Tip for May 2017
A recent study performed by the DOL found that a startling number of employee benefit plan audits were deficient. The DOL study also found that there was a “clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed.”
The DOL found that 33% of audit reports reviewed failed to comply with one or more of ERISA’s reporting and disclosure requirements. It believes that this error rate is at an unacceptably high level.
What to Look for in an Audit Firm
Selecting an auditor for an ERISA employee benefit plan is a fiduciary act. A CPA needs to be selected and monitored with the same demonstration of prudence used to hire any provider to such a plan.
The DOL identified several factors that contributed to whether employee benefit plan audits complied with established professional standards. These factors included:
- the size of the CPA firm performing the engagement;
- the adequacy of technical training and knowledge on the part of CPAs conducting employee benefit plan audits;
- the awareness of CPAs of the uniqueness of employee benefit plan audits;
- whether CPAs have established quality review and internal process controls;
- the perception by plan administrators and/or CPAs of the importance of employee benefit plan audits beyond fulfilling a governmental regulatory requirement;
- the amount of audit work in the CPAs overall practice;
- the failure of CPAs to perform necessary audit work;
- the failure of CPAs to understand the limited scope audit exception; and
- the period of time available to adapt to new technical guidance.
TIPs:
Where Enforcement Action is Headed
Under current law, there is no specific duty for a plan administrator or the plan’s CPA to communicate directly to the DOL when certain serious events called “irregularities” and/or other specified events (e.g., termination of the plan’s auditor) have occurred. The plan administrator currently is required to report certain of these events to the DOL through the filing of the plan’s Form 5500 Annual Report as long as 21 months after the event has occurred.
- The DOL has submitted a legislative proposal that would require the plan administrator to notify the DOL within five business days after the plan administrator first has reason to believe or after notification by the plan’s auditor that an “irregularity” may have occurred.
- Additionally, the legislative proposal would require CPAs to make such notification to the DOL in the event that the plan administrator fails to do so.
- Just as you periodically evaluate your plan’s vendors of operational services like recordkeeping and investment advice, your plan’s CPA should be vetted against industry standards, too. Those standards are changing rapidly.
Remember, a deficient plan audit can result in a determination by the DOL that the sponsor violated its fiduciary duty.
