilit y Ex p e rie nc e Inv e s t me nt s A s s ump t io ns C o nt rib ut io ns R e s o urc e s Ex p e rie nc e A s s ump t io ns C o nt rib ut io ns R e s o urc e s Ex p e ns e C o nt rib ut io ns Ex p e ns e a nd P ro p o rt io na t e Emp lo y e r 4 5,2 2 4 ,6 2 0 4 3 8 ,8 59 1,56 9 ,8 4 7 1,4 0 4 ,2 0 6 6 9 5,4 2 6 4 ,10 8 ,3 3 8 3 55,9 17 – 72 6 ,4 2 5 1,0 8 2 ,3 4 2 1,9 0 7,2 8 3 12 ,3 75 1,9 19 ,6 58 Emp lo yer 2 5,6 6 1,78 0 54 ,9 4 2 19 6 ,53 3 175,79 6 8 4 ,2 3 1 511,50 2 4 4 ,558 – 74 ,3 2 6 118 ,8 8 4 2 3 8 ,777 (1,79 3 ) 2 3 6 ,9 8 4 Emp lo yer 3 6 ,79 5,6 2 8 6 5,9 4 5 2 3 5,8 9 2 2 11,0 0 1 117,3 54 6 3 0 ,19 2 53 ,4 8 1 – 9 8 ,4 6 5 151,9 4 6 2 8 6 ,59 6 (8 ,0 8 8 ) 2 78 ,50 8 Emp lo yer 4 10 ,19 3 ,4 4 2 9 8 ,9 17 3 53 ,8 3 8 3 16 ,50 2 16 1,2 15 9 3 0 ,4 72 8 0 ,2 2 2 – 16 5,4 53 2 4 5,6 75 4 2 9 ,8 9 4 3 ,0 2 1 4 3 2 ,9 15 Emp lo yer 5 13 ,3 55,0 3 8 12 9 ,59 7 4 6 3 ,58 4 4 14 ,6 6 8 19 9 ,8 4 5 1,2 0 7,6 9 4 10 5,10 3 – 19 7,6 4 5 3 0 2 ,74 8 56 3 ,2 2 9 (9 ,9 0 0 ) 553 ,3 2 9 Emp lo yer 6 3 ,0 4 3 ,4 8 7 2 9 ,53 4 10 5,6 4 6 9 4 ,4 9 9 53 ,4 53 2 8 3 ,13 2 2 3 ,9 52 – 4 8 ,4 53 72 ,4 0 5 12 8 ,3 55 59 9 12 8 ,9 54 Emp lo yer 7 2 ,0 11,58 5 19 ,52 0 6 9 ,8 2 7 6 2 ,4 59 3 3 ,4 58 18 5,2 6 4 15,8 3 1 – 3 5,3 4 5 51,176 8 4 ,8 3 6 625 8 5,4 6 1 Emp lo yer 8 1,9 8 7,9 6 4 19 ,2 9 1 6 9 ,0 0 7 6 1,72 5 3 5,4 2 5 18 5,4 4 8 15,6 4 5 – 16 ,4 53 3 2 ,0 9 8 8 3 ,8 3 9 (5,712 ) 78 ,12 7 Emp lo yer 9 16 ,777,717 16 2 ,8 11 58 2 ,3 9 3 52 0 ,9 4 1 2 4 8 ,3 56 1,514 ,50 1 13 2 ,0 4 0 – 2 8 4 ,54 3 4 16 ,58 3 70 7,576 8 ,4 0 5 715,9 8 1 Emp lo yer 10 5,6 4 1,8 8 8 54 ,74 9 19 5,8 4 3 175,178 9 5,4 6 5 52 1,2 3 5 4 4 ,4 0 1 – 4 4 ,3 56 8 8 ,757 2 3 7,9 3 8 (1,18 8 ) 2 3 6 ,750 Emp lo yer 11 8 ,512 ,56 2 8 2 ,6 0 6 2 9 5,4 9 0 2 6 4 ,3 12 13 6 ,4 53 778 ,8 6 1 6 6 ,9 9 3 – 14 8 ,54 3 2 15,53 6 3 59 ,0 0 5 1,2 54 3 6 0 ,2 59 Emp lo yer 12 3 ,4 9 9 ,76 1 3 3 ,9 6 2 12 1,4 8 5 10 8 ,6 6 6 52 ,14 5 3 16 ,2 58 2 7,54 3 – 6 4 ,3 54 9 1,8 9 7 14 7,59 7 4 53 14 8 ,0 50 Emp lo yer 13 1,4 4 3 ,4 18 14 ,0 0 7 50 ,10 4 4 4 ,8 18 2 3 ,156 13 2 ,0 8 5 11,3 6 0 – 3 3 ,4 53 4 4 ,8 13 6 0 ,8 74 (2 0 5) 6 0 ,6 6 9 Emp lo yer 14 13 1,78 5 1,2 79 4 ,575 4 ,0 9 2 1,9 6 8 11,9 14 1,0 3 7 – 894 1,9 3 1 5,558 14 7 5,70 5 Emp lo yer 15 4 4 ,757 434 1,554 1,3 9 0 1,4 56 4 ,8 3 4 3 52 – 698 1,0 50 1,8 8 8 7 1,8 9 5 To tal fo r All Entities $ 12 4 ,3 2 5,4 3 2 1,2 0 6 ,4 53 4 ,3 15,6 18 3 ,8 6 0 ,2 53 1,9 3 9 ,4 0 6 11,3 2 1,73 0 9 78 ,4 3 5 – 1,9 3 9 ,4 0 6 2 ,9 17,8 4 1 5,2 4 3 ,2 4 5 Emp lo yer 1 $ © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs – 5,2 4 3 ,2 4 5 10 Cost-Sharing Plans: Employer Auditor Responsibilities Determine Evaluate • Sufficiency and appropriateness of audit evidence • Whether plan auditor’s report on schedules are adequate and appropriate for auditor purposes (e.g., evidence) • • • Verify & Recalculate • Amounts in schedules specific to employer • • • Test Review plan auditor’s report and any related modifications Evaluate whether plan auditor has necessary competence and independence Determine whether named as specified user 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 11 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) © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 12 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13 Issues Related to Agent Multiple-Employer Plans 14 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 