Amicus Curiae Brief — Central States, Southeast & Southwest Areas Pension Fund v. Central Transport, Inc.

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IN THI

Supreme Court of the United States

October term, 1983

PETITION FO

SsrATEN COL RIT

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE IN

SUPPORT OF THE PETITION FOR WRIT OF CERTIORARI

AND

BRIEF OF AMICUS CURIAE IN SUPPORT OF THE PETITION

FOR A WRIT OF CERTIORARI

BEST AVAILABLE COPY

QUESTION PRESENTED

MAY AN EMPLOYER, WHICH PARTICIPATES IN A

MULTIEMPLOYER BENEFIT PLAN, REFUSE TO MAKE

AVAILABLE ITS EMPLOYEE RECORDS, INCLUDING

RECORDS OF ITS PURPORTEDLY NON-COVERED

EMPLOYEES, WHICH IT IS REQUIRED BY sTATUTE TO

KEEP TO DETERMINE EMPLOYEE BENEFIT PLAN

ELIGIBILITY, TO THE INTERNAL AUDITORS OF THAT

MULTIEMPLOYER BENEFIT PLAN.

IN THE

Supreme Court of the United States

October Term, 1983

' NTR <A s ‘ <~ »& rHE-AST AN SO) THWEST AREAS PEN

| x >" { EN TRA ~ATATE<S “sft) THEAST AND SOM TH

A FS AREAS aL \ iH AN Wi rARE ij NI

Pet 7 reé re

~ -« YAN SPOR '™~ . A

MOTION FOR LEAVE TO FILE BRIEF AMICUS CURIAE IN

SUPPORT OF THE PETITION FOR A WRIT OF

CERTIORARI

\ Y e & ( ) Arthur Young respectfully

; Rule 42 he Rules of thes Court, for leave

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Employee Retirement Income Security Act of 1974 (“ERISA”),

29 U.S.C. §§ 1001-1461, and the regulations promulgated there-

under, 29 C.F.R. § 2520.103 et seg

Most employee benefit plans are required to file with the

Department of Labor annual reports which include the plan’s

financial statements. The annuai reports of plans with over 100

participants must include an independent accountant’s opinion

that the plan’s financial statements have been audited in accord-

ance with generally accepted auditing standards (“GAAS”). As

is demonstrated in the brief amicus curiae, the ruling of the Sixth

Circuit is inconsistent with this requirement and will materially

impair the ability of independent certified public accountants to

audit multiemployer benefit plans in accordance with GAAS

Congress required independent audits of the financial state-

ments of employee benefit plans (/.e., employee pension and

employee welfare plans) to provide, inter alia, a level of assur-

ance on the plan's financial statements. Although an independent

audit also provides an important control on the administration of

a plan,

[t]he primary objective of a plan’s financial

Statements 1s to provide financial information that

is useful in assessing the plan’s present and future

ability to pay benefits when due

FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT

OF FINANCIAL ACCOUNTING STANDARD No. 35 at §2

(1980)

In 1974 with the passage of ERISA Congress not only man-

dated an independent audit, but also required defined benefit

pension plans to have triennial actuarial valuations. Both the

annual audit and triennial actuarial requirements are comple

mentary: to assure that appropriate information is available so

that plan participants and others (including regulatory authori-

ties) can evaluate the ability of a plan to pay benefits when due

When Congress enacted ERISA requiring that all employee

benefit funds be audited in accordance with GAAS, 29 U.S.¢

$§ 1023, 1024, there was a defined body of professional practice

and literature detailing the audit procedures necessary in mul-

tiemployer health and welfare benefit funds and which aiso pro-

vided guidance for the audits of multiemployer plans. These

procedures included the testing of employer records. Congress

also knew that to conduct a GAAS audit the independent auditor

would be required to test the adequacy of the funding of employee

benefit plans according to the law and the terms of the plan. To

fulfill this goal, the auditor, inter alia, performs tests to determine

that the proper universe of plan participants has been identified,

contributions have been paid by the employer for each plan par-

ticipant, and that participant benefit entitlements have been prop-

erly reflected in the actuarial calculations and related

contributions received or receivable. GAAS thus requires not

only the testing of the admittedly covered employees, but also

testing for improper exclusion of covered employees from the

contribution and benefit calculations.

Since benefit eligibility in a multiemployer plan is determined

by an individual's employment status and not whether the

employer has contributed to the plan, absent such testing or a

comparable alternative procedure, it is impossible to determine if

all required employer contributions have been made or if the

actuarial valuation of a pension plan was correct. Accordingly,

one may not be able to determine if a pension plan is under-

funded -- a major concern underlying enactment of ERISA, 29

U.S.C. §§ 1001-1461, and the Multiemployer Pension Plan

Amendments Act of 1980, Act of Sept. 26, 1980, Pub. L. No. 96-

364, 1980 U.S. Cope Conca. & Ab. News (94 Stat.) 1208 and

the creation of the Pension Benefit Guaranty Corporation, 29

U.S.C. §§ 1301-1309, in 1974. For example, if there was an

annual under-reporting of only one half of one percent (.5%) of

all participants currently estimated to be members of multiem-

ployer pension plans (over 8,000,000 as of 1978) and the average

employer contribution per participant to multiemployer plans

were $50 a week (as it is in National Master Freight Agreement

at issue in the underlying proceeding), there would be an annual

initial under-funding of contributions in excess of $100,000,000

(40,000 omitted participants x $2600) for all multiemployer

plans. (The compounded lost earnings from these unmade contri-

butions is staggering.) To the extent plan under-funding occurs,

the resultant short falls ultimately must be made up either by all

employers in the plan (including those who did not under-report

their employees) either through increased contributions or

increased premium charges by the Pension Benefit Guaranty Cor-

poration. Moreover, to the extent the existence of under-funding

cannot be determined, payments imposed upon employers with-

drawing from the plan cannot be properly calculated

Although recognizing a very limited right of access to employer

data concerning purportedly non-covered employers, the opinion

of the Sixth Circuit has effectively precluded auditors from test-

ing the universe of plan participants in most multiemployer plans

thus creating a possible “scope” limitation on the audit. A “scope”

