Nonenforcement of SOP 92-6 : AICPA Comment Letter

May 12, 1997

Office of Regulations and Interpretations

Pension and Welfare Benefits Administration

Room N-5669

U.S. Department of Labor

200 Constitution Avenue, NW

Washington, DC 20210

ATTN: Reporting Enforcement Policy

Re: Notice and Request for Comments on Annual Reporting Enforcement Policy

The American Institute of Certified Public Accountants (AICPA) is the national professional association which represents more than 331,000 members in public practice, industry, government, and education. The AICPA, through the efforts of volunteer members, is devoted to developing standards for audits and other services provided by CPAs, providing educational guidance materials to its members, administering the uniform CPA examination, and monitoring and enforcing compliance with the profession's technical and ethical standards. All of these activities are undertaken with the objective of assisting our members in their efforts to serve the public interest.

The AICPA is pleased to comment on the Department of Labor’s (DOL) proposed adoption of an annual reporting enforcement policy pursuant to which the DOL would not reject the annual report of a multiemployer health and welfare benefit plan solely because the accountant’s opinion accompanying the report is qualified or adverse due to a failure to account for and report postretirement benefit obligations in accordance with AICPA Statement of Position No. 92-6, Accounting and Reporting by Health and Welfare Benefit Plans. The Notice and Request for Comment appeared in the March 13, 1997, Federal Register.

The AICPA is on record opposing the DOL’s nonenforcement position for collectively bargained, multiemployer health and welfare benefit plans whose financial statements do not disclose the amount of the obligation for future benefits expected to be paid to or on behalf of retired or active participants after retirement (postretirement benefit obligations). The DOL’s action is inconsistent with President Clinton’s actions encouraging workers to become more actively involved in learning about the future viability of their retirement benefits. It also runs contrary to the DOL’s statements, policies, and programs aimed at improving information available to workers. Moreover, the DOL’s action establishes a dangerous precedent of regulatory forbearance of full and fair disclosures of a plan’s financial status. Participants in all employee benefit plans should have the right to no less than full and fair disclosure. Many private sector employees and Federal government workers currently receive this information. Workers in multiemployer plans deserve no less.

As far back as 1979, the Financial Accounting Standards Board (FASB) recognized the need for full and fair disclosure by employers of their pension and retiree health and welfare benefit obligations. This discussion culminated in the issuance of FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions, in December 1990. The private sector accounting standards setters also recognized the need for accounting rules for the plans themselves, which resulted in the issuance of the AICPA SOP 92-6, in 1992. The objective of SOP 92-6 is to provide information to employees, sponsors, trustees, and other financial statement users that is essential in assessing a plan’s present and future ability to pay benefits when due.

The AICPA worked closely with the DOL in drafting SOP 92-6, and the DOL has in the past expressed strong support for this rule. Among other things, SOP 92-6 requires all health and welfare benefit plans, including collectively-bargained multiemployer plans, to disclose in their financial statement the amount of their postretirement benefit obligations. This disclosure fills a significant information need for workers to provide them with information they need to determine the ability of their plan to pay the benefits they have earned. It would also provide valuable information to plan sponsors, trustees, the DOL, and others. Failure by DOL to enforce this standard, on the other hand, would deny workers complete information about the ability of their plan to pay for promised benefits now and in the future.

Below are our comments on the specific matters the DOL is seeking comment on:

Usefulness of information to satisfy any responsibility or exercise any right under ERISA or the plan

The DOL states in the Notice that it believes plan administrators must determine benefit commitments under the plan. We believe this is a critical fiduciary responsibility to ensure that the plan is able to pay the promised benefits when due. Without measuring the benefit obligations, plan administrators have no basis for assessing future cash flow needs and taking appropriate actions to control the growth of the plan’s health and welfare benefit costs. The alternative of a pay-as-you-go accounting method does not properly reflect the true ultimate obligation of the current promise and could have dire consequences if the plan does not estimate its true obligations. Plan participants have a right to know this important information.

