The U.S. Department of Labor conducted a 2015 study of the quality of Employee Benefit Plan (EBP) Audits for the 2011 filing year. They looked at who audits EBPs, the size of CPA firms performing them, the proportion of each CPA practice devoted to them and the overall quality of audits performed. In doing so, they found that 61% of the audits performed were in line with Generally Accepted Auditing Standards (GAAS). However, 39% of the audits contained major deficiencies which could jeopardize plan qualification and result in rejection of Form 5500.
CPA firms who performed the most EBP audits had a 12% deficiency rate while those who performed the fewest had a 76% deficiency rate. Therefore, if a very small portion of a CPA firm is devoted to EBP audits and training of staff is not specific, the quality of the resulting audit work suffers. Plan Fiduciaries should keep this in mind when hiring a CPA firm to audit their EBPs. A tax accountant is not going to be as effective at auditing timeliness of employee contributions, vesting percentages and benefit payments, resulting in added risk for plan Fiduciaries.
Even the most diligent plan sponsors do not run retirement plans without operational errors. There are many moving parts and plenty of opportunities for mistakes. The annual audit of the plan by a CPA provides an opportunity to address operational errors before a regulator puts the plan under a microscope. Rest assured that DOL and IRS agents are trained to uncover errors in EBP plans and they will find what you have missed. When they do, you’ll face financial consequences and civil penalties.
As a courtesy, and because the DOL knows 4 out of 10 audits are deficient, they recently sent a message to all large plan filers which included tips for selecting and monitoring plan auditors. Here are a few things to consider:
- The number of employee benefit plans and the type of plans the CPA audits each
- The extent of specific annual training the CPA receives;
- 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 has been referred to the AICPA for investigation;
- Whether or not the CPA’s employee benefit plan audit work has been subject to a Peer Review.
There is talk about amending the ERISA definition of “Qualified Public Accountant” to add new qualification requirements aimed at improving EBP audit quality. Until then, Plan sponsors are on the hook when it comes to selecting a CPA for their EBP audit. My advice – avoid unwanted surprises and hire an expert!