limitation ipso facto results in a non-GAAS audit and would

require the auditors to “qualify” or “disclaim” their opinions on

employee benefit plan financial statements. The trustees would

then fail to meet the statutory requirements for an audit of the

plan financial statements in accordance with GAAS. Congress

could not have mandated an audit knowing what it entailed and at

the same time denied plan trustees the ability to fulfill that

requirement

In addition to causing a “scope” limitation in the audit, restrict-

ing access to employer data by the plan’s internal auditors signifi-

cantly reduces internal control over contributions legitimately

due the plan and thus increases the likelihood of error. The inabil-

ity in a multiemployer plan audit to routinely test whether pur-

portedly non-covered employees are covered is likely to lead to a

greater number of failures by employers to report covered

employees (and to make the corresponding required contribu-

tions) -- either through inadvertent oversight or possibly as a

result of intentional under-reporting. The significant deterrent

value of the audit tests would then be lost

Thus amicus curiae Arthur Young has a direct interest in the

outcome of this proceeding -- not only as it affects (and may

substantially impair) its ability to conduct its audit of the Central

States Pension Fund, but also its ability to conduct audits of other

multiemployer benefit plans. As a result of the Sixth Circuit

opinion, one employer has already refused access of its records to

Arthur Young and it is concerned that other employers will do

likewise.

WHEREFORE, Arthur Young respectfully moves this Court

that leave be granted to it to file the annexed brief amicus curiae

Dated: July 6, 1983

Respectfully submitted,

S CARL D. LIGGIO

Carl D. Liggio

General Counsel

Arthur Young & Company

277 Park Avenue

New York, New York 10172

Telephone: (212) 407-2367

Vil

TABLE OF CONTENTS

PAGi

QUESTION PRESENTED

MOTION FOR LEAVE TO FILE BRIEF AMICUS

CURIAE IN SUPPORT OF THE PETITION FOR

A WRIT OF CERTIORARI T

TABLE OF CONTENTS vi

TABLE OF AUTHORITIES ix

PRELIMINARY STATEMENT

INTEREST OF AMICUS CURIA}! 2

THE PROCEEDING BELOW 3

SUMMARY OF ARGUMENT 3

ARGUMENT 4

|. Background-Multiemployer Plans .

ll. Congress Directed That Multiemployer B

Plans Have Annual Independent A

Financial Statements in Accord

y Accepted Auditing Standard

\ The Audit Requireme:

B What an Audit of a M

Plan In Accordance A

Auditing employer

Z The use of interna

GAAS

( The Impact of a Qualified Auditor's Oy

lll. Congress Intended Plans to Have Access to A

Employer Records

A. Access to All Employer Data was Contemplat

ed by Congress in Order to Satisfy the Audit

Requirement

B In Order to Ascertain Funding Requirements

Access to All Employer Data was Contempilat-

ed by Congress

|. Lack of access to employer data precludes

adequate funding determinations required

by Congress

> The PBGC is adversely affected

CONCLUSION

APPENDIX

PAaGt

TABLE OF AUTHORITIES

( ases

Centrui States, et ai. v. Central Transport. Inc.. et ai. $2?

F. Supp. 658, reversed 698 F.2d 802, (6th Cir 933

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Statutes, Rules, and Regulations

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Ad ry Opinion Augu 176, PE’ Rep. (BNA

BEN! : } 5. 9

H. R. Rep. No. 533, 93rd Cong., 2d Sess. reprinted in

1974 US. Cope Conc. & Ab. News 4639. 4649

Lublin Law to Protect VUulti Employer Pensions Js

( ausing Hardship for Many Businesses. Wall St. J

Mar. 5. 1982 at 40. col

NATIONAL JOURNAL. June 28 98>

PENSION BENEFIT GUARANTY CORPORATION. Mui

tiempioyer Study Required by P.L. 95-214 (1978

Append v Potentia! Multiemployer p an | sabalit es

Under Title [V of ERISA

979.198 PENS. PLAN G ANNOT (CCH)

‘ 97 e77 (Oct ‘ RO )

AC S S. SUTHERLA* STA RY CONSTRL

rtON. & 04 (4t? { 97) 3

S Rep. } 93rd Cong.. 2d Sess reprinted in |\97/4

i SS Cone Com & An. News 4838. 4864

\S Keep N\ . 7+5th Cong st Sess.. reprinted in |\9//

['S Cone Con & Ary News 4178. 4179

IN THI

Supreme Court of the United States

October Term, 1983

ENTRAL STATI SOL THEAST AND SO HWEST AREAS PEN

LON Ff } A f ENTRAIL STATES SO THEAST AND SOLTTH

WEST AR s HEALTH AND WELFARE FUND

Petitioners

{ EPNTRA IR ANSPOR | PN fi a

Respondents

Py TION FOR A WRIT OF CERTIORARI TO THE UNITED

TATESN CCM RT Odi APPELALS FOR THE SIX THM CIRGCLTTI

BRIEF OF AMICUS CURIAL IN SUPPORT OF THE

PETITION FOR A WRIT OF CERTIORARI

Preliminary Statement

Arthur Young & Company (“Arthur Young’) submits this

brie! as amicus curiae in support of the petition for a writ o

ihat this Court review the judgement and

lor the United States Court of Appeals for the Sixt!

