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

No. 82-2157

Se

IN THE

Supreme Court of the United States

October Term, 1984

CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS

PENSION FUND AND CENTRAL STATES, SOUTHEAST AND

SOUTHWEST AREAS HEALTH AND WELFARE FUND,

Petitioners,

V.

CENTRAL TRANSPORT, INC., ef ai.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

WIOTION ANP

BRIEF OF AMICUS CURIAE

ARTHUR YOUNG & COMPANY

IN SUPPORT OF R EVERSAD

CARL D. LIGGIO

General Counsel

Arthur Young & Company

277 Park Avenue

New York, New York 10172

Telephone: (212) 407-2367

Of Counsel

JOHN E. MATSON

Associate General Counsel

PAUL J. OSTLING

Associate General Counsel

2

——

l

QUESTION PRESENTED

MAY AN EMPLOYER, WHICH PARTICIPATES IN A

MULTIEMPLOYER BENEFIT PLAN, REFUSE TO MAKE

AVAILABLE ITS EMPLOYEE RECORDS, INCI UDING

RECORDS OF ITS PURPORTEDLY NON-COVERED

EMPLOYEES, WHICH IT IS REQUIRED BY STATUTE TO

KEEP TO DETERMINE EMPLOYEE BENEFIT PLAN ELI-

GIBILITY. TO THE AUDITORS OF THAT MULTIEM-

PLOYER BENEFIT PLAN”

ii

IN THE

Supreme Court of the United States

October Term, 1984

No. 82-2157

CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS

PENSION FUND AND CENTRAL STATES, SOUTHEAST AND

SOUTHWEST AREAS HEALTH AND WELFARE FUND,

Petitioners,

Vv

CENTRAL TRANSPORT, INC., ef al.,

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

—~»—

MOTION OF ARTHUR YOUNG & COMPANY

FOR LEAVE TO FILE BRIEF AMICUS CURIAE

Arthur Young & Company (“Arthur Young”) respectfully

moves, pursuant to Rule 42 of the rules of this Court, for leave to

file the annexed brief amicus curiae. Although the consent of

counsel for the Petitioners has been obtained, the consent of

counsel for the Respondents has been refused. This Court previ-

ously granted leave to Arthur Yung to file a brief amicus curiae

in support of the Petition for Writ of Certiorari.

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 Petitioners, Central States, South-

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

sion Fund”) and Central States, Southeast and Southwest Areas

Health and Welfare Fund and also audits numerous employee

benefit plans (several of which are multiemployer plans such as

Petitioners). These audits permit the plan trustees to comply with

the Employee Retirement Income Security Act of 1974

(“ERISA”), 29 U.S.C. §§ 1001-1461, and the regulations

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

Most employee benefit plans are required to file annual reports

which include the plan’s financial statements with the Depart-

rent of Labor. The annual reports of plans with over 100 partici-

pants must include an independent accountant’s opinion that the

nlan’s financial statements have been audited in accordance with

generally accepted auditing standards (“GAAS”). As is demon-

strated in the brief amicus curiae, the ruling of the Sixth Circuit

‘s inconsistent with this requirement and will materially impair

the ability of independent certified public accountants to audit

multiemployer benefit plans in accordance with GAAS and thus

materially impair the ability of the plan’s trustees to comply with

their fiduciary and statutory obligations.

Congress has required independent audits of the financial

statements of employee benefit plans (/.e., employee pensior. and

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

ance on the plan’s financial statements. And although an inde-

pendent audit also provides an important control on the

administration of a plan,

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

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 STANDARDS No. 35 at 12

(1980).

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

dated an independent audit, but also required defined benefit

iv

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 certain

employee benefit funds be audited in accordance with GAAS, 29

U.S.C. §§ 1023, 1024, there existed a defined body of professional

practice and literature detailing the procedures necessary to con-

duct a GAAS audit of multiemployer health and welfare benefit

funds. These procedures included the testing of employer records.

Congress 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 accomplish this goal, the auditor, inter alia, performs

tests to determine that the proper universe of plan participants

has been identified, that contributions have been paid by the

employer for each plan participant, and that participant benefit

entitlements have been properly reflected in the actuarial calcula-

tions 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; in other words, GAAS

requires the ability to test the entire universe of employees.

Without the ability to determine the proper universe of plan

participants it is impossible to determine if all required employer

contributions have been made or if the actuarial valuation of a

pension plan is correct. Since benefit eligibility in a multiem-

ployer plan is determined by an individual’s employment status,

regardless of whether the employer has contributed to the plan,

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

funded! -- a major concern underlying the enactment of ERISA,

|. For example, if there were an annual under-reporting of only one

half of one percent (.5%) of all participants currently estimated to be

members of multiemployer 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 the National Master Freight Agree-

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

Vv

29 US.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. CODE CONG. & Ap. News (94 Stat.) 1208, and

the creation of the Pension Benefit Guaranty Corporation, 29

U.S.C. §§ 1301-1309, in 1974.

Plan under-funding ultimately increases the burden on all

employers, especially those who do not under-report their covered

employees, since the resultant shortfall must be made up either by

increased employer contributions to the fund from those remain-

ing in the plan or by increased premium and/or withdrawal

charges to employers by the Pension Benefit Guaranty Corpora-

tion (“PBGC”). Moreover, to the extent the existence of under-

funding cannot be determined, payments imposed upon employ-

ers withdrawing from the plan cannot be properly calculated,

contributing further to the financial uncertainty of multiemployer

plans and increasing the ultimate burden on those who remain in

the plan.

While recognizing a very limited right of access to employer

data concerning purportedly non-covered employees, the opinion

of the Sixth Circuit effectively precludes auditors from testing the

universe of plan participants in most multiemployer plans. This

restricted access to employer records creates a possible “scope”

limitation on the audit. A significant “scope” limitation ipso facto

results in a non-GAAS audit and would require the auditors to

“qualify” or “disclaim” their opinion on employee benefit plan

financial statements. The trustees would then fail to meet the

statutory requirements for an audit of the plan financial state-

ments in accordance with GAAS. Congress could not have man-

dated that plan trustees have a GAAS audit performed, knowing

what such an audit entailed, and at the same time denied plan

trustees the ability to fulfili that requirement.

initial under-funding of contributions in excess of $100,000,000 (40,000

omitted participants x $2600) for all multiemployer plans. The com-

pounded lost earnings from these unmade contributions is staggering.

vi

In addition to preventing a GAAS audit, restricted access to

employer data by both the plan’s independent and internal audi-

tors significantly reduces internal control over employer contribu-

tions legitimately due the plan and thus increases the likelihood of

plan under-funding. Prohibiting the auditor from routinely test-

ing whether purportedly non-covered employees are actually cov-

ered eliminates the significant deterrent value of these audit tests.

