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Northwest OH Legal Blog

Tuesday, January 24, 2017

ASK YOUR PLAN’S AUDITORS WHEN THEY WERE LAST AUDITED

          We are all acutely aware that defined benefit plans, defined contribution plans and health and welfare plans are extremely complex and that they are becoming even thorny  with tighter regulations, more United States Department of Labor (DOL) and Internal Revenue Service (IRS) investigations, changes proposed by the Pension Benefit Guaranty Corporation and the intricacies of the Affordable Care Act.  One function that plan fiduciaries perform in order to keep track of the transactions and reporting activities of their retirement plans is the annual audit.  Contributing employers may be subjected to payroll audits by multiemployer plan sponsors.  But all employee benefit plans (EBPs) are required by the Employee Retirement Income Security Act of 1974 (ERISA) to have its financial statements independently audited if there are 100 or more plan participants.  This requirement is one of the elements that an EBP sponsor must fulfill as part of their obligation for file a Form 5500 with the IRS.

Are there other practical reasons to have an annual plan audit?

             Besides being obligated to be sure an annual audit of an EBP is performed, are there practical reasons beyond the, “Because the government said so,” to hire an auditor to perform an annual “check-up” of an EBP’s financial statements?  The American Institute for Certified Public Accounts contends that there are important purposes and benefits that accompany these audits beyond the requirements imposed by ERISA.  For one thing, an annual audit helps protect the EBP’s financial integrity and reinforces promises made to provide benefits.  It allows plan committees and boards of trustees to properly determine whether assets are readily available to pay benefits from an EBP using an unbiased opinion of a third party auditor.  Annual audits may also improve plan management and shape up operations since errors can be found before a governmental audit takes place.

How should we determine who to hire to do the audit?

            The large majority of plan audits, whether they are payroll audits or financial audits are done by auditors, who are normally Certified Public Accountants, hired by a Plan’s Board of Trustees.  But how does a Board of Trustees have assurances that the auditors hired are performing quality audits and that they have sufficient  and current knowledge regarding the regulations and statutes associated with plans governed by the Employee Retirement Income Security  Act (ERISA)?  Enter the Employee Benefit Plan Audit Quality Center (EBPAQC), created and operated through the American Institute of Certified Public Accountants (AICPA) that encourages plan auditors to voluntarily join their organization to enable auditors to perform quality audits in the unique and complex universe of employee benefit plans.  Furthermore, the AICPA also strongly encourages employee benefit plan auditors to participate in peer review audits.  

            The AICPA has had many tools and resources in place to assist professionals who perform audits on employee benefit plans (EBPs).  However, in May, 2015, the DOL called for federal legislation that would allow the U.S. Secretary of Labor to establish iron-clad standards and require advanced education for CPAs who perform employee benefit plans instead of the standards currently set out by the AICPA for plan audits.  The DOL called for control of these auditing standards when it found that 39% of the employee benefit financial audits performed contained major deficiencies. 

            To show the DOL that members of the AICPA wanted to prove that these deficient audits reflected a minority of the CPAs performing EBP audits, the EBPAQC now makes available audit tools and more advanced continuing education and credit-oriented webinars.  Additionally, the firms and CPAs that review their peers are receiving more strenuous training and are taught to spot deficiencies in their peers’ auditing practices and activities.  The group is also attempting to develop a special credential for EBP audit specialists.  The AICPA recommends that professionals who audit EBPs welcome and receive a peer audit review at least every three years.  The AICPA even publishes the names of member-auditors who are deficient in their EBP audits and will recommend on their website that particular CPAs be barred from performing such audits.

How should Plan Sponsors best evaluate their auditor’s credentials?

            So how does a plan sponsor, Board of Trustees or retirement plan committee know if their auditor is doing a satisfactory job when auditing their EBP?  First of all, ask the auditor when their last peer-review took place and if they would share a copy of the results of that peer review.  Second, at least every three years, plan officials should ask the auditor to report the number of EBP plans which he/she services and the content of the continuing education that is taken to stay current with EBP regulations, trends and industry standards.  This inquiry should be made periodically since the DOL’s 2015 investigation revealed that the smaller the size of the EBP auditor’s practice, the greater the incidence of deficient audit elements that were discovered.

            If you are concerned about your auditor’s experience in auditing EBPs or have reason to believe that there are deficiencies in the audits being performed for your plan, consider contacting the AICPA to inquire whether any disciplinary actions related to the audit of EBPs have been brought or are pending against auditors that work on your plan.  And finally, do not panic!  The majority of CPAs  (61% according to the DOL’s investigation results from 2015) performing EBP audits are perfectly trained, well educated in recent regulatory developments and fully engaged in successful efforts to audit employee benefit plans.  However, as a fiduciary, there will always be a duty of due diligence to be sure your auditor is definitely included in the 61% that are diligent in their successful audit efforts and outcomes for your plan.

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