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by: Michael Curto, Principal - Assurance Services, Rachlin LLP
The AICPA Employee Benefit Plan Audit Quality Center recently released a Plan Advisory,
“The Importance of Internal Controls in Financial Reporting and Safeguarding Plan Assets”
(the Plan Advisory). This Plan Advisory was prepared to assist plan fiduciaries (plan sponsors, administrators and trustees) in understanding the importance of internal control over financial reporting related to their plan.
Under The Employee Retirement Income Security Act of 1974 (ERISA), plan fiduciary responsibilities include plan administration functions such as maintaining the financial books and records of the plan, and filing a complete and accurate annual return/report for their plan. Because errors and fraud can and do occur, it is important that plan fiduciaries establish safeguards to ensure they can adequately meet the fiduciary responsibilities of their plan. One way this can be accomplished is by implementing effective internal control over financial reporting.
Internal controls protect plan assets in two ways:
- By minimizing opportunities for unintentional errors or intentional fraud that may harm the plan.
- By discovering small errors before they become big problems.
The Plan Advisory contains useful information about the importance of internal controls, as well as tips on establishing, maintaining, and monitoring your internal control over financial reporting. The Plan Advisory notes the following as general characteristics of satisfactory plan internal control over financial reporting:
- Policies and procedures that provide for appropriate segregation of duties to reduce the likelihood that deliberate fraud can occur
- Personnel qualified to perform their assigned responsibilities
- Sound practices to be followed by personnel in performing their duties and functions
- A system that ensures proper authorization and recordation procedures for financial transactions.
Keep in mind that controls should be designed based on a systematic and risk-oriented approach, to ensure that there are adequate controls in areas of high risk. Management should design controls that are best suited for your plan based on the recognized risks.
For the full text of the Plan Advisory, click here. The document contains important information about annual financial reporting requirements and establishing effective internal controls over financial reporting.
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