 Hello and welcome to this session in which we will discuss the Department of Labor ethical standards when it comes to the CPA exam The first thing we want to understand is something called employee benefit plan. What is an employee benefit plan? It's a plan established by either the company or the union or both to maintain a pension plan for their employees Which we call participant simply put back in the 50s 60s 70s and even in the 80s Most companies had a pension plan. What is a pension plan? You work for a company For 15 20 30 years once you retire the company will pay you a certain amount of money Now it's important to understand those pension plan in historical context And why do we have this ERISA or the Department of Labor ethical standard? Back in the 50s and 60s pension plan were infiltrated by the mafia by the mob And if you watch mob movies like one of them is a good fellows It's it's not the best one for this topic, but they do touch upon this It's basically the mob was was infiltrating the dose plans through the union and misusing the money or even Outright stealing the money using it for some other purpose So what the government wanted to do is protect the participant and to protect the participant You wanted to make sure the benefit the benefit It means the funds that the company is putting away in that plan is protected Through either some sort of an insurance policy or self-funded arrangement But the money is there and the money is protected. So the government introduced this Employee Retirement Income Security Act or ERISA in 1974 and who enforces ERISA the Department of Labor So basically the government says going forward We are going to make sure those benefit plan report on an annual basis their figure to us Audit figures to make sure that the what they promised their employee will be there So the participants their participants are protected now when we do the audit when the auditor do the audit The audit has to follow the government auditing standard But the most important thing is the auditor must be independent So when the auditor conduct that audit of the employee benefit plan that gets submitted to the government that Making sure everything is good. The auditor themselves must be independent simply put You don't want the auditor to be part of the good fellows part of the mob That's that's the idea and I doesn't have to but that's the idea is your order must be independent to protect the public now What is independence as when it comes to the auditor before we proceed any further? 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We're gonna see what a member is has any financial interests Direct financial interests or any material indirect financial interests in the plan So simply put you cannot have any direct financial interests and any material indirect financial interests So you could have any material indirect financial interests. That's fine Now what is a member the member is pretty comprehensive all partners or shareholder employee of the firm and the whole firm and all professional employee participating in the audit also those are covered member or Located in an office of the firm participating in a significant portion of portion of the audit So notice member covered a lot Also, the auditor cannot be the plan sponsor or promoter. You cannot play those roles underwriter of the plan Invest and you cannot be an investment advisor to the plan voting voting trustee director officer or employee So what is the again? What is the plan? The plan will have assets will have Stocks will have bonds will have all sorts of investments The auditor cannot be any of this when it comes to the plan also the auditor cannot maintain the books of the plan And that's should be common sense to us You cannot maintain the books and audit your own work basically you're auditing your own work Also, the auditor cannot be party in interest with the plan What does that mean means you cannot buy and sell anything to the plan any stuff to the plan any investments Buy it from them sell it from them advise them so on and so forth Why because there's always the potential of conflict of interest and you have to be what? independent From the plan itself We also need to know when is independence is not impaired because that's what they test you on the example give you a scenario I'd say is independent impaired or not. Well Other professional services as long as they're not prohibited as we saw on the prior slide for example tax. That's fine Also, they always talk about the actuary. That's fine The plan can use as the an actuary that is also associated with the accountant What is an actuary an actuary is a specialist there's a field called actuarial science Where those actuaries it's really a tough exam much harder than the cpa exam much much harder And the actuary they will estimate The liability how much the company is responsible for in order to have that plan fully funded Based on the number of employee how long they're going to live so on and so forth now the plan Can use an actuary and that actuary can also be hired by the accountant for other purpose. That's fine There is no conflict of interest here Also the firm hired a former officer or employee That is this associated from the plan or the plan sponsor. That's fine as long as you are this associated And the employee don't work on the audit for the period for which he or she was an employee of the plan or the plan sponsor So it's okay to hire them as long as they this this associated themselves left left the plan And you don't allow them to work on an audit for the same period for which they were also an employee of the plan or the plan sponsor That does not Impair independence So the questions on the exam revolves around what is independence when it comes to the department of labor ethical standard And when the situation is not a violation of independence. Remember the department of labor Establishes enforces irisa and what's the purpose of irisa is to protect Your grandpa your grandma who has a pension plan? Why because you don't want that money to be embezzled So that's the purpose of it So you have the auditor auditing the plan and submitting the audit to the to irisa to make sure everything is good What should you do now go to farhat lectures look at mcqs specifically The previously released a icpa questions. They usually recycle them or they recycle the concepts Easy points on the cpa exam take it seriously. Good luck study hard. I'm always here to help you and stay safe