Overview of AICPA SAS 73

1
Overview of AICPA SAS 73

• John T Stokesbury
• Tonya B Manning
• Joseph W Belger

2
Disclaimer

• Not providing Accounting advice
• Not Accountants
• May not be precise in Accounting jargon
• May not be the only viewpoint

3
Facts and Circumstances

• Accounting and auditing firms are comprised of
  individuals
• Individual beliefs and approaches
• Professional differences occur
• One cannot generalize based on the results of a
  single set of facts
• Client confidentiality has a high priority
• Cannot use information for one client in the
  audit of another

4
Auditor Concerns

• Validity data, benefit payments
• Valuation measured properly, gains/losses
• Cutoff special events, right period
• Completeness amendments, special events
• Recording balances, financial statements
• Presentation footnote disclosures

5
Audit Documentation

• Each audit stands on its own
• Retain documents supporting conclusion
• Sufficient detail to reconstruct

6
What is SAS 73

• Published by AICPA
• Guidance to auditors on testing financials
• Testing the Work of a Specialist
• Potential for Reduced Testing Procedures
• Compared with SAS 57 Testing Managements
  Estimates

7
Without SAS 73 Reliance

• Evaluation of the findings must be more detailed
• Assumptions must be evaluated
• Results should be reasonable and follow from the
  data
• May verify the results using someone with
  familiarity with the subject matter
• Need to assess qualifications of management to
  select the assumption

8
SAS 73Using the Work of Specialist

• Auditors are not expected to be experts in all
  areas
• Auditor may encounter material matters which are
  complex or subjective
• An auditor may use the work of a specialist
  engaged by management as evidential matter to
  evaluate financial statement assertions

9

SEC View of Reliance on Specialists
Lynn Turner, Chief Accountant, SEC, May
2001 Auditors must do more than merely agree the
numbers in the actuarial reports to the financial
statements and related footnotes. Auditors should
evaluate the qualifications of the actuary and
rigorously challenge the assumptions and methods
used in calculating the numbers included in the
financial statements.
10
Understanding Roles and Responsibilities

• Management
• Ultimate responsibility for financials
• Certain officers have a personal responsibility
• Select assumptions
• Specialist
• Advise on assumptions?
• Provide measurements

11
Financial Audit Concern

• The plan sponsor has selected the assumptions
  used to disclose its retirement plans
• The assumptions may have significant financial
  impact on the plan sponsors financial statements
• The plan sponsor has a vested interest in the
  assumption selection

12
Auditors Decision to Use a Specialist

• Experience of the specialist
• Certification or recognition of competence
• Reputation amongst peers
• Objectives and scope of the work
• Relationship of the specialist to the client
• Specialist needs to be responsible for
  appropriateness and reasonableness of methods and
  assumptions

13
When Using SAS 73, An Auditor

• Obtains an understanding of the methods and
  assumptions
• Tests the data used
• Evaluates whether the assertions are
  appropriately supported
• May employ another specialist for assistance or
  to perform additional tests

14
Example Art Collection

• Client Owns significant art collection
• Need to test value Client has placed on art
  collection
• Consider source for Clients value
• Consider engaging Specialist
• Assertions by Specialist
• Independence of Specialist

15
Example Art Collection

• Would you be concerned if
• Client had not engaged a Specialist?
• Clients Specialist deferred to Client for all
  assumptions?
• Clients Specialist did not assert any
  qualifications?
• Clients Specialist did not provide supporting
  documentation and analysis?
• Client Specialists engagement was for a
  different purpose?
• Client Specialist was internal or otherwise
  beholden to the Client?

16
Example Art Collection

• Would you be concerned if
• Clients Specialist did not provide supporting
  documentation and analysis?
• Client Specialists engagement was for a
  different purpose?
• The work product did not describe the basis for
  the measurements or appeared incomplete?
• The work product had internal inconsistencies?
• The work product was out of date?

17
Example Art Collection

• What would you do if the Specialist failed the
  test?
• What would you do if the Work failed the test?

18
An Actuarys Role in an Accounting Firm

• Employed by the auditor
• Maintains a focus in a particular area
  (retirement plan accounting)
• Becomes a part of a clients audit team
• Maintains a healthy skepticism
• Utilizes specialized knowledge
• Documents approach and results

19
The Critical Link

• SAS 73 provides that the assumptions are the
  responsibility of the Specialist
• ASOPs 27 and 35 provide that FAS 87 and 106
  assumptions are prescribed by the Client
• Thus, the actuary is not responsible for FAS 87
  and 106 assumptions and there is not complete SAS
  73 reliance

20
Actuarial Professionalism

• Code of Conduct
• Qualification Standards
• Actuarial Standards of Practice

21
Whats Changed

• FAS 158
• Increased Emphasis on Measures of Liability and
  Assets
• FAS87 Expense generally amortized changes in
  these values over subsequent periods
• Pension Protection Act of 2006
• Increased timing pressure on underfunded plans --
  may face benefit payment restrictions to finalize
  funded status for the year

22
Whats Changed

• SOX 404
• Section 404 management and assessment of internal
  controls
• Must understand results
• Must be able to document the process of how the
  results are developed
• Actuarial Work
• Corporate management must identify and document
  controls around the selection of the assumptions
  used
• Should include understanding of review and
  quality assurance process