pinio;r

( cu n Central States. Southeast and Southwest Areas Pen

n Fund Central Transport. inc.. 698 F.2d 8O2 (6th Ci

a4)

I he petition for certiorari materially iffects the ability of ove

abe’ muilemy myer pension pians Witt ver $80 Pillion in assets

mn in excess of 5 U0) ON Dial part cipants rocon ply with ¢ yf

” ss rst ' ’ ry mf ’

iy mandated aud ima aciva _ CuUuire ‘

also impacts multiemployer welfare plans. In fact, if the decision

of the Sixth Circuit is allowed to stand, the salutory purposes of

the Employee Retirement Income Security Act (“ERISA”), 29

U.S.C. §§ 1001-1461, and the Multiemployer Pension Plan

Amendments Act of 1980, Pub. L. No. 96-364, 1980 U.S. Copt

Conc. & Ap News (94 Stat.) 1208, could be substantially

yeopardized

INTEREST OF AMICUS CURIAE

Arthur Young, a partnership of certified public accountants,

has over 90 offices and 6000 professionals in the United States In

addition to auditing public and private companies, Arthur Young

is the independent auditor of Petitioner, Central States, South-

east and Southwest Areas Pension Fund (“Central States Pen-

sion Fund”). as well as numerous employee benefit plans several

of which are multiemployer plans such as Petitioners. These

audits permit the plan trustees to comply with ERISA, 29 US

$§ 1001-1461 (1976 & Supp. V. 1981), and the regulations

promulgated thereunder, 29 C.F.R § 2520.103 (1982) ef seq

Most employee benefit plans are required to file with the

Department of Labor annual reports which include the plan's

financial statements. The annual reports of plans with over 100

participants must include an independent accountant’s opinion

that the plan financial statements have been audited in accord

ance with generally accepted auditing standards (“GAAS”). The

ruling of the Sixth Circuit ts inconsistent with this requirement

and will materially impair the ability of independent certihed

public accountants, such as Arthur Young, to conduct audits of

multiemployer employee benefit plans in accordance with GAAS

Thus amicus curiae, Arthur Young, is vitally interested in

having this Court resolve the question presented by this Petition

May an employer, which participates in a multiemployer

benefit plan, refuse to make available its employee

records, including records of its purported!y non covered

employees, which it is required by statute to keep to deter

mine employee benefit plan eligibility, to the internal aud!

tors of that multiemployer benefit plan

[HE PROCEEDING BELOW

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ve nited access employer records determine whetnoer

emplovees were improperly excluded and contributions om tted

| . eC > | : ine . ur ' iDt = th effect ve 5 pre. uces the rus!

sir ° statutory obligations and makes difficult, if not

NOss! Oe Gcependce uc | tre Dian I he Ggecision of tne

mnpecals negates the sudstantia Ggeterreni effec Mat the

<< . . Tre » .< " . . eT " \ nNcreases ne Doss i ant ry

de ding ¥ esult thereby jeopardizing the soivency

emp a." oe eT 4 > : ’ icverse ’ 7 pacts tne aL. U

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ARGU MENT

BACKGROUND-MULTIEMPLOYER PLANS

study estimated that more than 16 million workers will be covered

by multiemployer pension plans by the year 2000. 1979-198]

PENS. PLAN GUIDE ANNOT. (CCH) 922,877 (OcrT. 15, 1980)

Virtually all multiemployer plans require contributions solely

from employers. /d. For these plans funding is solely dependent

on employer contributions and plan eligibility is determined

“solely on the basis of service performed for a participating

employer, regardless whether that employer has made or

defaulted on his 1 *quired contributions.” Advisory Opinion, 31

August 1976, Pens. Rep. (BNA), No. 221, Jan. 8, 1979

Accordingly, even if an employer fails to report the employee as a

participant and make the required contribution, the multiem-

ployer plan is obligated to pay those benefits when demanded, see

29 U S.C. §§ 1052 and 1053; 29 C.F.R. § 2206-2(a)(1)(2), thus

creating an under-funding situation for the plan

Although multiemployer plans were subject to ERISA, it was

the Multiemployer Pension Plan Amendments Act of 1980

(MEPPAA) which directly addressed a growing concern over

inadequate funding of these plans. The Pension Benefit Guaranty

Corporation (PBGC }

found that 12 percent of all multiemployer pension plans,

covering one-fifth of all multiemployer pension plan par

ticipants, are experiencing extreme or significant financial

hardship which may result in plan termination Two

percent of all multiemployer plans, with a total unfunded

vested liability of more than $350 million, were found to

be experiencing extreme financial hardship and to have a

high potential for termination. The remaining 10 percent

were deemed to have a significant potential for termina

tion, with a total unfunded vested liability of $3.5 billion

S. Rep. No. 570, 95th Cong., Ist Sess., reprinted in 1977 U.S

Cope CONG. & AD. NEwS 4128, 4129 (footnote omitted)

Inadequate funding caused by, inter alia, under-reporting and

declining work forces in certain industries could lead to billions of

dollars in unfunded liabilities, far more than the resources avail

able to the PBGC to cover any failures. PENSION BENEFIT

GUARANTY CORPORATION, Multiemployer Study Required by

P.L. 95-214 (1978), Appendix I, Potential Multiemployer Plan

Liabilities Under Title IV of ERISA.

CONGRESS DIRECTED THAT MULTIEMPLOYER BENE-

FIT PLANS HAVE ANNUAL INDEPENDENT AUDITS OF

PLAN FINA™ CIAL STATEMENTS IN ACCORDANCE WITH

GENERALLY ACCEPTED AUDITING STANDARDS.

