The Employee Retirement Income Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have their annual reports audited. Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits. Here are the risks that plan administrators face if audit deficiencies occur and some ways to evaluate an auditor’s qualifications to minimize those risks.
Assessing the risks
Under ERISA, plan administrators are responsible for ensuring that benefit plan financial statements follow U.S. Generally Accepted Accounting Principles (GAAP) and are properly audited. Independent audits of plan financial statements help stakeholders assess whether they provide reliable information about the plan’s ability to pay retirement, health and other promised benefits to participants. They also help management evaluate and improve internal controls over the plan’s financial reporting.
When benefit plan audits discover deficiencies, the errors and omissions are often linked to inadequate auditor qualifications. Auditors who specialize in benefit plan audits are likely to enroll in specific continuing professional education related to benefit plan audits. This training familiarizes specialists with the nuances of benefit plan practices, operations and rules.
Administrators who hire unqualified plan auditors face substantial penalties from the U.S. Department of Labor (DOL). In addition, plan administrators have fiduciary responsibilities to obtain quality plan audits. Those individuals who don’t follow the basic standards of conduct under ERISA and DOL regulations may be personally liable to restore any losses to the plan.
Selecting a qualified auditor
The DOL points to extremely low audit fees as a warning signal that an audit may be deficient. So, plan administrators should carefully evaluate an auditor’s qualifications, rather than simply accept the lowest-bid contract offer. Only after the technical evaluation is complete and the qualified respondents have been identified should the administrator review the audit fees quoted by the qualified respondents.
Evaluating auditor qualifications requires consideration of licensing and independence rules. Independent plan auditors don’t have any financial interests in the plan (or the plan administrator) that would affect their ability to render an objective, unbiased opinion about the plan’s financial statements. The DOL doesn’t consider a plan auditor to be independent if the audit firm or any of its employees also maintain the plan’s financial records.
Qualified auditors will have expertise and training in the following areas:
- Fair value of plan assets covered by the audit,
- Unique aspects of plan obligations,
- Timeliness of plan contributions,
- Effects that plan provisions may have on benefit payments,
- Allocations to participant accounts, if applicable,
- Issues that may affect the plan’s tax status, and
- Transactions prohibited under ERISA.
In addition to understanding the DOL, ERISA and IRS regulations that apply specifically to benefit plans, qualified auditors must grasp other matters that may complicate plan reporting. These include changes to the plan document; plan mergers, freezes or terminations; and changes in service organizations.
When evaluating potential auditors, discuss the auditor’s work for other benefit plan clients and obtain references. Also review the audit team’s continuing professional education records over the last three years to determine whether they possess recent benefit-plan-specific training.
The American Institute of Certified Public Accountants (AICPA) provides recommendations on how to put together a comprehensive request for proposal (RFP) that can be used to evaluate bidders. Comprehensive RFPs provide detailed explanations of the audit engagement, including its objectives, scope, special considerations and expected timeline.
Interviewing prospective auditors
Once a plan administrator has weeded out unqualified respondents to its RFP, he or she should invite the finalists to present and discuss their proposal letters. Consider asking prospective auditors the following questions during the interview process:
- Is the firm a member of the AICPA Employee Benefit Plan Audit Quality Center?
- How many benefit plan clients does the firm serve?
- How many similar plan audits has the firm performed in the last two years?
- In which states is the firm licensed to practice?
- Is the firm subject to any current litigation related to its employee benefits practice?
- Has the firm been the subject of any DOL findings or referrals?
- Has the firm been the subject of any AICPA or state society ethics referrals?
- Does the firm meet the independence standards of the AICPA, DOL and Securities and Exchange Commission, if the plan’s financial statements will be included as part of an 11-K filing?
- Does the firm have insurance coverage for workers’ compensation, as well as errors and omissions?
Also consider asking prospective auditors to provide a copy of their firms’ latest peer review report. A clean peer review report can provide additional assurance that a firm is applying best practices when auditing benefit plans.
Covering your assets
Not every CPA is qualified to audit employee benefit plans. These engagements require specialized training and experience. Plan administrators who prepare comprehensive RFPs to systematically evaluate prospective auditors create a paper trail that documents their commitment to quality and due care.