DOL on Audit Quality:
ERISA Audits are Unique
"Employee benefit plan audits present different and unique challenges for auditors. This is because the scope of the audit transcends the money held in trust and the financial activity of the plan. Employee benefit plans exist and operate in a regulated environment and, accordingly, involve the examination of the plan's operation within that legal framework. For example, functional areas such as benefit payments, participant data, plan obligations and prohibited transactions are areas which auditors would typically not encounter during a corporate financial statement audit.
Benefit payments, participant data and plan obligations are all related areas in that the auditing of one of these areas often overlaps that of the other two. For example, eligibility testing affects all three areas: a benefit can be paid only to eligible participants and beneficiaries, a benefit payment must be properly applied to individual participant accounts, and the total plan benefit affects the plan's overall financial obligation. Audit procedures often include the review of the same underlying documentation in each of these three areas, such as personnel records, payroll records, and participant account records. In addition, the plan instrument and related documents set forth requirements and parameters that must be adhered to for each of these areas.
Accordingly, it is easy to see that audits of employee benefit plans are quite different from audits of other entities. Auditing of the above three distinct areas can be of great importance in that these areas can have a significant impact on the plan's financial statements and tax qualification status and, consequently, can significantly impact the opinion rendered (by a CPA) on such financial statements."
Too Many CPAs "Don't Get It"
The last time DOL reported on the quality of ERISA audits, it found that 19% of plan audits in 1992 failed to comply with professional standards, and 33% of the auditors reports failed to comply with ERISA's reporting and disclosure requirements
Among the factors that DOL suggests as affecting the quality of the audits:
- the amount of audit work done by the CPA firm, as a percentage of its entire practice,
- whether the CPAs understood the uniqueness of employee benefit plans
- the adequacy of CPAs training and experience in plan audits
- whether the CPA had established quality review and internal controls
- the perception of the plan administrator and CPA of the importance of plan audits, beyond fulfilling regulatory requirements.
With regard to the first factor, PWBA said:
"... for the audits we reviewed which contained significant deficiencies, the audit of the employee benefit plan frequently represented the only ERISA audit the firm performed. In some cases it also represented the firm's only audit engagement."
Cheek: I Get It
ERISA audit quality is critical. And key factors in a quality audit are experience and training. Many general practitioners, large or small, simply can not develop an expertise in employee benefit plans if they only audit one or two plans. And, although larger firms might have a depth of ERISA experience available, the staff you deal with are working with 2- 3 years general experience under their belts.
I work hard to maintain the quality of my employee plan audits, with extensive training, audit programs, disclosure checklists, and other procedures specifically tailored to employee benefit plans. I maintain a library of ERISA related publications, and I spend a great deal of time staying current on new issues. This website is a testament to the complexities of living in the ERISA environment.
I've been a member of the International Foundation of Employee Benefit Plans, chairman of the Nassau Chapter NYSSCPA Employee Benefits Committee, and I have lectured all over the USA on employee benefit matters. I wrote the textbook for CPE’s course, "Preparing Form 5500." I’ve written software to calculate the actuarial present value of postretirement welfare benefits.
I understand the industry because, for more than 20 years, I've spent 80% of my time on employee benefit plan audits. When you participate in quarterly trustee meetings as often as I have, you have a better understanding of trustee concerns, and the interplay of attorneys, actuaries, auditors, and investment managers in addressing those concerns.
When it comes to the unique demands of an ERISA audit, I know what I’m talking about.
I "get it."
(John Cheek is a Rochester NY CPA who has extensive experience in audits of ERISA benefit plans.)