This increases the likelihood that employers -- either through

inadvertent oversight or possibly as a result of intentional under-

reporting -- will fail to report and make required contributions for

covered employees.

Thus amicus curiae Arthur Young has a direct interest in the

outcome of this proceeding -- not only as it affects its ability to

conduct its audits of the Central States Pension and Welfare

Funds but also its ability to conduct audits of other multiem-

ployer benefit plans. As a result of the Sixth Circuit opinion, one

employer has already refused access of its empioyment records to

Arthur Young in the course of its audit of The Central States

Pension Fund and Arthur Young is concerned that other employ-

ers will do likewise.

WHEREFORE, Arthur Young respectfully moves this Court

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

Dated: August 9, 1984

Respectfully submitted,

/s/ Carl D. Liggio

TURP UTEOOST CCC eee eee

CARL D. LiGGIO

General Counsel

Arthur Young & Company

277 Park Avenue

New York, New York 10172

Telephone: (212) 407-2367

vil

TABLE OF CONTENTS

QUESTION PRESENTED ........:-sessesesessseneennneresnenssnnnnenens

MOTION FOR LEAVE TO FILE BRIEF

AMICUS CURIAE IN SUPPORT ..... scaniasainainanminnaaenn

TABLE OF CONTENTS ......:.---sssesesssesssssnsnrenenenennnensnsentrs

TABLE OF AUTHORITIES .....-----+-ssssessesesnersrseetererererere

PRELIMINARY STATEMENT .....--:+:s-sesseersssersrsetererserens

INTEREST OF AMICUS CURIAE ......-.. senenennsiianmnaninaiin

THE PROCEEDING BELOW .........-:::s:ccsresesssrsrsrenersnersens

SUMMARY OF ARGUMENT .........:::-s:seeesersererereneererer®

ARGUMENT. ......0-0:cscscsssveesrsssssronersrsssscnsssverensnssonsnonensoseeres

1.

IT.

If.

BACKGROUND—MULTIEMPLOYER PLANS

CONGRESS DIRECTED THAT MULTIEM-

PLOYER BENEFIT PLANS HAVE ANNUAL

INDEPENDENT AUDITS OF PLAN FINAN-

CIAL STATEMENTS—IN ACCORDANCE

WITH GENERALLY ACCEPTED AUDITING

STANDARDS ..........-++++ cceniinandenincenenvemmeentess estate

A. The Audit Requirement ........-.seerrrrrerre

B. What an Audit of a Multiemployer Benefit

Plan in Accordance With GAAS Entails .....

1. Auditing employer records .........-----+-+0-

1. The use of internal auditors to satisfy

GAAS cecececccecccscsesesccescsensensssscsssnssonsssnssonsoes

C. The Impact of a Qualified Auditor’s Opinion

CONGRESS INTENDED PLANS TO HAVE

ACCESS TO ALL EMPLOYER RECORDS ..

A. Access to all oy a Data was Contemplat-

ed by Congress in Order to Satisfy the Audit

Requirement ..........-+-sssssseessensersersnsenennsnrsnsensens

PAGE

Vill

PAGE

B. Access to all Employer Data was Contemplat-

ed by Congress in Order to Ascertain Funding

ReQuireMentS ..........:cecceceecesseerseeesseenneeteseesnenees 19

1. ‘Lack of access to employer data precludes

adequate funding determinations required

19

by COmgress ..........cccescessesssreereseesnesenseneeneens

2. The PBGC is adversely affected ................ 21

CONCLUSION ............. snaiiiltiainduasinenianstimesinnnnseeiemmenevetnitns 21

PTI .nccecceceocecccccccccsesssescccrseresescccovssossssccsesssononsonsssoes A-l

ix

TABLE OF AUTHORITIES

Cases PAGE

Audit Services, Inc. v. Rolfson, 641 F.2d 757 (9th Cir.

GED cecconcscacceasaccccccccncssnsscossscesessosssoossesnenesoesosesssssnessorss 17

Bugher v. Consolidated X-Ray Service Corp., 705 F.2d

1426 (Sth Cir. 1983), reh’g denied, 7i1 F.2d 713

(1983) cert. denied, 52 U.S.L.W. 3844 (U.S. May 21,

a 17

Central States, et al. v. Central Transport, Inc., et al.,

522 F. Supp. 658, rev'd, 698 F.2d 802, (6th Cir.

____ PARLE Soe eens oon 1,3, 4,5, 18

1.A.M. National Pension Fund v. Industrial Gear Manu-

facturing Company, 723 F.2d 944 (D.C. Cir. 1983) 17

Jim McNeff, Inc. v. Todd, 103 S. Ct. 1753 (1983) ..... 17

Laborers Health & Welfare Trust Fund v. Kaufman &

Broad of California, Inc., 707 F.2d 412 (9th Cir.