A. The Audit Requirement

Congressional concern with employee benefit funds dates back

to the enactment of the 1947 Labor Management Relations Act

H.R. Rep. No. 510, 80th Cong., Ist Sess., reprinted in 1947 US

Cope Conc. & Ab. News 1135, 1173. In 1947, one way Con-

gress sought to protect certain employee benefit funds was by

requiring an annual audit of such funds. 29 U.S. § 186(c)(5)

The legislative history reveals that the annual audit require-

ment was intended to put safeguards on the improper and unsuc-

cessful administration of employee benefit funds. Accordingly,

Congress decreed that company contributions to employee benefit

funds would not constitute an unfair labor practice if such funds

were “guarded by certain restrictions, such as that it should be

subject to joint control by employer and employees and by an

annual audit to insure its protection as a trust fund.” 93 CONG

Rec. 3565 (1947). (Emphasis added )

In 1974 ERISA supplemented existing reporting and disclo-

sure requirements with provisions requiring the reporting of more

detailed information concerning the administration of plan assets

and the payments of benefits. Moreover, it continued and

strengthened the independent audit requirement, 29 US€

§ 1023(a)(3)(A), by adding to the arsenal of weapons to protect

employee benefit plans already available to the Secretary of

Labor the right to hire independent auditors to audit such plans

29 U.S.C. § 1024(a)(5)

* es] =" 2a eee ee ns

In enacting ERISA Congress was concerned over the adequacy

of information available on employee plans. The House Report,

evidencing this concern, noted that

experience has shown that the limited data available

under the present Act is insufficient. Changes are there-

fore required to increase the information and data

required in the reports both in scope and detail. Experi-

ence has also demonstrated a need for a more particular

ized form of reporting so that the individual participant

knows exactly where he stands with respect to the plan -

what benefits he may be entitled to, what circumstances

may preclude him from obtaining benefits, what proce

dures he must follow to obtain benefits, and who are the

persons to whom the management and investment of his

plan funds have been entrusted. At the same time, the

safeguarding effect of the fiduciary responsibility section

will operate efficiently only if fiduciaries are aware that

the details of their dealings will be open to inspection, and

that individual participants and beneficiaries will be

armed with enough information to enforce their own

rights as well as the obligations owed by the fiduciary to

the plan in general

H.R. Rep. No. 533, 93rd Cong., 2d Sess. reprinted in 1974 U.S

CODE CONG. & AD. NEWS 4639, 4649

Ihe Senate Report similarly concluded that an opinion of an

independent auditor based upon the results of an annual audit

would “allow better assessment of the plan’s financial soundness

by administrators and participants alike.” S. Rep. No. 127, 93rd

Cong., 2d Sess., reprinted in 1974 U.S. Cope CONG. & AD

NEWS 4838, 4864. The Conference Report, recognizing the

importance of the audit requirement, specifically noted that “the

accountant is to give an opinion as to whether the financial state

ments of the plan conform with generally accepted accounting

principles and the statement is to be based upon an examination

in accordance with generally accepted auditing standards.” H

CONF. Rep. 1280, 93rd Cong. 2d Sess., reprinted in 1974 U.S

CODE CONG. & AD. News 5038, 5040

B. What an Audit of a Multiemployer Benefit Plan in

Accordance With GAAS Entails

1. Auditing employer records

When Congress imposed the audit requirement for employee

benefit plans under ERISA, a body of professional literature and

practice existed outlining the procedural steps required for audits

in general and audits of employee benefit plans in particular. For

example, in 1972, the American Institute of Certified Public

Accountants had published an Industry Audit Guide, AUDITS Of

EMPLOYEE HEALTH AND WELFARE BENEFIT FUNDS, which,

although not directly controlling audits of pension plans, summa-

rized audit requirements that had general applicability to pension

plans and specific applicability to employee health and welfare

funds such as Petitioners Central States, Southeast and South-

west Areas Health & Welfare Fund. The Guide noted that not

only its specific requirements apply, but

Generally accepted auditing standards apply to audits of

an employee health and welfare benefit funds to the same

extent they apply to the audits of a commercial enterprise

AicPA. AUDITS OF EMPLOYEE HEALTH AND WELFARE BENE

rit FUNDS (1972) at 18

The 1972 Industry Audit Guide reviewed the critical areas ol

employee health and welfare benefit fund audits. One such area

was the audit of employer contributions -- the basic funding

vehicle for any benefit plan

Contributions

The basic objective in auditing contributions ts to deter-

mine that amounts due the fund have been received and

properly recorded and that employer records and partict-

pant records (eligibility or vacation contribution) are

being properly maintained

The auditing procedures employed should normally

‘nclude. but are not necessarily limited to, the following

(1) Total cash receipts shown by the cash receipts bOOK [or

a selected period should be reconciled to the total amount

’

edger contribution accounts. to the

credited to the genera!

tola imount posted to the employer s record ing to

deposits shown by the Dank statements

?) Selected individual employer contribution payments

is shown by the cash rec eipts book should be compared t

the amount shown on the employer s contribution report

d to the amount posted to the individual employer s

bution record. Selected postings to the employer s

iu ge the test period should De traced the cas!

