EBPAQC 2010 Form 11-K Audit Live Forum

1. EBPAQC 2010Form 11-K Audit Live Forum Webinar Troubleshooting Tips • Disable all pop-up blockers on your computer • You should be able to hear music, if not, you may need to do one of the following: • Verify that the volume on your computer is not muted • If you are in Windows Media Player, please logout and try Real Player • If you are in Real Player, please logout and try Windows Media Player • Most often any audio or video difficulties are at the local user office so you may need to check with your IT administrator • If you are still having difficulties, please let us know by typing your problem in the question box on the left hand side, and a Genesys representative will assist you

2. Employee Benefit Plan Audit Quality Center 2010 Form 11-K Audit Live Forum March 23, 2010

3. Marilee Lau, CPA Chair EBPAQC Executive Committee Hal Hunt, CPA Mayer Hoffman McCann P.C . Lee Piper, CPA PricewaterhouseCoopers LLP Darrel Schubert, CPA Ernst & Young LLP William Seymour, CPA SB & Company, LLC Presenters

4. CPE Credit For Participating • Must have registered for CPE credit prior to this live forum • CPE Credit Approval Form posted on webinar instruction site • Listen for announcement of 4 CPE codes (7 digits: ALL_ _ _ _ ) and 4 polling questions during the live forum • Record CPE Codes on CPE Credit Approval Form (no need to record polling questions) • Return completed form (by fax or mail) to AICPA Service Center for record of attendance • Keep a copy of completed CPE Credit Approval Form for your records

5. Marilee Lau, CPA Chair EBPAQC Executive Committee Introduction

6. Today’s Forum • PCAOB/SEC report requirements and PCAOB inspections • Fair value of alternative investments using net asset value and other investment valuation issues • New requirements related to subsequent events - ASC 855 (FAS 165) • A brief look at PCAOB AS No. 7 • Auditor communications • Prohibited services • The DOL new EFAST 2 filing system and how this may affect your 11-K audit clients

7. PCAOB/SEC Report Requirements & PCAOB Inspections Hal J. Hunt, CPA Partner Mayer Hoffman McCann PC

8. PCAOB/SEC Report Requirements

9. Public Company Accounting Oversight Board (PCAOB) Established in 2002 CPA firms must register with the PCAOB before preparing or issuing audit reports on financial statements of “issuers” • An “issuer” is any public company, including a non U.S. company, that is required to file reports with the SEC or that has filed with the commission a registration statement for a public offering of its securities. • An “issuer” includes employee stock purchase, savings and similar plans for which Forms 11 K are filed with the commission.

10. SEC Rules and Regulations • Form S-8 • Form 11-K • Exemptions • Consents

11. Form S-8 • Registration of employer stock to be issued pursuant to an employee benefit plan • Registration of participants’ interest in a plan if: • Plan is both voluntary and contributory and • Not managed by an insurance company (separate account) or a bank (common trust fund) or • A single-employer plan in which employee contributions are invested in employer securities • Determination based on advice SEC counsel!

12. Form 11-K • For Annual Reports of Employee Stock Purchase, Savings and similar plans, interest in which constitutes securities registered under Securities Act of 1933 • Existing plan which adds employer securities • New plan which includes employer securities

13. Filing Requirements • Due Dates • 90 days after the end of the fiscal year of the Plan if filed under SEC format • Plans subject to ERISA and using the ERISA format within 180 days after the end of the fiscal year of the Plan • Late filings • Could have an effect on Registrant • 12b-25 Extension request for 15 calendar days

14. Financial Statements and Schedules • SEC Format Section 15(d) • Article 6A of Regulation S-X • Presentation and disclosures are very different • 2 years of statements of financial condition and 3 years of statements of income and changes in plan equity • ERISA Format • Full Scope Audit required/Limited Scope is not acceptable • Modified cash basis of accounting is acceptable • 2 years of statements of net assets and 1 year of statement of changes • Prior year limited scope audit- Upgrade of prior year audit required

15. Exemptions • Audited Financial Statements not required in 11-K if: • Less than 100 participants and filing in accordance with ERISA • Unaudited financial statements could be included in the 11-K filing • Otherwise would need audited financial statements using the SEC format