__ esiilaaincdadahiaadaliielin 17

Nachman Corp. v. Pension Benefit Guaranty Corpora-

we. BU @. 7), 6

Pension Benefit Guaranty Corporation v. R.A. Gray &

Company, 52 U.S.L.W. 4810 (U.S. April 16, 1984) 6

Schneider Moving & ».2rage Company v. Robbins, 104

DD, Ge, BED GI ccececsnsntsenscnesatunnconsnenscssesenssesesnenentes 20

Van Gunten v. Central States, et al., 672 F.2d 586 (6th

en 6, 16

Washington Star Company v. International Typographi-

cal Union Negotiated Pension Plan, 729 F.2d 1502

CE, Gs GED cecnscccccesesenscncncnccenneniinntnenentessncsenicnesons 19

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

eG eae 18

Wolfe v. J.C. Penny Co., Inc., et. al., 710 F.2d 388 (7th

4 OOOO 5

Statutes, Rules, and Reguiations

29 United States Code

ELL AEDLA LLL AE g

ata ciracaelaitllalallacialbeminnial 2

ee aeieeeaeaiaien 16

PAGE

SN al 5

ERE SN en a Toa a ne ea 14

Ree rr eS Le ee 2,8, 15

eee em 20

§ 1024(a)(S) coccccccccccece. liaienlngaaie titi ladda ile 8

I a a ‘idiaiideaite 6, 16

IPI dali tt ia la 6, 16

EE A et a eT 18

| EE 16

I ha 16

I i 4,18

By III secsanidesinceieant aia 21

a aii a 19

I haa aL 19, 20

I I aii ea tatiana iia 20

Sy I IN, ‘isihitiiecerintcietasiilinieamnitcieaiti ticle 19

I iia a 20

Multiemployer Pension Plan Amendments Act of 1980,

Act of Sept. 26, 1980, Pub. L. No. 96-364, 1980 U.S.

Cope Conac. & Ap. News (94 Stat.) 1208 ............ 2,6

29 C.F.R.

I 2

EEE Ee OT ee aE 15

§ 2520.103-1(B) (5) (iV) coecccecccccccccccceccseccceccsseeceeeceeeeeee. 15

EEE Eee 15

§$ 2530.200b-2(a) (1) (2) cccccccccccccccocccecceccseeccecsseeceeeceecee, 6

Other Authorities

Advisory Opinion, 31 August 1976, PeENs. Rep (BNA),

_ » & \ | _ Xian ais 6, 16

AICPA, AUDITS OF EMPLOYEE BENEFIT PLANS

EES CRY ec Re Oe En 13,14

AICPA, AUDITS OF EMPLOYEE HEALTH AND WEL.

FARE BENEFITS FUNDS (1972) .........000.-005. 9,10, 11, 13,14

AICPA, STATEMENT ON AUDITING STANDARDS NO. ] 14

xi

AICPA, STATEMENT ON AUDITING STANDARDS NO. 2

AICPA, STATEMENT ON AUDITING STANDARDS NO. 9

AICPA, STATEMENT ON AUDITING STANDARDS NO.

eee eee

ARTHUR YOUNG ERISA AUDIT MANUAL ..........0000065

3 Cone. REC. FSGS CIDST) ..cccccccsescccccceccvcccsecoscossccssees

FINANCIAL ACCOUNTING STANDARDS BOARD STATE-

MENT OF FINANCIAL ACCOUNTING STANDARDS

DUO. BS CIDDB) .nccecvecccccscsscceccovcsvccccecccssccessescossssscoseonees

H. Conr. REP. 1280, 93rd Cong. 2d Sess., reprinted in

1974 U.S. Cope Conca. & AD. News 5038 ............

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

1947 U.S. Cope Conac. & AD. News 1135 ............

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

1974 U.S. Cope Conc. & AD. News 4639, 4649

Lublin, Law to Protect Multi-Employer Pensions Is

Causing Hardship for Many Businesses, Wall St. J

Mar. 5, 1982 at 40, Col. 1 .........cccccccscccrrsrsrocreresessseeees

NATIONAL JOURNAL, June 28, 1982 ..........cccccccceceeeeeees

PENSION BENEFIT GUARANTY CORPORATION, Mul-

tiemployer Study Required by P.L. 95-214 (1978),

Appendix I, Potential Multiemployer Plan Liabilities

Under Title IV of ERISA. ...............cccccccesssesssceseeseeeeees

1979-1981 PENS. PLAN Guinée ANNOT. (CCH)

RN GS OR Ea

2A C. SANDS, SUTHERLAND STATUTORY CONSTRUC-

TION, § 51.03 (4th ed. 1973) ...ccccccccccecsseeeereeereeeeeeenes

S. Rep. No. 127, 93rd Cong., 2d Sess., reprinted in 1974

U.S. Cope Conc. & AD. NEWS 4838, 4864 ...........

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

U.S. Cope Conc. & AD. News 4128, 4129 ...........

IN THE

Supreme Court of the United States

October Term, 1984

No. 82-2157

>

CENTRAL STATES, SOUTHEAST AND SOUTHWEST AREAS

PENSION FUND AND CENTRAL STATES, SOUTHEAST AND

SOUTHWEST AREAS HEALTH AND WELFARE FUND,

Petitioners.

v.

CENTRAL TRANSPORT, INC.., ef ai.

Respondents.

ON WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE SIXTH CIRCUIT

— -

BRIEF OF AMICUS CURIAE

ARTHUR YOUNG & COMPANY

Preliminary Statement

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

brief as amicus curiae and urges that this Court reverse the

decision of the United States Court of Appeals for the Sixth

Circuit in Central States, Southeast and Southwest Areas Pen-

sion Fund v. Central Transport, Inc., 698 F.2d 802 (6th Cir.

1983).

This case materially affects the ability of over 2000 multiem-

ployer pension plans with more than 8,000,000 plan participants

and over $50 billion in assets to comply with Congressionally

mandated audit (and actuarial) requirements. The case also

2

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

the Sixth Circuit is allowed to stand, the salutary 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. Cope

CONG. & AD. News (94 stat.) 1208, could be substantially

jeopardized.

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 Petitioners, Central States, South-

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

sion Fund”) and Central States, Southeast and Southwest Areas

Health and Welfare Fund (“Welfare Fund” ), as well as numerous

employee benefit plans, several of which are multiemployer plans

such as Petitioners. These audits permit the plan trustees to com-

ply with ERISA, 29 U.S.C. §§ 1001-146! (1976 & Supp. V

1981), and the regulations promulgated thereunder, 29 C.F.R

§ 2520.103 (1982) et seg.

Most employee benefit plans are required to file an annual

report, which includes the plan’s financial statements, with the

Internal Revenue Service which furnishes a copy to the Secretary

of Labor. With respect to those plans with over 100 participants,

ERISA requires an independent auditor to conduct “an examina-

tion of any financial statements of the plan” in accordance with

Generally Accepted Auditing Standards (“GAAS”), 29 U.S.C.