DOOK a ine npiover s < tribution report

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records. In addition, a selected group of participants’ earn-

ings records should be compared with the employer's con-

tribution reports to ascertain that they have been properly

included or excluded from the reports

(4) The employer's general cash disbursements book

should be reviewed to ascertain whether any payments not

recorded as compensation have been made to empioyees

(5) For a selected period of time and for a selected

group of employees, the data shown in the payroll journal

should be compared to the employee earnings records and

time records, and the related payroll checks should be

examined

All exceptions to the foregoing tests should be cleared to

the independent auditor's satisfaction

Id. at 20-21

To verify participants’ data, the auditor must be able to test the

entire universe of employees (participants and non-partici-

pants’), to gain assurance that participant records (and related

pension plan liabilities) are neither understated nor overstated

As the pre-ERISA auditing literature (and practice) clearly indi-

cated, verification of participation data is an integral part of a

benefit plan audit

2. The audit literature applicable to all audits provides substantia!

guidance as to the problem raised by the possible failure to include all

participants

When planning a particular sample [for a substantive test], the

auditor should consider the specific audit objective to be achieved

and should determine that the audit procedure, or combination

of procedures, to be applied will achieve that objective. The

auditor should determine that the population from which he

draws the sample is appropriate for the specific audit objective

For example, an auditor would not be able to detect understate

ments of an account due to omitted items by sampling the

recorded items. An appropriate sampling plan for detecting

such understatements would involve selecting from a source in

which the omitted items are included

AICPA, STATEMENT ON AUDITING STANDARDS (“SAS”) No. 39

* 17, AU3SO.17 (Emphasis added. )

3. In recognition of applicable professiona! standards, Arthur

Young's own internal ERISA audit manual provided

Most rece AIC PA iss

AAS

- ?-! a Se ree ee 7 ee mee wee se

access to and, when needed, an audit of employer records to test

plan participation data such as plan membership and

contributions.

2. The use of internal auditors to satisfy GAAS.

In conducting an audit, not every record of the entity under

audit is examined. The independent auditor studies and evaluates

a client’s internal controls to determine which records will be

tested and the degree of reliance which can be placed on those

records and the internal controls. Aicpa,SAs No. 1, AU320.01.

One such internal control is the presence of an effective internal

audit function. AicPpA, SAS No. 9, AU322. As part of the study

and evaluation of internal control, the independent auditor evalu-

ates the work performed by the internal audit function in deter-

mining the nature, timing, and extent of its own procedures.

Aicpa, SAS No. 9, AU322.02.

In the audits of the Central States Pension Plan, Arthur Young

not only independently tests plan participation data by directly

seeking employer records, but also uses the work of the Central

States internal auditors in this area. Thus, the work of the Central

States internal auditors, which is at issue here, is an integral part

of Arthur Young’s statutory audit. 29 U.S.C. § 1023(a). Absent

the work of the Central States internal auditors, Arthur Young

would have to materially increase its own procedures at increased

cost to the Plan or render a “qualified” opinion based on a “scope”

limitation in the audit.

C. The Impact of a Qualified Auditor’s Opinion

The statute requires a GAAS audit resulting in an opinion by

the independent auditor “as to whether the financial statements

are presented in accordance with Generally Accepted Accounting

Principles.” 29 U.S.C. § 1023(a)(3)(A). The Department of

Labor has authorized independent auditors to have “scope” limi-

tations in the audit in a very limited category of situations not

applicable here. 29 C.F.R. § 2520.103-8. A “qualified” or “dis-

claimed” opinion resulting from a “scope” limitation relating to

Oe a > —— a

the inability to test plan participation data does not comply with

either the Labor Management Relations Act of 1947 or ERISA.

Arthur Young has been orally informed by the Department of

Labor that in all likelihood the absence of a “clean” opinion

caused by a “scope” limitation will be treated as a failure by a

plan to comply with the Annual Report filing requirements. Cy.

29 C.F.R. §§ 2520.103-1(b) (5) (iv) and 2520.103-2(b) (5) (iv).

CONGRESS INTENDED PLANS TO HAVE ACCESS TO ALL

EMPLOYER RECORDS.

A. Access to all employer data was contemplated by Con-

gress in order to satisfy the audit requirement.

One objecuive of financial statements of employee benefit plans

is to permit the assessment of the adequacy of a plan’s present and

future ability to pay benefits to covered employees. FINANCIAL

ACCOUNTING STANDARDS BOARD STATEMENT OF FINAN-

CIAL ACCOUNTING STANDARD NO. 35 at f 2 (1980). The Sixth

Circuit decision, Central States v. Central Transport, Inc., 698

F.2d 802 (6th Cir. 1983), restricting the scope of an audit only to

employer records of concededly covered employees, defeats this

objective.

Since multiemployer plans are liable for benefits to eligible

employees whether or not a particular employer has made contri-

butions on the employees’ behalf, see 29 U.S.C. §§ 1052 and

1053, Advisory Opinion, 31 August 1976, PENS. Rep. (BNA),

No. 221. Jan. 8, 1979, it is important to ascertain whether any

plan participants have been omitted and if all required contribu-

tions have been made. If access to the “entire universe” (i.e., both

admittedly covered and allegedly non-covered employees ) of plan

participants is denied, no one will be able to assess whether the

plan financial statements reflect all benefits likely to be paid and,

more importantly, all required contributions to fund those

benefits.

0 ee Pe ee re ee ee ee

It is in this context that Congress required employer record

keeping for all employees,’ not just plan participants, 29 U.S.C.

§ 1059(a), and imposed penalties on employers who failed to

keep such records. 29 U.S.C. § 1059(b). Moreover, Congress

imposed on employers reporting obligations based on these record

keeping requirements. 29 U.S.C. § 1059(a).

A court imposed “scope” limitation on access to all employer

records is likely to create an insurmountable audit problem to

discovery of instances of under-reporting and non-reporting for

alleged non-covered employees who are in fact covered by and

entitled to plan benefits. In fact, to deny access to those records

inhibits crucial auditing procedures, violates established stan-

dards of auditing practice, and essentially renders the reporting,

disclosure. and auditing requirements of ERISA and the Labor

Management Relations Act ineffective.