16. PCAOB Standard No. 1 References to PCAOB Standards • Title of audit report for filings with SEC • Report of Independent Registered Public Accounting Firm • Must refer to standards of the Public Company Accounting Oversight Board (United States) and cannot refer to GAAS. • SEC could reject filings if GAAS is referred to • DOL Regulations require reference to GAAS • DOL will accept dual references • Could reject filings if the only reference is to PCAOB standards

17. Consents of Independent Auditors • Auditor required to consent to the use of their report in a 1933 Act registration statement • Should be dated close to the filing date (generally within 3 to 5 days in advance of filing date)

18. Change in Auditors • Form 8-K not required • "Five-day letter" required by PCAOB rules to report termination of client-auditor relationship (SEC is copied on notification to client) • Form 5500 Schedule C requires reporting of change in auditor • Two consents needed: predecessor & successor • Effect on audit opinions • Additional audit procedures required

19. PCAOB Inspections

20. The PCAOB Inspection Process • Once registered and performing audits, the firm and its partners are subject to the PCAOB requirements including inspection: • Firms that audit 100 or more “issuers” are subject to annual inspections. • Firms that audit 100 or less “issuers” are subject to inspections every three years. The PCAOB is not only inspecting firms but also individual accountants and others at firms who participate in audits of “issuers”. PCAOB inspections also include non-employees, such as independent contractors who participate in the audit.

21. The PCAOB Inspection Process • PCAOB inspections focus on the firm’s compliance with provisions of Sarbanes Oxley which require: • Certain non-audit services are prohibited! • To be covered by Bill Seymour later in this webinar • Certain non-audit services are permitted that are pre-approved by an independent audit committee of the company.

22. The PCAOB Inspection Process • Lead and reviewing partners must take a five year break from the audit engagement after each five years of service, and audit partners with lesser involvement take a break for two years after seven years of service. • Firms with fewer than five audit clients and 10 partners are exempt from the partner rotation requirements. Exemption is not automatically granted and depends upon the results of the triennial PCAOB inspections and the competence of the key personnel of the audit engagement teams.

23. The PCAOB Inspection Process • Any person who was on the audit engagement team during the one year period preceding the date that audit procedures commenced does not currently work for the audit client in a financial reporting oversight role • Communications with the audit committee, beginning with the execution of the engagement letter and through all stages of the audit engagement • Before the auditor's report on the financial statements is filed with the SEC, there is evidence that the financial statements and any accounting issues were discussed with the audit committee

24. The PCAOB Inspection Process • The PCAOB will also inspect compliance with its auditing, attestation, quality control, ethical and independence standards. • The independence standards include Rule 2 01 of Regulation S X of the commission's rules relating to auditor independence. • Under Sarbanes Oxley, any violation of the PCAOB's rules will be treated in the same manner and subject to the same penalties as a violation of the Exchange Act. • The inspectors will review client acceptance and continuance policies, including documentation evidencing background checks and other considerations.

25. The PCAOB Inspection Process The PCAOB inspectors will approach the inspection with the emphasis on “tone at the top” • Owners of the firm will be interviewed to access their commitment to audit quality, how they are compensated and their criteria for employee promotion. • Employees and prospective partners will be interviewed to determine what message is being disseminated throughout the firm and what they need to do to advance in their careers with the firm. • Inspectors will compare the information obtained from the firm’s owners with the information obtained from the firm’s employees and any discrepancies will be noted.

26. The PCAOB Inspection Process • The best way to prepare for a PCAOB inspection is for the firm to have a rigorous and regular internal inspection program: • The PCAOB considers the firm's internal inspection process one of the most important components of quality controls. • A firm's internal inspection should include testing the firm's compliance with quality controls, reviewing selected engagements, summarizing the findings, determining the corrective actions to be taken as a result of any deficiencies, communicating the inspection findings and suggested improvements to the personnel involved, following up to make sure the corrective actions are implemented and documenting all of the above.

27. The PCAOB Inspection Process • Internal inspection will likely choose (as will the PCAOB in its inspection) engagements with a high level of assessed risk such as: • restatements, • litigation, • investigations or turnover of auditors, • engagements that have not been previously reviewed, • and at least one engagement worked on by each audit partner at the firm.

