The Department of Labor (DOL) recently formally released the results of their “audit the employee benefit plan auditor” campaign and the results were underwhelming, to say the least. Their report indicates that audit quality is actually getting worse, not better. While this is not shocking to the DOL, AICPA or many practitioners, including accounting firms, it has been shocking to the media and general public. The DOL and AICPA have indicated for several years that there is tremendous concern that benefit plan audits are not being performed in accordance with standards and they insist that employers should be very careful when hiring a plan auditor.
From an auditing perspective, benefit plan audits are very different from corporate audits, and the technical requirements resulting from the IRS Code and ERISA make them very unique. The DOL has long contended that accounting firms need to perform a certain number of engagements to truly be qualified to do the work.
The DOL reviewed 400 Form 5500 plan audits from tax year 2011 and found 39% had major deficiencies. The report indicated that this deficiency rate would put $653 billion and 22.5 million retirement plan participants at risk. Previous DOL reviews supported a deficiency rate closer to 33%. The increase is nothing short of alarming given the efforts by the plan audit community over the last several years to educate accountants and plan sponsors of the importance of a quality plan audit. The results showed a direct correlation between the number of audits performed and the deficiency rate. The deficiency rate for plan audits by firms that only performed one or two audits was 76%, and the rate declined as the number of audits performed by accounting firms increased.
It is easy for plan fiduciaries to fall into the trap of a low cost/low effort benefit plan audit. However, the costs associated with a rejected 5500 due to a deficient audit ($1,000/day) far exceed those associated with a quality plan audit – not to mention the cost of correcting years’ worth of plan operational defects that could have been caught early. Plan sponsors also fail to realize that the DOL has no authority to sanction accounting firms that perform poor quality audits, resulting in plan sponsors paying the price, not the auditor.
Aronson has been banging the “quality audit” drum for many years and our own experience supports the DOL’s finding. Our Employee Benefit Plan Services Group performs hundreds of plan audits each year, and we have found significant deficiencies in prior years’ audits performed by underqualified auditors.
The Department of Labor (DOL) is preparing to release the results of another audit quality study performed on audits of employee benefit plans.* Based on comments made publicly, the report will show that audit quality continues to decline and is particularly poor when the auditor does not have retirement plan audit experience. Hiring the plan auditor is a fiduciary function, and a common misconception among plan fiduciaries is that, if an audit is found to be deficient, the accounting firm that performed the work is somehow in trouble with the DOL. Surprisingly, this is not the case. A deficient audit can subject the plan sponsor, not the accounting firm, to significant fines and penalties as authorized by Title I of the Employee Retirement Income Security Act of 1974 (ERISA).
Furthermore, under ERISA, failure to properly select and monitor service providers, including qualified auditors, exposes the plan administrator to potential fiduciary violations and civil penalties. The only real recourse the DOL has against auditors is to report the accounting firm to their state licensing board.
The DOL has stated that one of the main reasons these audits are deficient is the auditors’ lack of training and knowledge in areas unique to employee benefit plans. Fiduciaries should understand the importance of prior experience when considering hiring a plan auditor for the first time or in deciding to continue with existing auditors. The American Institute of Certified Public Accountants issued a plan advisory, “The Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit.” This guide explains why your plan audit is important and provides excellent information on what factors to consider in evaluating different audit firms. It also provides an outline for developing a Request for Proposal (RFP).
The employee benefit plan audit season has begun. If you have not taken the time to evaluate the qualifications of your plan auditor, consider doing so now before it is too late!
For questions about benefit plan audits, please contact Aronson partner Kathryn Petrillo at 301.231.6233 or email@example.com.
*ERISA generally requires employee benefit plans with 100 or more participants to have an independent financial statement audit. The audit report must accompany the Form 5500 that is filed annually with the DOL.
In the nonprofit world, “going concern” refers to an auditor’s opinion or footnote disclosure that describes a scenario where there is substantial doubt about the organization’s ability to continue as a going concern. In other words, the organization’s ability to function for the foreseeable future. This doubt could be the result of a debt default, recurring operating losses, a bankruptcy filing, a negative outcome to a material lawsuit, governmental action threatening the organization’s future, or just simply not being able to pay the bills as they come due. Obviously, it is not ideal for external readers of your financial information to be alerted to such a situation, so decisions about such determinations can be very difficult.
Recent guidance from the FASB further clarifies the extent of management’s obligation to address going-concern situations. FASB ASU No. 2014-15, “Presentation of Financial Statements –Going Concern, Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern,” codifies for the first time these standards into generally accepted accounting principles (GAAP). Prior to this update, the only responsibility to report going concern issues was placed on auditors of financial statements in AU C Section 570, “The Auditor’s Consideration of an Entity’s Ability to Continue as a Going Concern.”
This prior guidance put the decision solely on the shoulders of the auditors to make the determination as to whether they would modify their audit opinion to include a statement that substantial doubt exists. The guidance specified that, to make the determination, the look-forward period was one year from the balance sheet date.
The new guidance states that the look-forward period is one year from the financial statement issuance date, so the time horizon for consideration is now longer. The definition of “substantial doubt” in the new standard also uses a relatively high threshold of probability that the entity will become unable to meet its obligations within the look-forward period. The probability threshold is also thought to be a slightly higher threshold than under current practice.
Audit standard setters will also presumably have to change other audit standards to conform to the new guidance, so stay tuned for more to come on this important development.
If you have any questions regarding a going concern situation or other issues related to financial statements, contact your Aronson advisor or Craig Stevens of Aronson’s Nonprofit & Association Industry Services Group at 301.231.6200.
Ask These Questions to Gauge Experience and Knowledge
Choosing a qualified benefit plan auditor can be a challenging process, particularly for the uninitiated. Selecting an inexperienced auditor or one with a less than stellar track record can have lasting ramifications on your plan. There are several factors to consider when evaluating potential auditors:
After encountering heavy resistance from the public and action from the House of Representatives, the PCAOB has finally dropped its project pushing auditor rotation. On February 5, James Doty, PCAOB Chairman, informed members of the SEC that the board no longer has an active project regarding a term limit for auditors. Research by the PCAOB showed that for certain industries, the choice of audit firms with suitable expertise may be too limited to make rotation feasible. Ultimately, it’s possible that skill and knowledge of a company’s complexities trumps any benefit of a new, but potentially uninformed, set of eyes.
Read more about it at the Wall Street Journal here.