Economic Fallout Casts Spotlight on Pension Accounting

Auditors of companies with large defined benefit plans would be wise to pay extra close attention to their clients' pension accounting this year, as investors and analysts cast a wary eye on corporate pension woes.

Reasons for concern:

  • Effects on profits. A report issued by Morgan Stanley this summer points out that net pension surpluses among S&P 500 companies were $235 billion in 2000, but tumbled 98% to only $4 billion in 2001. Some companies are likely to have deficits in 2002, resulting in lower operating profits in 2002 or 2003.

  • Going concern risks. A clear danger for companies with underfunded pensions is that they could end up in technical defaults on their loans and bonds, thereby jeopardizing their ability to continue as going concerns.

  • Criticism of accounting standards. UBS Warburg, the Swiss banking giant, points out that U.S. accounting techniques "delay and only partially recognize changes in asset market values." They also smooth or amortize these changes over a long period leading to "balance sheet values of net pension liabilities or assets that are often completely meaningless." UBS notes that 118 of the 355 S&P companies with defined benefit pension plans show a surplus on their balance sheets when the fund is really in deficit. ("Accounting tricks can't hide the big squeeze on pensions," Financial Times, October 2, 2002.)

David Blitzer, chairman of Standard & Poor's index committee predicts pensions will replace stock options as the big corporate accounting issue next year. The full impact may not be felt for two to four years because companies are not required to contribute funds until pension assets fall below 85% of liabilities. But Nancy Webman, editor of Pensions and Investments, is hoping companies will disclose more details to investors. "With all the accounting scandals and all that," she said, "It's possible some companies will be more upfront."

You may like these other stories...

The Public Company Accounting Oversight Board (PCAOB) on Tuesday adopted a new auditing standard and amendments in three areas of the audit that could pose an increased risk of material misstatement in company financial...
Read more from Larry Perry here and in the Today’s World of Audits archive.In my last article, I presented an overview of one of the first steps in the preplanning phase of an audit engagement: reviewing prior year...
Read more from Larry Perry here and in the Today’s World of Audits archive.AU-C Section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks (SPFs),...

Already a member? log in here.

Upcoming CPE Webinars

Sep 24
In this jam-packed presentation Excel expert David Ringstrom, CPA will give you a crash-course in creating spreadsheet-based dashboards. A dashboard condenses large amounts of data into a compact space, yet enables the end user to easily drill down into details when warranted.
Sep 30
This webcast will include discussions of important issues in SSARS No. 19 and the current status of proposed changes by the Accounting and Review Services Committee in these statements.
Oct 23
Amber Setter will show the value of leadership assessments as tools for individual and organizational leadership development initiatives.
Oct 30
Many Excel users have a love-hate relationship with workbook links. For the uninitiated, workbook links allow you to connect one Microsoft Excel spreadsheet to other spreadsheets, Word documents, databases, and even web pages.