The DOL’s Employee Benefits Security Administration (“EBSA”) recently completed its report on the quality of audit work performed on employee benefit plans by independent qualified public accountants (“IQPA”) and was not pleased with the results. EBSA reviewed a sample of the 81,000 audits completed as a part of each plan’s Annual Report/Form 5500 filing requirement and found that only 61% of the audits fully complied with the applicable standards or had only minor deficiencies. That means that nearly 4 out of 10 audit reports contained “major deficiencies” which places “$653 billion and 22.5 million plan participants and beneficiaries at risk.”
Even though the DOL may be over-dramatizing the “risk” to plan assets and participants, the report’s findings speak for themselves. In 2011, there were 7,330 different CPA firms performing plan audits. Most of those firms perform only a small number of plan audits and those are the firms that appear to be most concerning to the DOL. The EBSA’s report determined that “CPAs who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate” versus “the firms performing the most plan audits [that] had a deficiency rate of only 12%.”
Many plan administrators have received deficiency notices from EBSA regarding their audit report and have experienced the time, effort, and expense of coordinating and re-submitting their Annual Report/Form 5500 in order to avoid ERISA’s $1,100 per day civil penalty. EBSA is proposing to make the auditors accountable for the deficient audits and responsible for those penalties, but that recommendation would require legislative action from Congress to amend ERISA. The other noteworthy recommendation in EBSA’s report is that the agency should re-evaluate its enforcement targets and focus on CPAs with smaller employee benefit plan audit practices. This recommendation does not require Congressional approval so we expect to see an uptick in IQPA investigations in the near future.
Plan auditors are not the only benefit plan service provider in the EBSA’s enforcement spotlight. The report comes on the heels of the proposed changes to ERISA’s definition of fiduciary that would broaden that definition to include a greater number of service providers giving investment advice for a fee. This sharpened focus on service providers falls in line with EBSA’s trend towards targeting service providers for investigations instead of individual plans.
What does this mean for retirement plan sponsors and administrators?
Although there appears to be a greater EBSA focus on enforcement against plan service providers, it is important to remember that plan fiduciaries are ultimately responsible for the proper administration of an employee benefit plan. Thus, plan fiduciaries should be sure to act in accordance with ERISA in selecting and monitoring plan service providers. With respect to plan auditors, care should be taken to ensure, among other things, that the plan’s auditor is experienced in auditing employee benefit plans and continues to spend a significant time of his or her practice auditing such plans.