The Importance of Internal Controls in Financial Reporting and Safeguarding Plan Assets
Table of Contents
I Introduction I Why Internal Control Is Important to Your Plan I What Is Internal Control? I How to Establish Cost-Effective Controls I Monitoring Your Controls is Critical I Auditor Communications of Internal Control Deficiencies 10 8 6 5 4 3
I How Your Auditor can Help You Improve the Effectiveness of Your Plan’s Internal Control I Examples of Selected Controls for Employee Benefit Plans 14 11
The AICPA Employee Benefit Plan Audit Quality Center has prepared this advisory to assist you as a plan sponsor, administrator, or trustee in understanding how internal control over financial reporting is critical to your plan. This advisory discusses: I I I I I I I
Why internal control is important to your plan The basics of internal control How to establish cost-effective controls Monitoring your controls Auditor communications of internal control deficiencies How your auditor can help you improve the effectiveness of your plan’s internal control Where to obtain additional information about internal controls
In addition, this advisory contains helpful examples of controls for you to consider establishing at your plan. This advisory should be used for reference purposes only.
Why Internal Control Is Important to Your Plan
AS A PLAN SPONSOR, ADMINISTRATOR, OR TRUSTEE, YOU ARE CONSIDERED A FIDUCIARY UNDER ERISA — As such, you are subject to certain responsibilities, and with these fiduciary responsibilities come potential liability: Fiduciaries that do not follow the basic standards of conduct may be personally liable to restore any losses to the plan, or to restore any profits made as a result of their improper use of the plan's assets. Under ERISA, your 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 your plan. Because errors and fraud can and do occur, it is important that you establish safeguards at your plan to ensure you can adequately meet your fiduciary responsibilities. One way this can be accomplished is by implementing effective internal control over financial reporting. Effective controls reduce the risk of asset loss, and help ensure that plan information is complete and accurate, financial statements are reliable, and laws and regulations are complied with. When internal control is effective, you have reasonable assurance that your plan is achieving its financial reporting objectives. When it is not effective, you have little or no such assurance. Internal control protects your plan in two ways: I
By minimizing opportunities for unintentional errors or intentional fraud that may harm the plan. Preventive controls, which are designed to discourage errors or fraud, help accomplish this objective. By discovering small errors before they become big problems. Detective controls are designed to identify an error or fraud after it has occurred.
What Is Internal Control?
INTERNAL CONTROL IS A PROCESS — effected by plan management and other personnel, and those charged with governance, and designed to provide reasonable assurance regarding the achievement of objectives in the reliability of financial reporting. Your plan’s policies, procedures, organizational design and physical barriers all are part of the internal control process. The following are some general characteristics of satisfactory plan internal control over financial reporting: I I I I
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...