Generally, benefit plans with 100 or more participants are required to have an audit performed annually in conjunction with the filing of their Form 5500. If you are undertaking an employee benefit plan audit, there are several questions you should ask to ensure that the audit firm is qualified for this type of audit.
The Department of Labor (DOL) holds plan sponsors responsible to ensure that plan financial statements are properly audited in accordance with generally accepted auditing standards (GAAS), the framework under which auditors exercise their professional responsibility.
Unfortunately DOL stats show that over 30% of audits performed have deficiencies – a compelling reason to ensure you choose your auditor carefully.
This responsibility represents a significant risk to plan sponsors and due care should be exercised during the selection process. Unfortunately, many of the audits performed on employee benefit plans are deficient. Plan sponsors need to know that their CPA firm is actually qualified to perform this type of work.
The DOL has identified certain factors that it believes contribute to whether employee benefit plan audits comply with professional standards and GAAS. The factors the DOL identified include:
- The size of the CPA firm performing the engagement
- The adequacy of technical training and knowledge on the part of the accountants conducting plan audits;
- Awareness of the auditors of the uniqueness of plan audits;
- Whether the auditors have established adequate quality review and internal process controls and;
- The extent of audit work performed by the CPA firm.
So how do you evaluate audit firms? There are several questions you should ask to ensure that the audit firm is qualified for this unique type of audit.
Is the firm a member of the AICPA Employee Benefit Plan Audit Quality Center (EBAQC) and to what other professional organizations does it belong? Compliance with rigorous standards and practices specific to employee benefit plan audits is central to the EBAQC. There are also national affiliations of independent accounting firms formed specifically to act as forums to share technical resources. A good firm will have established professional relationships with attorneys, actuaries, and consultants, within their local benefits community and nationally.
What percent of the audit practice is comprised of employee benefit plan work? Ask how many plan audits they have performed in the last two to three years. One of the most common reasons for deficient plan audits is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. Consider an audit firm that views employee benefit plan audits as a core industry and not as “summer work.”
What is the size of the audit firm? The DOL noted a correlation between the size of the firm and the probability of audit deficiencies. Most notably, firms with 20 or fewer employees were responsible for almost two-thirds of the deficient audits reviewed. Many firms utilize their staff as both tax and audit professionals, meaning the staff perform tax work during tax season and then perform employee benefit plan audits during the summer. A good firm will have professionals whose sole focus is on audit matters and audit standards. An even better firm will have audit professionals specifically devoted to employee benefit plan audits.
Have the firm’s plan audits undergone an AICPA peer review or review by the Public Company Accounting Oversight Board (PCAOB) or the Department of Labor? 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 CPA firm every three years. The plan sponsor should also inquire as to how many employee benefit plan audits were selected in the review process and the outcome of the reviews. Ask to see the Peer Review report letter and see if the firm received a rating of “pass.” Firms that audit public companies which file a Form 11-K with the SEC are subject to inspection by the PCAOB. Ask to see the public portion of that report. Finally, the DOL may perform various levels of review of plan audit workpapers. Ask to see the results of such reviews or if they received a clean “no change” letter.
Does the firm have in-house expertise regarding the Employee Retirement Income Security Act (ERISA) to assist in resolving operational, demographic, and plan document issues? Employee benefit plan teams should have experience with qualified plans, welfare benefit plans, and 403(b) plans. This experience is evidenced by a solid understanding of ERISA, DOL, and IRS compliance requirements including, but not limited to, correction of plan defects and reporting and disclosure. Having this expertise in-house can assist in the timely resolution of any operational, demographic, and/or plan document issues encountered during an audit.
How thorough is the firm’s training program, and how does the firm keep current with changes in laws and regulations? One of the basic tenets of GAAS requires that a qualified firm possess adequate technical competence to complete the engagement. Audit teams should be receiving intensive training each year, including specialized training for audits of employee benefit plans. This training should also include education related to legislative changes and current events in the employee benefits industry.
What are the firm’s internal processes used for quality assurance? The accounting and auditing practice for every firm should be governed by a Quality Control Document (QCD). This document states the guidelines governing a firm’s practice on a day-to-day basis. A good firm will have a section of the QCD specifically related to the audits of employee benefit plans.
What are the key areas of the firm’s audit work and what will be examined during the audit? Frequently, audits are found to be deficient because of the failure of the auditor to conduct tests in areas unique to employee benefit plans. Audit areas related to participant data, plan obligations, participant loans, benefit payments, and party-in-interest/prohibited transactions are unique to employee benefit plans and are the areas where most audit failures occur.
By asking some key questions during the section process the plan sponsor can make sure that they have chosen a strong plan auditor that will provide an efficient and effective audit.
About the Blogger
Chris Etheridge is the leader of Frazier & Deeter’s Employee Benefit Plan Audit Practice. He is a member of the AICPA’s Employee Benefit Plan Audit Quality Center and he is a columnist for the Journal of Pension and Benefits.