Effect of DOL nonenforcement position on the quality of accountant’s examinations

The primary objective of a health and welfare benefit plan’s financial statements is to provide information about (a) the plan’s resources and obligations and how they are discharged, (b) the results of transactions and events that affect the information about those resources and obligations, and (c) other factors necessary for users to understand the information provided. Generally accepted accounting principles (GAAP) establishes accounting and reporting requirements for plan financial statements. A material omission, such as the failure of a plan to disclose the amount of the plan’s postretirement benefit obligation, can rob financial statements of their credibility. The DOL’s position not to require multiemployer plans to disclose the amount of their postretirement benefit obligation has serious consequences on the independent auditor’s report on the plan’s financial statements as required under the Employee Retirement Income Security Act (ERISA). Specifically, when mutliemployer plan financial statements do not disclose the amount of the plan’s postretirement benefit obligation as required by SOP 92-6, auditors will issue adverse or qualified opinions on the fairness of the presentation of such financial statements. If the plan administrator does not quantify the amount of, or change in, the plan’s postretirement benefit obligation, and in the absence of an actuarial determination, the auditor would presume the effects of the omission on the financial statements are material. Adverse and qualified opinions raise a "red flag" on the reliability of the information in the plan’s financial statements. More importantly, the readers of the financial statements are not able to evaluate the plan’s ability to pay promises when due because of the missing information.

Further, if the auditor issues an adverse opinion on the plan’s financial statements, the auditor cannot express an opinion on the ERISA-required supplemental schedules (for example, schedule of prohibited transactions, schedule of plan investments) as contemplated by ERISA. An expression of an opinion on the supplemental schedules in those circumstances would be inappropriate because it may overshadow or contradict the adverse opinion on the plan’s basic financial statements.

Estimates of any increase in administrative, information collection, and recordkeeping costs or burden hours to comply with SOP 92-6

SOP 92-6 fills a need for information to determine the plan’s financial status. Fulfilling this significant need for information comes at a cost—namely, the incremental cost of developing, implementing, and maintaining a measurement and reporting system to support the required accrual accounting and disclosures and the cost of learning how to use the new information. Many plan fiduciaries have not monitored and managed the plan’s postretirement benefit obligations and costs. Consequently, a significant portion of the incremental systems cost reflects costs that a prudent plan fiduciary would incur in monitoring and managing the plan’s postretirement benefit arrangement. Those costs should be associated with the existence of those arrangements, rather than with the requirements of a new accounting rule, and would vary depending on the quality of the current plan recordkeeping.

Estimates of any increased accounting and actuarial costs

The incremental accounting and actuarial costs of complying with SOP 92-6 will depend on several factors, including the nature and extent of promised benefits and number of participants, and the quality of the plan’s current recordkeeping practices. Based on experience with single-employer plan implementation of SOP 92-6, the cost would significantly decrease after the initial year of adoption of the accounting rule. In terms of increased audit effort, auditors would use the work of the plan’s actuary as a specialist by considering the professional qualifications of the actuary and would evaluate the reasonableness of the methods or assumption used to determine if the actuary’s findings support the amount disclosed in the plan’s financial statements.

Whether the DOL nonenforcement policy should be conditioned by including an "Additional Explanation" section in the summary annual report

We believe including an "Additional Explanation" section in the summary annual report describing the reasons for an adverse or qualified opinion is not a substitute for disclosing the postretirement benefit obligation amount. The auditor’s report already describes the reason for an adverse or qualified opinion.

Inconsistent DOL policy for multiemployer vs. single employer plans

As previously noted, participants in all types of plans should have the right to full and fair disclosure. Workers with multiemployer plans deserve no less. Without proper accountability and disclosure of postretirement benefit obligations, participants in multiemployer plans will remain in the dark about their plan’s ability to pay promised benefits.

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We would be happy to discuss our comments with DOL’s representatives.

Sincerely,

/s/G. Michael Crooch Chair AICPA Accounting Standards Executive Committee

/s/Randi L. Starr Chair AICPA Employee Benefit Plans Committee