In various reviews of the quality of Employee Benefit Plan audits, the Department of Labor (DOL) has found that firms with limited employee benefit plan audit experience have a higher rate of deficient professional work. The DOL’s most recent audit quality assessment for employee benefit plans found that nearly 4 in 10 audits fail to meet professional standards and there is a correlation between the size of a firm’s Employee Benefit Plan practice and the audit quality.
Generally, the Employee Retirement Security Act of 1974 (ERISA) requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file an annual return/report (Form 5500 Series). If your employee benefit plan is required to have an audit, one of your most important duties is to hire an independent qualified public accountant, and to ensure that the plan has obtained a quality audit in accordance with ERISA and DOL requirements.
Why a Financial Statement Audit is Important
Independent audits of employee benefit plan financial statements are an important accountability mechanism. A financial statement audit provides an independent, third-party report to participants, plan management, the DOL and other interested parties that indicates whether the plan’s financial statements provide reliable information to assess the plan’s present and future ability to pay benefits. It helps protect the financial integrity of the employee benefit plan which helps determine whether the necessary funds will be available to pay retirement, health,
and other promised benefits to participants.
The audit may also help plan management improve and streamline plan operations by evaluating the strength of the plan’s internal control over financial reporting and identifying control weaknesses or plan operational errors. The audit also helps the plan administrator carry out its
legal responsibility to file a complete and accurate Form 5500 for the plan with the DOL.
Risks to Plan Administrators if a Quality Audit is Not Performed
ERISA holds plan administrators responsible for ensuring that plan financial statements are properly audited in accordance with generally accepted auditing standards (GAAS). There is a significant amount of risk to plan administrators associated with the audits of their ERISA
plans. As mentioned above, DOL studies of audit quality have identified significant deficiencies in plan audits.
The DOL has implemented various enforcement strategies with respect to audit deficiencies. The penalties for such audit failures can be substantial. In recent years the DOL Employee Benefits Security Administration (EBSA) has significantly stepped up its enforcement of the audit requirement for employee benefit plans. The DOL has the right to reject plan filings and assess penalties of up to $1,100 per day, without limit, on plan administrators for deficient filings.
Because an incomplete, inadequate or untimely audit report may result in a rejection of your filing and penalties being assessed against you as the plan administrator, selection of an experienced and reliable auditor is very important.
While ERISA requires plan fiduciaries to ensure that only “reasonable” compensation is paid for services when selecting an auditor, the reasonableness of the fees must be analyzed in comparison with the quality of the required services to be provided. Hiring a firm that lacks knowledge of the specialized nature of the industry and skills necessary to perform plan audits conflicts with the stated goal of ERISA to protect plan participants. Only after the technical evaluation is complete and the qualified respondents have been identified should you review the prices offered by the qualified respondents.
By: Mark A. Batliner, CPA, CFE | Senior Manager
