By Brian Morrison, Partner
In general, all employee benefit plans with 100 or more participants are required to have an audit as part of their obligation to file an annual report. If your organization’s employee benefit plan is required to have an audit, it’s the plan administrator’s duty to hire an independent qualified public accountant to carry it out. By working with a professional, you can ensure that the plan has obtained a quality audit in accordance with the Employee Retirement Income Security Act of 1974 (ERISA) and the U.S. Department of Labor (DOL) requirements.
Choosing an auditor that provides a high quality audit is more important than ever, as recently the DOL released its’ report on Assessing the Quality of Employee Benefit Plan Audits. An excerpt from the report is as follows:
The EBPAQC prepared this summary of frequent (5 or more) deficiencies noted by the Department of Labor (DOL) in its review of 400 ERISA plan audits and which DOL deemed the finding to be an “unacceptable, major” deficiency with respect to one or more relevant GAAS requirement. Deficiencies found in 20 or more audits (5% of total audits reviewed by DOL) are in bold. (Source: DOL Employee Benefits Security Administration (EBSA) report, Assessing the Quality of Employee Benefit Plan Audits (May 2015)
A quality audit will help protect the assets and the financial integrity of your employee benefit plan. Additionally, a thorough audit ensures that the necessary funds will be available to your participants when/if they need them, while also helping you carry out your legal responsibility to file a complete and accurate annual report. Meaning, the higher the quality of a plan’s financial statement audit, the more reliable the information used to manage and administer the plan. Therefore, when looking for a quality employee benefit plan auditor you should examine the following two areas in depth and answer the corresponding questions:
1. Firm Qualifications
What are the size, location and history of the accounting firm?
The size, location and history of the accounting firm are important factors in the selection process.
Size – The size of the audit firm generally provides a gauge of the resources that a firm has to help navigate the complex regulatory issues associated with employee benefit plans or other areas of specialty such as tax or other professional services and the availability of the firm to meet your required deadlines
Location – Having a firm with a local office provides a venue for more timely communications, more efficient audits and more timely resolution of issues.
History – The history of the audit firm tells you a lot about its stability over time and its ability to meet client expectations. A firm that has an established history is an important selection factor.
That being said, audit firms can take a number of actions to ensure the quality of their employee benefit plan audits including; having the firm undergo a peer review, having a dedicated employee benefit plan department, providing employee benefit plan continuing education to firm personnel, and being a member of the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC). The benefits of each can be seen below:
Peer Review – Peer reviews are done to assess professional competence and audit quality. Firms belonging to the AICPA are required to have their practice reviewed by an outside firm every three years. A firm that has undergone a peer review, including review of at least one employee benefit plan audit, and has been found to comply with professional and ethical standards without qualification, is the best firm to select as part of your fiduciary duty to the plan. Ask to see the Peer Review report letter to guarantee that you are getting a high quality experienced firm.
Employee Benefit Plan Department – If a firm has an Employee Benefit Plan Department, the firm can utilize the specialized knowledge of the department, to produce a meaningful audit and management letter for your company and plan trustees.
Employee Benefit Plan Continuing Education – All auditors, including auditors of employee benefit plans, are required to keep up to date with changes in the law, regulations and professional standards and practices. While the number of courses and programs necessary to stay current will vary from time to time, your employee benefit plan auditor should be able to show that he or she as well as other staff members involved in the audit, have a thorough, current knowledge, and understanding of the operations and fiduciary responsibilities of employee benefit plans. The more hours of training a firm has in place for employee benefit plans, and the more recent the training, the more likely it is fully qualified to do the audit. Ask about your CPA’s continuing education in employee benefit plan audits.
Professional Organizations – To help CPAs meet the challenges of performing quality audits in this unique and complex area, the AICPA has established the EBPAQC, a firm-based voluntary membership center for firms that audit employee benefit plans. EBPAQC membership requirements include, the completion of employee benefit plan-specific continuing professional education courses for all individuals signing benefit plan audit opinions, as well as those professionals of the firm who manage employee benefit plan audit engagements. Additional requirements include, monitoring procedures relating to the quality control standards over the firm’s employee benefit plan audit practice, as well as making publicly available information about its most recently accepted peer review report.
2. Engagement Approach
What is the audit approach and what will you examine during the audit?
An audit of an employee benefit plan is a thorough examination of the plan assets, liabilities and operations. Firms use different approaches, but generally their examination will include the following:
- Review of payroll records to see that eligibility and hours of service are being properly determined.
- Review of selected participant documents for completeness
- Review of timeliness of deposits of employee contributions to the plan.
- Review of plan loans and hardship withdrawals
- Determination that plan contributions comply with the plan document provisions and that they are made in a timely fashion.
- Review of the method used to allocate defined contribution plan contributions to participants or the actuarial assumptions and calculations used in defined benefit plans.
- Funding status of the plan if applicable—is there a shortfall?
- Check status of benefit payments and method of computation and payment, including verification of tax withholding and IRS reporting and procedures to find “lost” terminated participants.
- Review of Form 5500 and other required governmental forms.
- Prohibited transactions and their resolution.
What are the expected staffing levels and completion dates for each portion of the audit?
The commitment of the firm to staff continuity and executive participation in the employee benefit plan audit are very important factors for getting the highest quality audit possible. Furthermore, you should request the biographies of those staff that would be assigned to your audit to make sure that they have the technical expertise and experience needed to successfully navigate the regulatory environment and provide value added recommendations.
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