28. The PCAOB Inspection Process Matters noted in past PCAOB inspections relating to 11-K audits related to failure to perform and document adequate procedures with respect to: • Testing existence of investments • Testing of investment valuations and transactions • Testing of payroll data used in testing contributions • Testing of participant loans and benefit payments

29. The PCAOB Inspection Process • Audit documentation must contain sufficient information to enable an experienced auditor, with no previous connection to the engagement but with knowledge of the relevant industry and its accounting and auditing issues, to understand the nature, timing, extent and results of the procedures performed, the evidence obtained and the conclusions reached. • The documentation should also record who performed the work, the date such work was completed, who reviewed the work and the date of such review. • The failure to prepare adequate documentation, particularly when the risk of a material misstatement associated with an assertion is high, is considered a serious violation of the PCAOB rules.

30. The PCAOB Inspection Process • Documentation of auditing procedures related to the inspection of significant contracts or agreements should include abstracts or copies of the documents or refer to where they can be found. • PCAOB inspectors expect documentation to include third-party audit evidence. • For example, obtain written confirmation of plan investments • PCAOB inspectors are certain to ask what steps the firm has taken in an audit engagement to detect fraud, as required by SAS 99.

31. The PCAOB Inspection Process • 45 days after the audit report release date, a complete and final set of audit documentation must be assembled for retention. • Audit documentation must be retained for seven years from the date that all necessary auditing procedures are completed, sufficient evidence has been obtained and the auditor grants permission to use the auditor's report, unless a longer period of time is required by law. • After the document completion date, audit documentation must not be deleted or discarded • but information may be added to record audit procedures performed as long as it indicates the date the information was added, the name of the person who prepared the additional documentation and the reason for adding it.

32. The PCAOB Inspection Process • The PCAOB inspectors will likely conduct an exit interview with the firm or with individual partners. • A draft inspection report points out any deficiencies that it found. • The firm may object to or otherwise comment on the draft inspection report and may suggest steps that it may take to address any deficiencies. • The PCAOB may adopt its draft report as final, revise the draft report, or continue or supplement the inspection before issuing a final report. • After a final inspection report is issued, the PCAOB makes it available for review by the firm, and sends a copy to the commission and to each appropriate state regulatory authority, together with the firm's response to the draft report.

33. The PCAOB Inspection Process • If a final inspection report contains criticisms of the firm’s quality controls, the firm may demonstrate that it has improved such controls no later than 12 months after the issuance of the PCAOB's final inspection report. • The PCAOB will notify the firm whether it deems the deficiencies to have been adequately fixed, and if not, why not. • If the PCAOB determines that the firm has adequately fixed the deficiencies, it will notify the firm, the commission and any state regulatory authority to which it had supplied the final inspection report of this fact. • Defects in the quality controls that the firm has not adequately corrected during this time period shall be made public.

34. The PCAOB Inspection Process • If an inspection leads to an investigation, the PCAOB may commence a disciplinary hearing to determine whether there has been any violations. • A violation could result in the imposition of penalties, temporary suspension or permanent revocation of the firm's registration; the temporary or permanent suspension of a person from further association with any registered public accounting firm; prohibiting a firm from accepting new audit clients for a period of time; the assignment of a supervisor to an associated person; requiring a firm to terminate one or more audit engagements; requiring a firm to make functional changes in supervisory personnel organization or in engagement team organization • .

35. The PCAOB Inspection Process • A failed inspection could lead to a damaged reputation or worse. • The PCAOB and firms have one goal in common: it is the protection of the investing public

36. Online Resources • PCAOB: http://pcaobus.org/ • SEC: http://www.sec.gov/ • AICPA EBPAQC: http://ebpaqc.aicpa.org/ • AICPA EBPAQC 11-K Audit Resources: http://ebpaqc.aicpa.org/Resources/Accounting+and+Auditing+Resource+Centers/Form+11-K+Audits+Resource+Center.htm