Moreover. when Congress enacted the audit requirements of

ERISA and established the foregoing employer record keeping

and reporting requirements for all employees, existing audit prac-

tices included the testing of employer records to determine

whether there were unreported employees who were nevertheless

entitled to benefits. Supra at 8-12. As the record keeping require-

ment complements the audit requirement by assuring the availa-

bility of information to make the necessary evaluations, the two

provisions should be read together. To deny access to the very

records which Congress has required employers to keep to deter-

mine both plan eligibility and the amount of employer contribu-

tions while requiring an audit which must examine, inter alia, the

universe of plan participants, which in turn requires access to

those records, creates an internal inconsistency in the statute.

Application of the basic rules of statutory construction further

supports the view that the Sixth Circuit decision is contrary to

congressional intent and inconsistent with the applicable statute.

It is an established tenet of statutory construction that acts of

4. The definition of employee as set forth in ERISA, 29 U.S.C.

§ 1002 (6) includes any in ividual employed by an employer. Thus,

ERISA fails to make a distinction between “covered” and “non-cov-

ered” employees.

rtrtneetinnta itil 0 TE Pe eee ee

EE a ST

FLD LF OT EE TT EY

Congress relating to the same subject matter are to be read in pari

materia. Weinberger v. Hynson, Westcott and Dunning, Inc. 412

U.S. 609, 631-32 (1973) [separate provisions of a single act

should be interpreted to give the Act “the most harmonious,

comprehensive meaning possible” in light of the legislative policy

and purpose]. 2A C. SANDS, SUTHERLAND STATUTORY CON.

STRUCTION, § 51.03 (4th ed. 1973). This harmony can only be

achieved here if 29 U.S.C. § 1059 is read as a grant of authority

to a Plan to enable it to fulfill its statutory audit requirement.

Finally, although the Sixth Circuit recognized that there is a

“reasonable cause” standard which allows access to employer

records, 698 F.2d at 810, it felt it was arbitrary and capricious to

“audit” all employee records of the employer. /d. at 811. This

holding failed to consider the statutory requirement placed on the

trustees to obtain an independent audit of the plans and obtain an

opinion on the plan’s financial statements as to whether they were

prepared in accordance with generally accepted accounting prin-

ciples. Since the failure to obtain access to the employer records

could result in a non-GAAS audit and a “qualified” or “dis-

claimed” opinion on the plan’s financial statements, it follows that

the Sixth Circuit’s holding that, as a matter of law, a request for

inspection of “non-covered” employee records is “arbitrary and

capricious” is, a fortiori, incorrect. In fact, failure to seek access

to the records may be a failure by the trustees to maintain ade-

quate internal controls which, inter alia, could result in a scope

limitation in the audit and could well violate the “prudent man”

standard found in ERISA, 29 U.S.C. § 1104(a)(1)(B).

B. In order to ascertain funding requirements access to

all employer data was contempiated by Congress

Another Congressional concern was the possible draining of

fund assets in the future by persons unidentified in the plan

records and for whom employer contributions were not made. At

the time such under-reporting becomes known, the employer

responsible may be neither in business nor a participating

employer.

Te eS TY ET ET Rr TR ROR TE FT > CE OS OF IT LE ee See

1. Lack of access to employer data precludes adequate

funding determinations required by Congress

The Multiemployer Act of 1980 significantly changed an

employer's funding responsibilities in a multiemployer plan. An

employer's obligation to fund benefits is no longer limited to its

negotiated contribution plus a modest contingent liability upon

withdrawal.

When an employer withdraws completely or partially from a

plan, the Act converts what would otherwise be a contingent

liability assessed only on plan termination into a present liability

for the employer’s share of all unfunded vested benefits. 29

U.S.C. §§ 1381 et. seg.. In three out of the four methods for

calculating an employer's withdrawai liability, amounts are real-

located from other employers who have escaped liability. 29

U.S.C. § 1391. (Thus, an employer may become liable for bene-

fits earned by workers who were never in its employ. )

Moreover, to minimize the impact of underfunding, the Mul-

tiemployer Act of 1980 also provided that, to the extent multiem-

ployer pension plans were underfunded, all employers in the plan

could be assessed to cure the underfunding. 29 U.S.C. § 1421 et.

seg. If a plan does not meet the funding standards required by

the Act, a plan may be placed in reorganization and an

employer’s contribution may be increased to prevent the plan

from terminating. 29 U.S.C. § 1423(b). If a plan terminates,

employers may be required to continue to contribute in order to

fund the plan’s unfunded vested benefits. Thus, the burden for

such latent benefits due to under-reporting falls on other employ-

ers through increased future contributions to the plan and proba-

bly increased insurance premiums to the PBGC.

Unless the total universe of plan participants is identified, the

actuarial computations to determine plan funding, 29 U.S.C.

§§ 1023(d) and 1393, and withdrawal liabilities, 29 USC.

§ 1391, are suspect and both an employer's current funding obli-

gations and withdrawal liabilities cannot be determined, let alone

accurately determined. Accordingly, access to all employee data

to ascertain that all plan participants are reasonably accounted

oe nee ee eee ee

BR ER OL EE Ne eR OO -

=< ae” eer! fe rere ee ee ee

for and required contributions made is essential to the proper

administration of multiemployer plans. Thus, the passage of the

Act makes the need for comprehensive audits to permit reliable

assessment of funding liability all the more critical.

2. The PBGC is adversely affected

In order to insure that payments will be made to all employees

entitled to benefits, Congress created an insurance funding mech-

anism through the PBGC. Employers in single employer plans

and multiemployer plans are assessed an “insurance premium” to

cover both actual and estimated shortfalls in benefit payments

because of underfunded plans. 29 U.S.C. §§ 1301 et seg. The

PBGC constantly reviews both the financial statements and actu-

arial reports of pension plans to assess the adequacy of funding.

