How to choose a plan auditor
Published December 13, 2018
Selecting an auditor for an employee benefit plan is critical to the successful running of the plan. The plan administrator, along with those charged with selecting an auditor, must understand the complexities and risks involved in this decision. It is their fiduciary responsibility to the plan and its participants to ensure that the plan’s financial statements are properly audited in accordance with generally accepted accounting principles, making this one of the most important decisions they’ll make for their plan participants.
The regulatory environment for benefit plans includes the Department of Labor (DOL) and Internal Revenue Service (IRS). The DOL looks at the fiduciary standards of the plan, reporting and disclosing requirements and rules specific to them, while the IRS looks at the plan’s qualified status and any potential tax issues. These regulators not only look at what makes up the plan, including assets and liabilities, but also at the bigger picture—when did the assets arrive, how reasonable are the fees, are there proper controls in place? An incomplete, inadequate, or untimely plan audit report can result in the rejection of a filing and penalties being assessed against the plan administrator. When errors or plan audit failures are identified, the plan administrator may be at risk for significant penalties or fines, sometimes as high as $50,000.
When choosing an auditor, it is important to document the reasons for the selection. At the top of the list should be experience–the audit firm should have significant expertise in the subject of employee benefit plans. They must understand the employee benefit plan itself, the accounting system and controls, common problem areas for benefit plans, and the relevant DOL and tax rules. Oftentimes an audit firm is chosen for a benefit plan simply because that firm has been hired to audit the company’s financial statements. This can be problematic. The audit firm may lack the appropriate training and overall experience for the plan audit, or the firm may not focus sufficiently on employee benefit plans. An audit firm is also often chosen based upon fees alone. While low audit fees are appealing, they do not always result in an audit that benefits the plan and its participants. Sometimes higher audit fees are necessary to provide the quality and expertise required to meet the needs of the plan.
As you undergo the selection process, there are four common characteristics of deficient auditors: inadequate technical training and knowledge, lack of awareness of the unique nature of auditing employee benefit plans, lack of quality control around the audit process, and a failure to understand the requirements for limited scope audits. A good audit firm should be able to demonstrate focus on the specialized nature of such plan audits, including through the successful completion of other benefit plan audits, continuing education for its employees on the topic, or through other reference materials. A good audit firm should demonstrate its ability to perform detailed audit procedures, perform detailed risk assessments of the plan’s financial reporting operations, and ensure that the plan is operating in compliance with plan provisions and DOL and ERISA guidelines.
In a recent DOL study, major deficiencies were found in 39% of benefit plan audits. The study found that the smaller the audit firm’s employee benefit plan audit practice, the greater the incidence of audit deficiencies. Accounting firms that were members of the AICPA Employee Benefit Plan Audit Quality Center tended to have fewer deficiencies than those that were not members. Additionally, training specifically targeted toward audits of benefit plans seemed to contribute to better audit work, and firms with greater benefit plan specific training saw fewer deficiencies.
The current regulatory environment suggests that there may be increased scrutiny of audit firms and their processes for completing benefit plan audits going forward, as well as increased scrutiny of those charged with the responsibility of selecting the audit firm for the plan. The plan administrator and others charged with governance of the plan should make the selection of an audit firm a high priority and exercise due care throughout the selection process in order to assure the success of the plan.
MCM CPAs & Advisors audits more than 200 employee benefit plans on an annual basis. For more information, please contact MCM Senior Assurance Manager Jennifer Kaelin, CPA via e-mail or phone (502.882.4655).