§ 1023(a)(3)(A), so that the annual reports of those plans will

include an independent accountant’s opinion on whether the

plan’s financial statements and certain required schedules are

presented fairly in accordance with Generally Accepted Account-

ing Principles (“GAAP”). Jd. The ruling of the Sixth Circuit is

inconsistent with this requirement and will materially impair the

ability of independent certified public accountants, such as

3

Arthur Young, to conduct audits of multiemployer benefit plans

in accordance with GAAS.

Thus amicus curiae, Arthur Young, is vitally interested in

having this Court resolve the question presented by this case:

May au employer, which participates in a muitiemployer

benefit plan, refuse to make available its employee records,

including records of its purportedly non-covered employ-

ees, which it is required by statute to keep to determine

employee benefit plan eligibility, to the auditors of that

multiemployer benefit plan?

THE PROCEEDING BEI OW

In fulfilling the Trustee’s statutory obligations, the joint inter-

nal audit staff of Petitioners, Central States Pension and Welfare

Funds, both of which are multiemployer benefit plans, sought to

examine the employment records of Respondents, who are con-

tributing employers, to ascertain whether Respondents had

employees who were covered by the plans and for whom funding

contributions had not been made by their employers (the Respon-

dents). After finding inconsistencies in employee reported data

and ascertaining that there were upward adjustments in the

accounts due from the employers (Respondents) of at least

$268,000, the auditors sought to make further inquiries. When

the employers (Respondents) refused access to their records and

ejected the Central States internal auditors, the Central States

Pension and Welfare Funds obtained an injunction directing

Respondents to make the necessary records available. 522 F.

Supp. 658 (E.D. Mich. 1981). On appeal, the Sixth Circuit

reversed, holding that Petitioners had no right to review such

records. 698 F.2d 802, 806.

4

SUMMARY OF ARGUMENT

In denying access to the records of purportedly noncovered

employees, the Sixth Circuit committed several critical errors:

(1) it narrowly viewed the trustees’ responsibilities and

ignored the statutory requirement that the trustees obtain

an annual independent audit in accordance with GAAS

and an opinion as to whether the plan’s financial state-

ments were prepared in conformity with GAAP consist-

ently applied;

(2) it concluded that although certain limited rights of inspec-

tion might be available to the funds, as a matter of law no

“audit” of an employer's complete employee records to

ascertain plan participants by the funds was authorized,

698 F.2d at 806, but failed to recognize that access to such

records is inherently related to the required independent

audit of the plan; and

(3) it concluded as a matter of law that an “audit” of an

employer’s complete employee records was “arbitrary and

capricious,” even though the court conceded that under

the plan trust agreements there was a “reasonable cause”

standard supported by the “prudent man” standard of

ERISA, 29 U.S.C. § 1104(a)(1)(B), which allows a

right of investigation, 698 F.2d at 810-811

Upon analysis, these holdings are internally inconsistent as well

as inconsistent with ERISA. Contrary to the holding of the Sixth

Circuit, ERISA implicity authorizes access to all employee

records of employers who participate in multiemployer benefit

plans so that the plan trustees can meet the statutory reporting

requirements and fiduciary obligations imposed by ERISA. By

denying even limited access to an employer’s employee records to

1. Inso finding the Court also found that such audits were a waste of

assets. 698 F.2d at 811. This finding was made by the Sixth Circuit

without any factual basis. In fact, the finding runs counter to estab-

lished precedent and what is in fact the case. See, infra, n. 7.

5

determine whether employees are improperly excluded and con-

tributions omitted, the decision of the court of appeals effectively

precludes the trustees from fulfilling their statutory obligations

and makes an independent audit of the plan difficult, if not impos-

sible. The decision of the court of appeals negates the substantial

deterrent effect of the possibility of an audit, and jeopardizes the

solvency of employee benefit plans by increasing the possibility of

under-funding. The decision also adversely impacts the accurate

calculation of fund termination payments upon withdrawal of an

employer from the plan.

The Sixth Circuit decision in Central States has already

resulted in troubling and unwarranted consequences. For exam-

ple, the Seventh Circuit has interpreted the decision in Central

States as limiting a plan trustee’s ability to determine plan cover-

age. Wolfe v. J.C. Penny Co.,Inc., 710 F.2d 388, 393 (7th Cir.

1983). Allowing the decision of the Sixth Circuit to stand will no

doubt lead to further erosion of the ability to protect pension

benefit plans and continued undermining of Congressional inten-

tions in enacting ERISA.

ARGUMENT

I.

BACKGROUND-MULTIEMPLOYER PLANS

Multiemployer benefit plans are generally industry wide

employee benefit plans covering all or some of a participating

company’s employees, 29 U.S.C. § 1002 (37). These plans pro-

vide a variety of retirement, health, and welfare benefits. They are

usually jointly administered by management and labor under a

collective bargaining agreement.

Covering employees of more than one company, multiemployer

plans can include hundreds or even thousands of employers from

all over the country, or only a few employers in one area. Plan

participants may include both union and non-union employees.

Over 8,000,000 employees in construction, mining, shipping,

trucking, food retailing, textiles, and other industries currently

EE

6

participate in over 2000 multiemployer plans’ covering approxi-

mately 25 percent of all U.S. workers protected by defined benefit

pension plans in the private sector. NATIONAL JOURNAL, June

26, 1982 at 12. A 1980 Department of Labor study estimated that

more than 16 million workers will be covered by multiemployer

pension plans by the year 2000. 1979-1981 PENS. PLAN GUIDE

ANNOT. (CCH) { 22,877 (Oct. 15, 1980).

Virtually all plans require contributions solely from employers.

Id. For these plans funding is dependent solely upon employer

contributions; and plan eligibility is determined “solely on the

basis of service performed for a participating employer, regard-

less [of] whether that employer . . . has made or defaulted on his

required contributions.” Advisory Opinion, 31 August 1976,

PENS. Rep. (BNA), No. 221, Jan. 8, 1979; Van Gunten v. Cen-

tral States, 672 F.2d 586, 589 (Sth Cir. 1982). Accordingly, even

if an employer fails to report the employee as a participant and

does not make the required contributions, the multiemployer plar

is nonetheless obligated to pay benefits to the employee when

demanded. See 29 U.S.C. §§ 1052, 1053; 29 C.F.R. § 2530.200b-

2(a)(1)(2). Thus, failure to make contributions for all employ-

ees covered by the plan leaves the plan under-funded.