37. Lee Piper, CPA Partner PricewaterhouseCoopers LLP ASU 2009-12, Measuring the Fair Value of Alternative Investments Using NAV (or Its Equivalent)(a/k/a “The Practical Expedient”)

38. Overview • Provides additional guidance on how entities should estimate the fair value of certain alternative investments such as hedge funds, private equity funds, real estate funds, venture capital funds, offshore funds and funds of funds • Fair value can be determined using Net Asset Value (NAV) as a practical expedient unless it is probable that the investment will be sold at a price that is different than NAV

39. Overview (continued) • New disclosures of the attributes of all investments within scope of the new guidance is required regardless of whether the reporting entity uses “the practical expedient” • Effective for the first annual or interim reporting period ending after December 15, 2009

40. Key Provisions • A reporting entity is allowed to estimate the fair value of certain alternative investments using NAV without further adjustment if NAV is calculated consistent with the guidance in ASC 946, Financial Services – Investment Companies (formerly the AICPA Audit and Accounting Guide, Investment Companies (“the AICPA Guide”)) as of the reporting entity’s measurement date

41. Key Provisions (continued) • Does not apply to investments in entities for which fair value is readily determinable, as defined in the Master Glossary of the FASB Accounting Standards Codification (formerly paragraph 3 of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities)

42. Key Provisions (continued) • Reflects the FASB’s desire to avoid potentially arbitrary adjustments being made to NAV in determining fair value and the FASB’s conclusion that the benefit to financial statement preparers of applying such an expedient outweighed the associated costs and effort to make such adjustments

43. Scope NAV can be used to estimate fair value provided that: • The investment in the entity has all the attributes of an investment company as specified in ASC 946-10-15-2 (formerly paragraph 1.06 of the AICPA Guide), or • If one or more of the attributes specified in ASC 946-10-15-2 are not present, the investment is in an entity for which it is industry practice to issue financial statements using guidance consistent with ASC 946, Financial Services – Investment Companies

44. Restrictions on Use When it is probable that an entity will sell its investment at an amount other than NAV, the practical expedient cannot be used and the guidance in ASC 820, Fair Value Measurements and Disclosures, (formerly FASB Statement No. 157, Fair Value Measurements) should be followed to estimate fair value in those instances

45. Restrictions on Use (continued) A sale of an investment is considered probable only if all of the following criteria are met: • Management, having the authority to approve the action, commits to a plan to sell the investment • An active program to locate a buyer and other actions required to complete the plan to sell the investment have been initiated • The investment is available for sale subject only to terms that are usual and customary for sales of such investments • Actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn

46. Required Disclosures Required for all investments within the scope of ASU 2009-12 not just those for which the reporting entity has elected to use “the practical expedient” • Fair value of investments in each major category and a description of the significant investment strategies of the investee(s) in the major category • For each major category of investment that includes investments that can never be redeemed with the investees, but the reporting entity receives distributions through the liquidation of the underlying assets of the investees, the reporting entity’s estimate of the period of time over which the underlying assets are expected to be liquidated by the investees

47. Required Disclosures (continued) - The amount of the reporting entity’s unfunded commitments related to investments in the major category - A general description of the terms and conditions upon which the investor may redeem investments in the major category - The circumstances in which an otherwise redeemable investment in the major category might not be redeemable due to a restriction and an estimate of when the restriction from redemption might lapse

48. Required Disclosures (continued) • Any other significant restriction on the ability to sell investments in the major category at the measurement date • If it is probable that the reporting entity will sell an investment for an amount different from NAV per share, the entity shall disclose the total fair value of all investments that meet the criteria in ASC 820-10-35-62 and any remaining actions required to complete the sale

49. Required Disclosures (continued) • If a group of investments would otherwise meet the criteria in ASC 820-10-35-62 but the individual investments to be sold have not been identified such that the individual investments continue to qualify for the practical expedient, the reporting entity shall disclose its plans to sell and any remaining actions required to complete the sale(s) • Disclosures are required for each major category of investments rather than for each individual investment

50. Question – What is a “major category”? A major category is determined based on the nature of risks of the investments, consistent with the guidance for major security types for debt and equity securities in ASC 320, Investments – Debt and Equity Securities (formerly paragraph 19 of FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities)