At a recent American Institute of Certified Public Accountants (”AICPA”) conference, the Deputy Assistant Secretary of the Department of Labor Employee Benefits Security Administration reportedly commented that the ERISA benefit plan audits are deficient in over 1/3 of the audits they receive according to their recent survey of filings. In addition, the Employee Benefit Plan Audit Quality Center of the AICPA (“Center”) recently issued a “Plan Advisory” entitled, “The Importance of Hiring a Quality Auditor” http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/Resources/PlanAdvisories/Pages/TheImportanceofHiringaQualityAuditortoPerformYourEmployeeBenefitPlanAudit.aspx.
In the Plan Advisory, the Center lists certain causes for deficient audits as identified by the Department of Labor including:
- Limited experience and training for specialized audits like employee benefit plans;
- Lack of awareness of special issues applicable to ERISA plans;
- Lack of quality review and internal processes for benefit plan audits;
- A limited number of annual audit engagements by the auditing firms;
- Failure of audit firms to perform necessary procedures; and
- Failure of auditors to understand the limited scope audit exception under ERISA for plans whose assets are held in custody with banks or under licensed insurance company contracts.
The Center publication explains the purpose of benefit plan audits, the risks to plan sponsors if the benefit plan audit is deficient and a process for conducting due diligence in selecting a competent auditor.
The Employee Retirement Income Security Act of 1974 (“ERISA”) Section 203, requires plans with over 100 (in some situations, 120) participants to include an opinion on the benefit plan financial statements from an independent accountant with the annual report Form 5500. Smaller plans holding certain types of hard to value assets must also be audited. Failure to file a complete or filing a deficient Form 5500 can subject the plan administrator to Department of Labor fines up to $1,100 per day without a cap. The 18 page Plan Advisory includes a link to a list of auditing firms around the U.S. who are members of the AICPA Employee Benefit Audit Quality Center. The Center’s members agree to apply the Center’s standards and best practices for performing benefit plan audits.
The Plan Advisory also outlines an RFP process for obtaining information on potential auditors’ qualifications and experience. The Plan Advisory notes (appropriately), that if assets of the plan are or may be used to pay audit fees, such fees must be “reasonable” in order to avoid ERISA prohibited transaction penalties and fiduciary violations. However, plan sponsors are not required to select the lowest cost provider if doing so is not in the best interests of the plan participants. After all, one of the major purposes of the audit is to protect plan participants’ benefits under the plan.
The Department of Labor (“DOL”) is still evaluating its survey information on the quality of benefit plan audits. Whether the DOL will adopt new measures to “qualify” benefit plan auditors is yet to be seen.