15 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) © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 16 Agent Plans —AICPA Recommendations and Guidance Whitepaper Government Employer Participation in Agent Multiple Employer Plans: Issues Related to Information for Employer Reporting Auditing Interpretations Issuing interpretations to 3 AU-C sections – AU-C 500 – AU-C 600 – AU-C 805 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 17 Total Pension Liability, Deferred Outflows/Inflows, and Pension Expense—AICPA Recommendations Total Pension Liability 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 18 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 19 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 20 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 21 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 22 Example Schedule of Changes in Fiduciary Net Position by Employer Example Agent Multiple-Employer PERS Schedule of Changes in Fiduciary Net Position by Employer As of and for the year ended June 30, 20X5 Employer 1 Additions: Contributions: Employer Plan Member Investment income: Total additions Deductions: Pension benefits, including refunds Administrative expenses Total deductions Net increase (decrease) Net position restricted for pension benefits: Beginning of year End of year $ Employer 2 Total 86,252,000 32,662,000 80,965,000 199,879,000 34,500,000 13,065,000 20,347,000 67,912,000 51,751,000 19,597,000 37,112,000 108,460,000 172,503,000 65,324,000 138,424,000 376,251,000 384,635,000 4,716,000 389,351,000 (189,472,000) 184,352,000 1,886,000 186,238,000 (118,326,000) 228,356,000 2,829,000 231,185,000 (122,725,000) 797,343,000 9,431,000 806,774,000 (430,523,000) 5,843,645,000 5,654,173,000 1,468,538,000 1,350,212,000 2,678,595,000 2,555,870,000 9,990,778,000 9,560,255,000 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs Employer 3 23 Agent Plans: Employer Auditor Responsibilities Determine Evaluate Test • 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 © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 24 Commons Questions/ Issues 25 Common Questions/Issues Allocation to departments for separately issued financial statements Allocation to funds – Allocation methodology – Changes in proportion Timing of actuarial valuation – Recommended Auditing – Funding use of beginning of year valuation the discount rate calculation assumptions Application of cost-sharing guidance to single employer plans © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 26 Common Questions/Issues Determination of special funding situation and audit evidence needed Reconsideration of type and number of plans Lack of communication by plans © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 27 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 Amend certification letter addressed to employer contract/engagement letter with plan actuary – Involvement of employers in establishing actuarial assumptions © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 28 Next Steps 29 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. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. American Institute of CPAs 30 Thank you for participating. © 2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and ‘cutting through complexity’ are registered trademarks or trademarks of KPMG International Cooperative (KPMG International).