23
Whats Changed

• Overall Trend
• Management increased interest in
• Determination of liabilities
• Advance review and agreement on methods and
  assumptions
• Ability to predict liabilities with greater
  accuracy and speed based on partial data, prior
  to complete data reconciliation
• More and earlier dialogue with management and
  auditors

24
Qualification Standards

• Information for client financials is a PSAO
  (Appendix I)
• Consider if PSAO covers more than one practice
  area (section II D)
• OPEB, STD, LTD
• Acknowledge satisfaction of the Qualification
  Standards (section V)
• Enrolled Actuaries deemed to satisfy continuing
  education requirement to practice in the pension
  practice area (section II C 3)

25
Code of Conduct

• Precept 4 -- Take reasonable steps to make sure
  that your actuarial communications are clearly
  appropriate to the circumstances and their
  intended audience and satisfy applicable
  standards of practice
• Precept 8 Take reasonable steps to ensure that
  your services are not used to mislead other
  parties

26
Actuarial Standards of Practice

• Documentation and Disclosure Provisions
• ASOP 4, Pension Measurements
• ASOP 6, OPEB Measurements
• ASOP 21, Assisting Auditors
• ASOP 23, Data Quality
• ASOP 27, Selecting Economic Assumptions
• ASOP 35, Selecting NonEconomic Assumptions
• ASOP 41, Actuarial Communications

27
ASOP 4 Pension Measurements(revision pending)

• Sufficiency of Communication
• Identify Actuary and Firm
• Identify Purpose of the Measurements
• Disclose
• Data / Assumptions / Plan provisions / Methods /
  techniques
• Adjustments for incomplete or inaccurate data
• Any facts which, if not disclosed, might
  reasonably be expected to lead to an incomplete
  understanding of the communication
• Changes in long term trends if current methods /
  assumptions continue to be used

28
ASOP 4 Pension Measurements(Exposure Draft)

• Prescribed Assumptions
• Disclose if conflicts with what actuary considers
  to be reasonable or the actuary is unable to
  assess reasonableness

29
Generally Accepted Practices

• Actuarial Standards
• ASOP 4 -- Measuring Pension Obligations
• Measuring pension obligations requires judgments
  on the choice of assumptions and methods
• Judgment required to evaluate suitability of data
  for purpose
• The actuary should not perform an actuarial
  calculation if the available information is
  substantially less than complete and there is
  sufficient uncertainty about the characteristics
  of the unknown information so that the results of
  the calculation are not adequate for the intended
  purpose.

30
ASOP 6 OPEB Measurements

• Collaborating Actuary
• Document support for methods and assumptions
• Available for disclosure?
• Disclose, in sufficient detail
• Plan provisions
• Covered population
• Methods / techniques
• Concerns / limitations

31
ASOP 21 Assisting Auditors

• Discuss
• Data
• Source of Prescribed Assumptions
• Basis for Other Assumptions
• Methods
• Respond to requests, such as for
• Data
• Analyses
• Sample Calculations

32
ASOP 23 Data Quality

• Source of Data
• Reliance on Others
• Disclosure procedures done / not done
• Document defects / adjustments
• Disclose concerns with data
• Disclose limitations on results due to data

33
ASOP 27 / 35 Selection of Assumptions
(revision pending)

• Selecting or Giving Advice on the Selection of
  Assumptions
• Identification of Prescribed Assumptions
• Consider the Nature of the Measurement
• Consistency

34
ASOP 41 Actuarial Communications

• Identify the Responsible Actuary/ies
• Summarize
• Data
• Plan Provisions
• Methodology
• Assumptions
• Sufficient Clarity
• Reliance on Others?

35
Case Study I

• Small company, pension actuarial work performed
  by a sole practitioner (EA, MAAA)
• Auditor notices benefit payments exceeded SC IC
• Client acknowledges all benefits paid as lump sum
• Actuary had not reflected settlement accounting
  in NPPC

36
Case Study I, cont.

• Actuary revises NPPC to reflect settlement
  accounting
• Auditor questions whether revisions follow SFAS
  88 guidance
• Actuary asserts limited experience with
  settlement accounting
• Actuary asks Auditor to provide direction
• What would you do?

37
Case Study II

• Plan Audit for a Retiree HW plan (VEBA)
• Actuarial report provides should only be used
  for SFAS 106 purposes other measurements may be
  different
• What would you do?

38
Case Study III

• SFAS 87 pension plan
• Actuary asserts that did not provide advice on
  selection of assumptions, only information to
  enable Client to select assumptions
• Client asserts knows little about selection of
  assumptions and relied on Actuarys
  recommendation
• What would you do?

39
Case Study III

• OPEB actuarial work performed by a credentialed
  actuary (EA, MAAA)
• Auditor questions the gain due to claims
  experience
• Actuary confirms that actual experience was
  better than expected, but cannot explain the
  difference
• Actuary states that his previous experience is
  primarily with pension plans
• What would you do?

40
Case Study IV

• Which statements indicate the actuary is taking
  responsibility for the assumptions?
• "We are unable to express an opinion on the
  reasonableness of the assumptions."
• "It is our opinion, based upon limited facts,
  that the assumptions are reasonable."
• "We are of the view that the assumptions are
  reasonable.
• We believe the assumptions could be viewed as
  not only reasonable, but conservative.
• The assumptions used are within the range of
  those used by other companies, and we therefore
  believe they are reasonable.
• "In our opinion, the assumptions should be
  considered reasonable.