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Audit Risk – Do you know who is performing your plan's audit?

05/03/2016  |  By: Mark Blackburn, CPA, Shareholder, Audit and Advisory

In November 2015, many plan sponsors received an email from the Department of Labor (DOL) about selecting and monitoring a plan auditor.  The email contained a reminder that “selecting a qualified CPA who has the expertise to perform an audit…is a critical responsibility in safeguarding your plan’s assets and ensuring your compliance with ERISA’s reporting and fiduciary requirements.”  It went on to remind plan administrators that “employee benefit plan audits have unique audit and reporting requirements and are different from other financial audits.  Care should be taken by the plan administrator to select a CPA who possesses the requisite knowledge of plan audit requirements and expertise to perform the audit…”  Finally, plan sponsors were told that “substandard audit work can be costly to plan administrators and sponsors.”

Why did the DOL feel the need to send this letter to plan sponsors?

Earlier in 2015, the DOL released a report titled, “Assessing the Quality of Employee Benefit Plan Audits.”  The study reviewed the audit workpapers for a sample of 400 plan audits from the 2011 filing year.  The review found that only 61% of the audits fully complied with professional auditing standards.  However, 39% contained major deficiencies that would lead to a rejection of a Form 5500 filing.  The report included the table below, which shows the deficiency rates based on the number of employee benefit plan audits the CPA firm performed (for example, the 1-2 strata includes 95 reviews from CPA firms that only performed 1-2 employee benefit plan audits). 

Major Deficiency Audit Rates

Strata Audit
Reviews
Audits With
Deficiencies
Standard
Error
Lower
Bound
Upper
Bound
1-2  95 75.8% 4.4% 66.1% 83.4%
3-5 95 68.4% 4.8%  58.3% 77.0%
6-24 95 67.4% 7.7% 50.9% 80.4%
25-99 65 41.5% 9.7% 24.4% 61.0%
100-749 25 12.0% 4.9% 5.2% 25.4%
750+ 25 12.0% 8.0% 3.0% 37.8%
Total Reviewed 400 38.8% 3.5% 32.2% 45.9%

Not surprisingly, the first finding included in the report was that “there is a clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed.”  Other findings included in the report included “CPA firms that were members of the AICPA’s Employee Benefit Plan Audit Quality Center tended to produce audits that have fewer audit deficiencies,” and “training specifically targeted at audits of employee benefit plans may contribute to better audit work.”

What does this mean to you as the plan sponsor?

The DOL was not pleased with the outcome of its study.  As shown in the following chart from their report, audit quality has continued to decline over the years.

Results of Prior Audit Quality Studies

Audit Quality Study 1988 1997 2004 2014
Audits  With  GAAS Deficiencies 23% 19% 33% 39%

The DOL made several recommendations based on the findings of the report. The first enforcement recommendation was to revise case targeting to focus on (a) CPA firms with smaller benefit plan audit practices that audit plans with large amounts of plan assets, and (b) CPA firms in the 25-99 plan audit strata given their high deficiency rates and the amount of plan assets and plan participants at risk from deficient audits.

What can you do about it?

In the email sent to plan sponsors, the DOL provides a link to a pamphlet that they prepared “Selecting an Auditor for Your Employee Benefit Plan.”  The DOL recommends considering the following factors to ascertain the qualifications of a CPA firm:

  • The number of employee benefit plans the CPA audits each year, including the type of plans
  • The extent of specific annual training the CPA received in auditing plans
  • The status of the CPA’s license with the applicable state board of accountancy
  • Whether the CPA has been the subject of any prior DOL findings or referrals, or has been referred to a state board of accountancy or the AICPA for investigation
  • Whether or not your CPA’s employee benefit plan practice has been reviewed by another CPA (“Peer Review”) and, if so whether such review resulted in negative findings

You may also want to ask if your CPA firm is a member of the AICPA’s Employee Benefit Plan Audit Quality Center.

The message being sent by the DOL is clear.  Plan sponsors need to make sure that they are engaging a qualified CPA firm to their employee benefit plan audit.  As a plan sponsor, it is important to document the process you went through to select your plan auditor.