This Court has only recently reaffirmed that among the pur-

poses of ERISA was to ensure that employees and their benefi-

ciaries would not be deprived of anticipated retirement benefits

by the termination of inadequately funded pension plans. Pension

Benefit Guaranty Corporation v. R.A. Gray & Company, 52

U.S.L.W. 4810, 4811 (U.S. April 16, 1984). Congress wanted to

guarantee that “if a worker has been promised a defined pension

benefit upon retirement -- and if he has fulfilled whatever condi-

tions are required to obtain a vested benefit -- he actually will

receive it.” Nachman Corp. v. Pension Benefit Guaranty Corp.,

446 US. 359, 375 (1980).

Although multiemployer plans were subject to ERISA. it was

the Multiemployer Pension Plan Amendments Act of 1980

2. As of 1982 multiemployer plans controlled over $50 billion in

assets. Lublin, Law to Protect Multi-Employer Pensions Is Causing

Hardship for Many Businesses, Wall St. J. Mar. 5, 1982 at 40, col. 1.

7

(MEPPAA) which directly addressed the growing concern over

inadequate funding of multiemployer plans. The Pension Benefit

Guaranty Corporation (PBGC), which must provide benefits to

participants in those plans which terminate with insufficient

assets to support their guaranteed benefits found, that:

12 percent of all multiemployer pension plans, covering

one-fifth of all multiemployer pension plan participants,

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 US.

Cope CONG. & Ab. 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 FINANCIAL 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 U.S.

Cope ConG. & Ab. News 1135, 1173, when Congress sought to

8

protect certain employee benefit funds by requiring that the funds

be subject to an annual audit. 29 U.S.C. § 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 U.S.C.

§ 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).

In enacting ERISA Congress was also concerned over the ade-

quacy of information available on employee benefit 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 Las 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

9

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 US.

Cope CONG. & AD. NEws 4639, 4649.

The 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. CoDE CONG. & AD.

NEWS 4838, 4864. The Conference Report, recognizing the

importance of the audit requirement, specifically noted that “rhe

accountant is to give an opinion as to whether the financial

statements of the plan conform with generally accepted account-

ing principles and the statement is to be based upon an examina-

tion in accordance with generally accepted auditing standards.”

H. Conf. Rep. 1280, 93rd Cong. 2d Sess., reprinted in 1974 US.

CopE CONG. & AD. News 5038, 5040. (Emphasis added).

B. What an Audit of a Multiemployer Benefit Plan

in Accordance With GAAS Entails

1. Auditing employer records

When Congress enacted ERISA and mandated that employee

benefit plans be subject to an examination in accordance with

GAAS, 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

published an Industry Audit Guide, AICPA, AUDITS OF

EMPLOYEE HEALTH AND WELFARE BENEFIT FUNDS, (“1972

INDUSTRY AUDIT GUIDE”) which, although not directly con-

trolling audits of pension plans, summarized audit requirements

10

that had general applicability to pension plans and specific appli-

cability to employee health and welfare funds such as the Peti-

tioner, Central States Welfare Fund. The Guide noted that in

addition to its specific requirements:

Generally accepted auditing standards apply to audits of

an employee health and welfare benefit fund to the same

extent they apply to the audits of a commercial enterprise.

1972 INDUSTRY AUDIT GUIDE at 18.

The 1972 INDUSTRY AUDIT GUIDE reviewed the critical areas

of 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 is to deter-

mine that amounts due the fund have been received and

properly recorded and that employer records and partici-

pant records (eligibility or vacation contribution) are

being properly maintained.

> > 7

The auditing procedures employed should normally

include, but are not necessarily limited to, the following:

(1) Total cash receipts shown by the cash receipts book

for a selected period should be reconciled to the total

amount credited to the general ledger contribution

accounts, to the total amount posted to the employer's

record, and to deposits shown by the bank statements.

(2) Selected individual employer contribution payments

as shown by the cash receipts book should be compared to

the amount shown on the employer’s contribution report

and to the amount posted to the individual employer’s

contribution record. Selected postings to the employer’s

record during the test period should be traced to the cash

receipts book and to the employer’s contribution report.

Id. at 19.

—

ll

These procedures were initially directed at an audit of the

plan’s own records. However, when the auditor deemed it neces-

sary and a direct review of an employer’s complete employee

records was undertaken, these same procedures were applied.

Such procedures would include:

Payroll Audits

There may be circumstances in which the independent

auditor is engaged to conduct audits of employers’ payroll

records to determine the fropriety of the contributions

made. The following paragraphs outline certain

procedures which should be considered in the audits of

employers selected:

(1) The collective bargaining agreement should be

reviewed to determine that the employer has complied

with the applicable provisions.

(2) The total gross earnings shown by the employees’

earnings records should be reconciled with total wages

shown by the general ledger and the payroll tax reports.

(3) Information shown on the employer’s contribution

reports for a selected number of participants should be

compared with the data shown on the employees’ earnings

-ecords. 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 employees.

(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 foregcing tests should be cleared to

the independent auditor's satisfaction.

id. at 20-21.

12

In order to verify participants’ data, and gain assurance that

participant records and related pension plan liabilities are neither

understated nor overstated, the auditor must be able to test the

entire universe of an employer’s employees, including non-partici-

pants.’ As the pre-ERISA auditing literature and practice

clearly indicated, verification of participation data is an integral

part of a benefit plan audit in accordance with GAAS.‘

3. The audit literature applicable to all —— substantial

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 uediile audit objective to be achieved

and shouid determine that the audit procedure, or combination

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

auditor should determine that t'* population from which he

draws the sample is appropriat<¢ ror the ific 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,

AICPA Professional Standards Volume A, U.S. Auditing Standards as

of June 1, 1984 (“AICPA PROFESSIONAL STANDARDS” ), AU350.17.

(Emphasis added. )

4. In recognition of applicable professional standards, Arthur

Young’s own internal ERISA audit manual provided:

The objective of the verification, when necessary, is to ascer-

tain whether the data is complete, primarily that all eligible

participants are included and that all relevant data has n

provided, and accurate. (Eligible participants include present

employees who meet the participation requirements of the plan,

terminated employees who have vested benefits, and retired

employees or their surviving spouses or other dependents receiv-

ing benefits.) Verification procedures usually include:

¢ Determining benefit eligibility requirements and the statisti-

cal data about eligible participants necessary for the actuary

to make his computations.