Failure to have reliable information on which to make these

critical assessments would impair the ability of the PBGC to

effectively fulfill its statutory mandate

CONCLUSION

If there is a failure to report only one half of one percent (.5%)

per year of employees eligible to participate in all multiemployer

plans, contributions to multiemployer pension plans will be

underfunded at an initial rate of over $100,000,000 per year

(When the lost compounded earnings that would have been gen-

erated by these contributions is taken into account, the amount of

the underfunding becomes staggering.) Congress clearly did not

intend such a result; in fact, the legislative history shows Congress

intended the audit and actuarial functions to be one line of

defense against such potential underfunding. The decision of the

Sixth Circuit is inconsistent with clearly defined obligations

imposed upon both the trustees and independent auditors by Con-

gress. The decision substantially undermines the ability to assess

the adequacy of funding of all multiemployer benefit plans and

could lead to substantial instances of under-reporting of covered

es er ee ee ee ER > ee ee Fe TP Se ee berm rer me

employees either through inadvertence or design. Thus the deter-

rent effect of the audit process would be substantially weakened.

Finally, the ability to calculate employer plan withdrawal liabili-

ties is adversely impacted.

Wherefore Amicus Curiae Arthur Young respectfully requests

that this Court grant certiorari to determine this critically impor-

tant question.

Dated: July 6, 1983

Respectfully submitted,

p \

S CARL D. LIGGIO

General Counsel

Arthur Young & Company

277 Park Avenue

New York, New York 10172

(212) 407-2367

Of Counsel

JOHN E. MATSON

Associate General Counsel

PAUL J. OSTLING

Associate General Counsel

A-|

APPENDIX

§ 1002. Definitions

For purposes of this subchapter:

* * *

(5) The term “employer” means any person acting

directly as an employer, or indirectly in the interest of an

employer, in relation to an employee benefit plan; and

includes a group or association of employers acting for an

employer in such capacity.

(6) The term “employee” means any individual employed

by an employer.

§ 1023. Annual Reports

(a) (1) (A) An annual report shall be published with respect

to every employee benefit plan to which this part applies.

* * *

(B) The annual report shall include the information

described in subsections (b) and (c) of this section and

where applicable subsections (d) and (e) of this section

and shall also include --

(i) a financial statement and opinion, as required by

paragraph (3) of this subsection, and

(ii) an actuarial statement and opinion, as required

by paragraph (4) of this subsection.

* * *

(3) (A) Except as provided in subparagraph (C), the

administrator of an employee benefit plan shall engage, on

behalf of all plan participants, an independent qualified

public accountant, who shall conduct such an examination

of any financial statements of the plan, and of other books

and records of the plan, as the accountant may deem

A-2

necessary to enable the accountant to form an opinion as

to whether the financial statements and schedules required

to be included in the annual report by subsection (b) of

this section are presented fairly in conformity with gener-

ally accepted accounting principles applied on a basis con-

sistent with that of the preceding year. Such examination

shall be conducted in accordance with generally accepted

auditing standards, and shall involve such tests of the

books and records of the plan as are considered necessary

by the independent qualified public accountant. The inde-

pendent qualified public accountant shall also offer his

opinion as to whether the separate schedules specified in

subsection (b) (3) of this section and the summary mate-

rial required under section 1024 (b) (3) of this title pre-

sent fairly, and in all material respects the information

contained therein when considered in conjunction with the

financial statements taken as a whole. The opinion by the

independent qualified public accountant shall be made a

part of the annual report. In a case where a plan is not

required to file an annual report, the requirements of this

paragraph shall not apply.

(B) In offering his opinion under this section the accoun-

tant may rely on the correctness of any actuarial matter

certified to by an enrolled actuary, if he so states his

reliance.

(4) (D) In making a certification under this section the

enrolled actuary may rely on the correctness of any

accounting matter under subsection (b) of this section as

to which any qualified public accountant has expressed an

opinion, if he so states his reliance.

A-3

(b) An annual report under this section shall include a

financial statement containing the following

information:

* * *

(2) With respect to an employee pension benefit plan: a

statement of assets and liabilities, and a statement of

changes in net assets available for plan benefits which

shall include details of revenues and expenses and other

changes aggregated by general source and application. In

the notes to financial statements, disclosures concerning

the following items shall be considered by the accountant:

a description of the plan including any significant changes

in the plan made during the period and the impact of such

changes on benefits; the funding policy (including policy

with respect to prior service cost), and any changes in such

polici.s during the year; a description of any significant

changes in plan benefits made during the period; a descrip-

tion of material lease commitments, other commitments,

and contingent liabilities; a description of agreements and

transactions with persons known to be parties in interest; a

general description of priorities upon termination of the

plan; information concerning whether or not a tax ruling

or determination letter has been obtained; and any other

matters necessary to fully and fairly present the financial

statements of such pension plan.

* * *

this section the following information:

(1) The number of employees covered by the plan.

* * *

(5) Such financial and actuarial information including

but not limited to the material described in subsections (b) and

(d) of this section as the Secretary may find necessary or

appropriate.

A-4

Actuarial statement

(d) With respect to an employec pension benefit plan (other

than (A) a profit sharing, savings, or other plan, which is an

individual account plan, (B) a plan described in section 1081 (b)

of this title, or (C) a plan described both in section 1321(b) of

this title and in paragraph (1), (2), (3), (4), (5), (6), or (7) of

section 1081 (a) of this title) an annual report under this section

for a plan year shall include a complete actuarial statement appli-

cable to the plan year which shall include the following:

(1) The date of the plan year, and the date of the actuarial

valuation applicable to the plan year for which the report

is filed.

(2) The date and amount of the contribution (or contribu-

tions) received by the plan for the plan year for which the

report if filed and contributions for prior plan years not

previously reported.

