July 1, 2021
Cutting Costs? Here’s Why Not to on Your EBP Audit
As a plan administrator, why should you care about the quality of your employee benefit plan’s (EBP’s) financial statement audit? One reason might be knowing that you got what you paid for. But another reason might be knowing that you won’t have to pay more in the long run. In addition to gaining peace of mind over your organization’s retirement and health plans, an efficient and effective plan audit can result in the best use of a plan sponsor’s time and resources and can even come with additional benefits.
Audit quality continues to be an area of focus for the U.S. Department of Labor (DOL) and an ongoing challenge to regulate when close to 5,000* CPA firms audit 83,000* of the country’s retirement and health plans. The DOL continues to implement enforcement strategies in response to significant deficiencies in plan audits that were identified during its study on audit quality, including substantial monetary penalties for plan administrators as a result of audit failures. The DOL has the right to reject plan filings and can also assess penalties of up to $2,259 per day for failure to file. In addition, the Internal Revenue Service (IRS) charges penalties, which can include $25 per day that a filing is late, up to $15,000. Audit firms that perform deficient work can also be reprimanded, including disciplinary referrals to state boards of accountancy and detriment to their professional reputation and licensure.
The DOL is developing outreach programs to better educate plan administrators on their responsibilities as they relate to financial statement audits. In November 2019, the ERISA Advisory Council provided the Secretary of Labor with various recommendations for the DOL to provide plan administrators new educational resources and access to tools and data regarding the uses of financial statement audits. These resources can assist plan administrators in selecting, retaining, and interacting with the independent auditor of the plan’s financial statements as well as understanding some of the most common deficiencies found in plan audits.
Why you should care about audit quality
Undergoing an audit can be a disruption from the daily responsibilities of an organization and minimizing that time and disruption can be a huge benefit. However, it is important to understand the difference between an efficient audit and a deficient audit. An efficient audit team is:
- Organized: Efficient teams have an organized process and regular communication throughout the audit
- Knowledgeable: Experienced EBP audit teams understand how plans function and how to audit them
- Up-to-date: They have their finger on the pulse of the latest IRS and DOL regulations that can impact your plan and will keep you apprised of industry, regulatory and financial reporting changes
In addition, a specialized EBP auditor may be able to offer recommendations for improvements to streamline plan operations and internal controls based on experience. While a deficient audit may be completed very quickly with minimal impact to daily routines, the extent of procedures performed may not be sufficient to meet ERISA regulations, which could pose an additional compliance risk for the plan.
What should you ask CPA firms when selecting a plan auditor?
Below are five questions you can ask to better understand the quality of a CPA firm’s EBP practice:
- How many EBPs does your CPA firm audit each year, and what types of plans?
- What EBP specific training do CPA firm professionals receive each year?
- What is your CPA firm’s license status with the applicable state board of accountancy?
- Has your CPA firm been the subject of prior DOL findings or referrals?
- Has your CPA firm’s EBP audit work recently been peer-reviewed by another CPA firm?
Plan administrators have a fiduciary responsibility to ensure that plan financial statements are properly audited and should use the same due diligence and care when evaluating their plan auditor as with any other service provider. While price is one factor in the plan auditor selection process, the plan is more likely to achieve the best result for everyone involved when both price and technical abilities are taken into consideration.
If you have any questions about Johnson Lambert’s EBP practice and audit qualifications, please contact us.
* Based on 2018 Form 5500 Database
DOL – Employee Benefits Security Administration – Office of the Chief Accountant, 2014 Audit Quality Study, May 2015
Advisory Council on Employee Welfare and Pension Benefit Plans, Beyond Plan Audit Compliance: Improving the Financial Statement Audit Process, November 2019
Federal Register / Vol. 86, No. 9 / Thursday, January 14, 2021 / Rules and Regulations