¢ Testing the completeness and my of the list of eligible

employee participants by applying the eligibility require-

ments to employment records, both for employees on the list

and not on the list.

* Testing the accuracy of the statistical data about other eligi-

ble participants by reference to employment and payroll

records.

13

The 1972 INDUSTRY AUDIT CuIDE further prescribed that a

“disclaimer” of opinion on the financial statements of a multiem-

ployer benefit plan would be appropriate when the auditor could

not gain assurance as to “the propriety of employer contribu-

tions.” Jd. at 29. Such a “disclaimer” of opinion results from an

inability to apply all of the procedures required by GAAS -- such

as the ability to test the universe of employees. AICPA, SAS

No. 2, AICPA PROFESSIONAL STANDARDS, AU509.12 and

AUS09.45.

In 1983, the AICPA issued a new Audit and Accounting

Guide, covering all employee benefit plans, which codified

existing literature and prior practice: AICPA, AUDITS OF

EMPLOYEE BENEFIT PLANS (1983) (“1983 INDUSTRY AUDIT

GuIpDe”). This 1983 INDUSTRY AUDIT GUIDE, which was first

issued as an exposure draft in 1980, expressly recognizes, as had

the 1972 INDUSTRY AUDIT GUIDE, that “in examining the finan-

cial statements of a multiemployer plan, the auditor may need to

make special arrangements to examine employer records,” id. at

56; and concludes, as did the earlier Guide, that “[i]f the auditor

is unabie to obtain the necessary assurance regarding partici-

pants’ data, he ordinarily should conclude that it will be necessary

to express a qualified opinion or disclaim an opinion because of

the limited scope of the examination.” /d. at 63.

In imposing a GAAS audit requirement, Congress did so in the

face of an established body of procedures which contemplated

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

plan participation data such as plan membership and contribu-

tions. Without access to and, when necessary, the ability to audit

employer records, the GAAS audit requirement imposed by Con-

gress cannot be met.

2. The use of internal auditors to satisfy GAAS

In conducting an independent audit, not every record of the

entity under audit is examined. The independent auditor studies

¢ Testing the accuracy of the employment and payroll records

from which the data is obtained.

ARTHUR YOUNG ERISA AubDIT MANUAL § 8.105

14

and evaluates a client’s internal accounting controls to determine

which records will be tested and the degree of reliance which can

be placed on those records and internal accounting controls.

AICPA, SAS No. 1, AICPA PROFESSIONAL STANDARDS,

AU320. One aspect of internal accounting control which has a

bearing on the extent of the independent auditor’s procedures is

the presence of an effective internal audit function. AICPA, SAS

No. 9, AICPA PROFESSIONAL STANDARDS, AU322. The inde-

pendent auditor evaluates how the internal audit function relates

to the system of internal accounting controls and then considers

the extent to which the internal audit staff may perform parts of

the audit under the independent auditor’s supervision. /d.

For example, in the audits of the Central States Pension Fund

and Welfare Funds, Arthur Young not only independently tests

plan participation data by, inter alia, directly testing employer

records, but also uses the work of the internal auditors in this

area. 1972 INDUSTRY AUDIT GUIDE at 15; 1983 INDUSTRY

AUDIT GUIDE at 62. Based on Arthur Young’s review of fund

records, it may request the internal audit group to examine cer-

tain employer’s records or do so itself. Arthur Young also reviews

the work performed by the internal auditors with respect to the

audits of employer records. Accordingly, the work of the internal

audit function, which is at issue here, is an integral part of Arthur

Young’s independent audit required by statute. 29 U.S.C.

§ 1023(a). Absent the work of the internal auditors. Arthur

Young would have to materially increase its own procedures’ at

increased cost to the plan or render a “qualified” or “disclaimed”

opinion based on a “scope” limitation in the audit caused by the

failure to have access to all records necessary to render its opinion

on the plan’s financial statements.

5. One employer has already refused Arthur Young access as a

result of the Sixth Circuit's decision. In addition, Arthur Young’s audit

work papers show that there were 16 instances of employer “turn

downs” to access by the internal auditors of employer records during the

period June 13, 1983 to March 31, 1984.

15

C. The Impact of a Qualified Auditor’s Opinion

ERISA requires a GAAS audit to enable the independent audi-

tor to opine as to whether the financial statements fairly represent

the financial position of the plan in conformity with generally

accepted accounting principles consistently applied. 29 U.S.C.

§ 1023(a)(3)(A). The Department of Labor has authorized

independent auditors to have “scope” limitations in the audit in a

very limited category of situations not applicable here. 29 C.F.R.

§ 2520.103-8. A “qualified” or “disclaimed” opinion resulting

from a “scope” limitation relating to the inability to test plan

participation data indicates a non-GAAS audit and does not

comply with the statutory requirements of the Labor Manage-

ment Relations Act of 1947 or ERISA. Arthur Young has been

orally informed by the Department of Labor that in all likelihood

the submission of an opinion containing such a “scope” limitation

will be treated as a failure by a plan to comply with the Annual

Report filing requirements. Cf. 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

Congress in Order to Satisfy the Audit Requirement

One objective 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 STANDARDS No. 35 at 12 (1980). The

Sixth Circuit decision, 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 regardless of whether a particular employer has made

16

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

1053, Department of Labor Advisory Opinion No. 76-89, 31

August 1976, PENs. Rep. (BNA), No. 221. JAN 8, 1979): Van

Gunten v. Central States, supra, it is essential in determining the

plan's financial integrity to ascertain whether any plan partici-

pants have been omitted and whether all required contributions

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 for which the plan

will ultimately be responsible and, more importantly, all contri-

butions required to fund those benefits.

It is in this context that Congress required employers to main-

tain records 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 reporting obligations on employers 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 of

employees who are in fact covered by and entitled to plan benefits.

To deny access to those records inhibits crucial! auditing proce-

dures, violates established standards of auditing practice, and

essentially renders the reporting, disclosure, and auditing require-

ments of ERISA and the Labor Management Relations Act

ineffective.