(3) The following information applicable to the plan year

for which the report is filed: the normal costs, the accrued

liabilities, an identification of benefits not included in the

calculation; a statement of the other facts and actuarial

assumptions and methods used to determine costs, and a

justification for any change in actuarial assumptions or

cost methods; and the minimum contribution required

under section 1082 of this title.

(4) The number of participants and beneficiaries, both

retired and nonretired, covered by the plan.

(5) The current value of the assets accumulated in the

plan, and the present value of the assets of the plan used by

the actuary in any computation of the amount of contribu-

tions to the plan required under section 1082 of this title

and a statement explaining the basis of such valuation of

present value of assets.

SET EL) Pee er 0 2 ee ee er

EP pete 0 ee er eT OT OT PLES ee :

OS OE

. 266. Ere) are

A-5

(6) The present value of all of the plan’s liabilities for

nonforfeitable pension benefits allocated by the termina-

tion priority categories as set forth in section 1344 of this

title, and the actuarial assumptions used in these computa-

tions. The Secretary shall establish regulations defining

(for purposes of this section) “termination priority cate-

gories” and acceptable methods, including approximate

methods, for allocating the plan’s liabilities to such termi-

nation priority categories.

(7) A certification of the contribution necessary to reduce

the accumulated funding deficiency to zero.

(8) A statement by the enrolled actuary—

(A) that to the best of his knowledge the report is

complete and accurate, and

(B) the requirements of section 1082(c) (3) of this title

(relating to reasonable actuarial assumptions and

methods) have been complied with.

(9) A copy of the opinion required by subsection (a) (4)

of this section.

(10) Such other information regarding the plan as the

Secretary may by regulation require.

(11) Such other information as may be necessary to fully

and fairly disclose the actuarial position of the plan.

Such actuary shall make an actuarial valuation of the plan for

every third plan year, unless he determines that a more frequent

valuation is necessary to support his opinion under subsection

(a)(4) of this section.

§ 1024. Filing and furnishing of information

(a)(1) The administrator of any employee benefit plan subject

to this part shall file with the Secretary—

, a

FL EE ST TTT 7 TO OE eee FR we a Eg a ret nabbutrerumn: ETO

A-6

(A) the annual report for a plan year within 210 days

after the close of such year (or withi. such time as may

be required by regulations promulgated by the Secre-

tary in order to reduce duplicative filing);

* * *

(5) If the Secretary rejects filing of a report under para-

graph (4) and if a revised filing satisfactory to the Secre-

tary is not submitted within 45 days after the Secretary

makes his determination under paragraph (4) to reject

the filing, and if the Secretary deems it in the best interest

of the participants, he may take any one or more of the

following actions—

(A) retain an independent qualified public accountant

(as defined in section 1023(a)(3)(D) of this title) on

behalf of the participants to perform an audit,

(B) retain an enrolled actuary (as defined in section

1023(a)(4)(C) of this title) on behalf of the plan par-

ticipants, to prepare an actuarial statement,

as may be appropriate to enforce the provisions o7 this

part, or

(D) take any other action authorized by this

subchapter

The administrator shall permit such accountant or actuary to

inspect whatever books and records of the plan are necessary for

such audit. The plan shall be liable to the Secretary for the

expenses for such audit or report, and the Secretary may bring an

action against the plan in any court of competent jurisdiction to

recover such expenses.

§ 1030. Alternative methods of compliance

(a) The Secretary on his own motion or after having received

the petition of an administrator may prescribe an alternative

A-7

method for satisfying any requirement of this part with respect to

any pension plan, or class of pension plans, subject to such

requirement if he determines—

(1) that the use of such alternative method is consistent

with the purposes of this subchapter and that it provides

adequate disclosure to the participants and beneficiaries in

the plan, and adequate reporting to the Secretary,

(2) that the application of such requirement of this part

would—

(A) increase the costs to the plan, or

(B) impose unreasonable administrative burdens with

respect to the operation of the plan, having regard to the

particular characteristics of the plan or the type of plan

involved; and

(3) that the application of this part would be adverse to

the interests of plan participants in he aggregate.

(b) An alternative method may be prescribed under subsection

(a) of this section by regulation or otherwise. If an alternative

method is prescribed other than by regulation, the Secretary shall

provide notice and an opportunity for interested persons to pre-

sent their views, and shall publish in the Federal Register the

provisions of such alternative method.

§ 1059. Recordkeeping and reporting requirements

(a) (1) Except as provided by paragraph (2) every employer

shall, in accordance with regulations prescribed by the Secretary,

maintain records with respect to each of his employees sufficient

to determine the benefits due or which may become due to such

employees.

The plan administrator shall make a report, in such manner

and at such time as may be provided in regulations prescribed by

the Secretary, to each employee who is a participant under the

plan and who—

0 er eT BT en ee Ee ee) eee ee ee

A-8

(A) requests such report, in such manner and at such

time as may be provided in such regulations,

(B) terminates his service with the employer, or

1053(b)(3)(A) of this title).

The employer shall furnish to the plan administrator the infor-

mation necessary for the administrator to make the reports

required by the preceding sentence. Not more than one report

shall be required under subparagraph (A) in any 12-month

period. Not more than one report shall be required under sub-

paragraph (C) with respect to consecutive l-year breaks in ser-

vice. The report required under this paragraph shall be sufficient

to inform the employee of his accrued benefits under the plan and

the percentage of such benefits which are nonforfeitable under

the plan

(2) If more than one employer adopts a plan, each such

employer shall, in accordance with regulations prescribed by

the Secretary, furnish to the plan administrator the informa-

tion necessary for the administrator to maintain the records

and make the reports required by paragraph (1). Such

administrator shall maintain the records and, to the extent

provided under regulations prescribed by the Secretary,

make the reports, required by paragraph (1).

* .

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.