EBP Audits, Auditors Not Created Equal
Joseph Reinhardt, CPA
09.15.2016 | Client Alert
Federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/ report (Form 5500 Series). But it’s important to remember in choosing an auditor for your plan that not all audits, and not all auditors, are created equal.
Consider this: A recent study by the U.S. Department of Labor (DOL) found that 4 out of 10 employee benefit plan audit reports contained major deficiencies with respect to one or more relevant Generally Accepted Auditing Standards (GAAS) requirements. There’s a lot at stake: those deficiencies could put $653 billion and 22.5 million plan participants and their beneficiaries at risk.
The study also showed that the greatest percent of plan audits were deficient in firms that only audit 1-2 plans annually. And despite the deficiencies found by the DOL in the plan audits included in the study, a significant number of these firms conducting the audits received clean peer review reports.
What does this mean? It means that when it comes to quality benefit plan audits, size and experience really do matter. It also means that, in some instances, you get what you pay for: the lowest price does not guarantee a quality audit.
A deficient audit can also be costly. The DOL has implemented various enforcement strategies – i.e., penalties – with respect to audit deficiencies. The DOL can assess penalties on plan sponsors of up to $1,100 a day, capped at $50,000, per annual report filing where the required auditor’s report is missing or deficient. That’s why, as a plan sponsor, you should be careful in selecting your auditor.
The audit deficiencies noted by the DOL in this study were widespread and included, among other things:
- Failure to properly test participant data and forfeitures;
- Failure to properly test investments;
- Failure to properly test contributions and certain participant data;
- Failure to properly test distributions, withdrawals, and claims payments;
- Failure to properly test and disclose related parties, parties in interest, prohibited transactions;
- Failure to understand testing requirements on a limited scope engagement;
- Improper use of the limited scope exemptions;
- Inadequate disclosures related to participant-directed investment programs;
- Incomplete description of the plan and its provisions;
- Failure to properly report on and/or include the supplemental schedules required by ERISA and DOL;
- Failure to disclose tax years that remain subject to examination by major tax jurisdictions; and
- Failure to conform the auditor’s report to new clarified standards.
There are a number of questions you can ask a new auditor or your existing auditor to get a better sense if the audit firm is right for your plan.
For example, if you are interviewing a new auditor for your plan or preparing a Request for Proposal, consider these questions:
- How many plans does the firm audit each year?
- Is your firm a member of the AICPA Employee Benefit Quality Center? Member firms must adhere to higher standards of audit quality in their policies, procedures, and training.
- Have your workpapers ever been reviewed by the DOL? If so, were there any findings?
- Who will lead your engagement? How much experience does he/she have auditing plans?
- Does the Firm meet the independence standards of the AICPA and DOL?
- What is the Firm’s policy regarding work paper retention?
- Does the firm have adequate insurance coverage (errors & omissions, workers’ compensation, etc.)?
- Does the engagement letter document the specific terms of the audit engagement, including a proposed schedule, cost, management responsibilities, etc.
Evaluate your current auditor by asking a series of simple questions, such as:
- Does your auditor ask about the timeliness of contributions?
- Does your auditor request bank statements?
- Does your auditor ask for a Summary Plan description, plan amendments, and other pertinent plan documents?
- Does your auditor ask to review loan applications?
- Does your auditor send confirmations to plan participants?
The hiring of a plan auditor is considered a fiduciary function. Use the same care and due diligence in hiring a plan auditor that you would use when hiring an individual or organization that provides services to the plan.
Questions: Contact your Berdon advisor or Joseph Reinhardt, CPA, Chair Employee Benefit Plan and Labor Union Practice, Berdon LLP New York Accountants