When Congress enacted the audit requirements of ERISA and

established the foregoing employer record keeping and reporting

requirements for a// employees, existing audit practices included

the testing of employer records to determine whether there were

unreported ernployees who were nevertheless entitled to benefits

and thus payments due the plan to cover those employee benefits.

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

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

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

ered” employees.

17

Supra at 9-13.’ As the record keeping requirement complements

the audit requirement by assuring the availability of information

to make the necessary evaluations, the two provisions should be

read together. For Congress to have denied access to the very

records which it has required employers to keep to determine both

plan eligibility and the amount of employer contributions as the

court of appeals held, while at the same time to have required an

audit, which by definition includes an examination, inter alia, of

records to determine the universe of plan participants, creates an

internal inconsistency in the statute, which Congress could not

have intended.

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

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

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

+

It is a given that audits of payroll records can result in substantial

recoveries of monies which are due to multiemployer plans, but have not

been paid because neither proper information nor employee coverage

has been reported to the multiemployer plan. See, e.g., Jim McNeff,

Inc. v. Todd. 103 S. Ct. 1753 (1983) (audit revealed that employer

owed more than $5,000 on behaif of five employees that employer had

never reported as covered), Laborers Health & Welfare Trust Fund v

Kaufman & Broad of Northern California, Inc., 707 F.2d 412 (9th Cir

1983) (audit indicated a discrepancy exceeding $1 30,000 due to contro-

versy regarding covered or uncovered status of particular nonumion

labor); Bugher v. Consolidated X-Ray Service Corp., 705 F.2d 1426

(Sth Cir. 1983), reh'g denied, 711 F.2d 713 (1983), cert denied, S52

L.S.L.W. 3844 (U.S. May 21, 1984) (audit uncovered more than

$100,000 due on behalf of covered employees who employer erroneously

believed were not covered); Audit Services, Inc. v. Rolfson, 641 F.2d

757 (9th Cir. 1981) (deficiency of more than $25,000 revealed due to

failure to contribute on behalf of nonunion covered employees). /.4.M

Vational Pension Fund v. Industrial Gear Manufacturing Company.

723 F.2d 944 (D.C. Cir. 1983) (audit revealed that employer had failed

to make payments in excess of $90,000). Based on information

obtained from Central States during the audit process, Arthur Young's

audit records show that as a result of these audits by the Central States

internal audit function, substantial adjustments and recoveries from

employers have been made. For example, in the 12 months since July

1983. there were SO internal audits of employers at an estimated cost to

Central States of $770,000. These audits produced assessments total-

ing $5,540,000 or a potential 7 to | return

18

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 enable a plan to fulfill its statutory audit requirement by

obtaining access to all employee records.

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” ai// employee records of the employer, id. at 811, notwith-

Standing the fact that the internal auditors had found errors and

omissions in the data reported by the employers (Respondents).

This holding failed to consider the statutory requirement imposed

upon the plan's trustees to obtain an independent audit of the plan

and a “clean” or “unqualified” opinion on the plan’s financial

statements free from any “scope” limitation resulting from lim-

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

to the employer records could result in a non-GAAS audit and a

“qualified” or “disclaimed” opinion on the plan's financial state-

ments, it follows that the Sixth Circuit's holding that 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); and

such failure might mandate that the independent auditor obtain

access to those employer records.

Moreover, the holding fails to consider both the monetary ben-

efit such audits result in (supra, n. 7) and the substantial deter-

rent effect they have.

19

B. Access to all Employer Data was Contemplated by

Congress in Order to Ascertain Funding Requirements

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. The employer who created the under-funding then

escapes the liability and the burden is imposed on other employers

who have already paid their fair share.

1. Lack of access to employer data precludes adequate

funding determinations required by Congress

The passage of MEPPAA in 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. Thus in order to minimize the impact of under-

funding, MEPPAA provided that, to the extent multiemployer

pension plans were under-funded, all employers in the plan could

be assessed to cure the under-funding. 29 U.S.C. § 1421 et. seq.

The withdrawal liability provisions of the MEPPAA are a cen-

tral part of the solution adopted by Congress to protect the bene-

fits of participants in multiemployer pension plans. Washington

Star Company v. International Typographical Union Negotiated

Pension Plan, 729 F.2d 1502, 1505 (D.C. Cir. 1984). Upon

complete or partial withdrawal from an on-going multiemployer

plan, the withdrawing employer incurs an immediate liability for

a share of the plan’s unfunded vested benefits, 29 U.S.C. § 1381

et. seg., not just the under-funding caused by the withdrawing

employer. MEPPAA describes a variety of methods by which a

plan may calculate the amount owed by a withdrawing employer.

29 U.S.C. § 1391. In three out of the four methods described,

amounts are reallocated from other employers who, by terminat-

ing their plans without fully funding their liability because of

under-reporting or otherwise, have escaped liability. /d.

EE —————

20

Similarly, 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). Ifa plan terminates,

participating employers may be required to continue to contrib-

ute in order to fund the plan’s unfunded vested benefits of the

terminated plan.

Thus, the burden for such latent benefits due to under-report-

ing falls on all employers* through increased future contributions

to the plan and, probably, increased insurance premiums to the

PBGC. To the extent the latent benefits were caused by previously

withdrawn employers, participating employers and those subject

to plan termination charges become liable for benefits earned by

workers who were never in their employ.

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 U.S.C.

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

gations and withdrawal liabilities cannot be accurately deter-

mined, if they can be determined at all. Accordingly, access to all

employee data to ascertain that all plan participants are reason-

ably accounted for and required contributions made is essential to

the proper administration of multiemployer plans. Thus, the pas-

sage of MEPPAA makes the need for comprehensive audits to

permit reliable assessment of funding liability all the more

critical.

8. As this court recognized in Schneider Moving & Storage Com-

pany v. Robbins, 104 S. Ct. 1844, 1850 (1984), the failure of an

employer which participates in a multiemployer plan to properly fund its

share of the liabilities adversely affects other employers, thus:

“Each of the participating unions and employers has an interest

in the prompt collection of the proper contributions from each

employer. Any diminution of the fund caused by the arbitration

requirements of a particular employer's collective-bargaining

agreement would have an adverse effect on the other

participants.”

21

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 multiemployer plans are

assessed an “insurance premium” to cover both actual and esti-

mated shortfalls in benefit payments because of under-funded

plans. 29 U.S.C. §§ 1301 et seg. The PBGC constantly reviews

both the financial statements and actuarial reports of pension

plans to assess the adequacy of funding. Failure to have reliable

‘nformation 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%)

of the employees eligible to participate in all multiemployer plans,

contributions to multiemployer pension plans will be under-

funded at an initial rate of over $ 100,000,000 per year.“Congress

clearly did not intend such a result: in fact, the legislative history

shows Congress intended the audit and actuarial functions to be

an important line of defense against such potential under-fund-

ing. The decision of the Sixth Circuit is inconsistent with clearly

defined obligations imposed upon both the trustees and independ-

ent auditors by Congress. 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 employees either through ‘nadvertence or

9 In 1978 it was estimated that there were over 8,900,000 employ-

ees participating in multiemployer plans. This number is expected to

grow to 16,000,000 sore, by the year 2000. Assuming the aver-

age employer contribution is $50 a week per “covered” employee as it is

in the National Master Freight Agreement at issue here, there is an

annual under-funding of contributions in excess of $100,000,000 a year

(40,000 omitted participants X $2600). When the lost compounded

earnings that would have been generated by these contributions is taken

into account, the amount of the under-funding becomes staggering.

Using a compounded rate of 10%, within 4% years multiemployer plans

would be under-funded by almost 4 billion dollars if funding were not

provided for over .5% of the covered employees.

22

design. Thus the deterrent effect of the audit process would be

substantially weakened. Finally, the ability to calculate employer

plan withdrawal liabilities is adversely impacted.

WHEREFORE, amicus curiae Arthur Young respectfully

requests that this Court reverse the decision of the Sixth Circuit

Court of Appeals.

Dated: August 9, 1984

Respectfully submitted,

/s/ Carl D. Liggio

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

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APPENDIX

§ 1002. Definitions

For purposes of this subchapter:

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(5S) The term “erployer” 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.

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(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 shail also include --

(i) a financial statement and opinicn, as required by para-

graph (3) of this subsection, and

(ii) an actuarial statement aid opinion, as required by

paragraph (4) of this subsection.

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

istrator of an employee benefit plan shall engage, on beha!f of all

plan participants, an independent qualified public accountant,

who shall conduct such an examination of any financial state-

ments of the plan, and of other books and records of the plan, as

the accountant may deem necessary to enable the accountant to

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form an opinion as to whether the financial statements and sched-

ules 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 consistent

with that of the preceding year. Such examination shall be con-

ducted 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 independent qualified public accountant shall

also offer his opinion as to whether the separate schedules speci-

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

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

ments of this paragraph shall not apply.

(B) In offering his opinion under this section the accountant

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 quali-

fied public accountant has expressed an opinion, if he so states his

reliance.

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

cial staternent containing the following information:

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

ment of assets and liabilities, and a statement of changes in net

assets available for plan benefits which shall include details of

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revenues and expenses and other changes aggregated by general

source and application. In the notes to financial statements, dis-

closures 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 poli-

cies during the year; a description of any significant changes in

plan benefits made during the period; a description of material

lease commitments, other commitments, and contingent liabili-

ties; 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 finan-

cial statements of such pension plan

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(c) The administrator shall furnish as a part of a report under

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

Actuarial statement

(d) With respect to an employee 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 (6)

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

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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 dat* 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 cther 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.

(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.

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(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 sub-

ject to this part shall file with the Secretary --

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

after the close of such year (or within such time as may be

required by regulations promulgated by the Secretary in

order to reduce duplicative filing)

(5S) If the Secretary rejects filing of a report under paragraph

(4) and if a revised filing satisfactory to the Secretary is not

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submitted within 45 days after the Secretary makes his determi-

nation under paragraph (4) to reject the filing, and if the Secre-

tary 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 partici-

pants, to prepare an actuarial statement,

(C) bring a civil action for such legal or equitable relief

as may be appropriate to enforce the provisions of 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

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 cons:stent

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 --

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(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 the aggregate

(b) An alternative method may be prescribed under subsec-

tion (a) of this section by regulation or otherwise. If an alterna-

tive method is prescribed other than by regulation, the Secretary

shall provide notice and an opportunity for interested persons to

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

provisions of such alternative method

§ 1059. Recordkeeping and reporting requirements

(aj)(!) 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 --

(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

(C) has a l-year break in service (as defined in section

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

The employer shall furnish to the plan administrator the informa-

tion necessary for the administrator to make the reports required

by the preceding sentence. Not more than one report shall be

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required under subparagraph (A) in any |2-month period. Not

more than one report shall be required under subparagraph (C)

with respect to consecutive l-year breaks in service. The report

required under this paragraph shall be sufficient to inform the

employee of his accrued benefits under the plan and the percent-

age 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 information nec-

essary 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 regula-

tions prescribed by the Secretary, make the reports, required by

paragraph (1)

§ 1381. Withdrawal liability established; criteria and definitions

(a) If an employer withdraws from a multiemployer plan in a

complete withcrawal! or a partial withdrawal, then the employer

is liable to the plan in the amount determined under this part to be

the withdrawal! liability

(b) For purposes of subsection (a) of this section --

(1) The withdrawal liability of an employer to a plan is

the amount determined under section 1391 of this title to

be the allocable amount of unfunded vested benefits,

adjusted --

(A) first, by any de minimis reduction applicable

under section 1389 of this title,

(B) next, in the case of a partial withdrawal, in accord-

ance with section | 386 of this title,

(C) then, to the extent necessary to reflect the limita-

tion on annual payments under section 1 399(c)(1)(B)

of this title, and

(D) finally, in accordance with section 1405 of this

title

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(2) The term “complete withdrawal” means a partial

withdrawal described in section 1385 of this title.

(3) The term “partial withdrawal” means a partial with-

drawal described in section 1385 of this title.

§ 1382. Determination and collection of liability; notification of

employer

When an employer withdraws from a multiemployer plan, the

plan sponsor, in accordance with this part, shall --

(1) determine the amount of the employer’s withdrawal

liability,

(2) notify the employer of the amount of the withdrawal

liability, and

(3) collect the amount of the withdrawal liability from

the employer.