DOL Audit Quality Study: Employee Benefit Plan Auditors Are not Making the Grade

Posted by Chris Ciminera, CPA, QKA

DOL Quality Audit StudyAt last week’s American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan (EBP) Conference, the Department of Labor (DOL) compared auditing retirement plans to brain surgery.  The analogy was meant to indicate that a patient would not seek out a general practitioner to perform brain surgery, due to the highly complex nature of the service and the lack of experience the general medical practitioner would have at performing the service.  As shown by this analogy, retirement plan audits are a specialized area with extensive compliance issues.  Two governmental agencies (the IRS and DOL) are charged with overseeing compliance, indicating that the breadth of regulations and compliance can be massive.  Accounting principles specific to plan accounting are not always in line with those principles for regular financial statement audits.  Like the general medical practitioner, a general CPA who performs regular plan sponsor audits or tax work may not have devoted enough time and focus to such a highly technical and complex area.  So what led the DOL to make this analogy?  The DOL just released a report from a study that the agency conducted on the quality of retirement plan audits.  The results are not favorable. As one would expect, the number of deficiencies the DOL noted show a direct correlation to the size of a firm’s employee benefit practice.  It appears that many general  accounting practitioners are performing these audits and do not have adequate experience or knowledge to perform sufficient audits under the professional standards. Let’s take deeper look into the study and see what deficient audits mean for plan sponsors.

2015 Audit Quality Study

Sample

The DOL selected a sample of 400 retirement plan audits performed for the plan years covered by the 2011 Form 5500 annual filing.  The sample was divided into six strata based on the size of a firm’s employee benefit practice, as follows:

Plans                     Deficient Audits

1-2                                          75.8%

3-5                                          68.4%

6-24                                       67.4%

25-99                                     41.5%

100-749                                12.0%

750+                                      12.0%

Findings

The results of the DOL’s Audit Quality Study reported a direct correlation between the size of an audit firm’s EBP practice and deficient work.  The DOL reported that 75% of plan audits were deficient in the 1-2 plan strata.  The DOL specifically noted that firms that were members of the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC) had lower deficiency rates, but there are still member firms performing deficient work.  This may be due to the low requirements to be a member firm, such as only requiring 8 hours every 3 years of continuing professional education.  Clearly this requirement is out of date and much more time needs to be invested for an auditor to be knowledgeable in all relevant matters concerning an employee benefit plan audit.  The DOL also noted that audit work is of a lesser quality in engagements where firms have less expertise.  The DOL made 131 referrals to the AICPA’s Professional Ethics Division and 13 referrals were made to the state boards of accountancy (which license individuals).  However, the DOL indicated that state boards are not always taking enough action, in the agency’s view.

Impacts of Deficient Audits on Plan Sponsors

Plan sponsors are fiduciaries of the plan charged with selecting quality service providers.  The DOL may reject a 5500 filing if the agency finds that a deficient audit was performed, subjecting plan sponsors to filing penalties of $1,100 per day and up for each filing. Ultimately, a quality audit protects participants and their beneficiaries from enjoying the benefits accumulated throughout their career. The AICPA EBPAQC also details the importance of hiring a qualified auditor as a technical advisor.

As one may infer from the brain surgery analogy, indications of a specialized and qualified auditor include the time devoted to the EBP practice, the variety and diversity of plan types audited, and the level of training and time spent on keeping up to date with relevant issues.  In our experience auditing plans from other accountants, even large firms that perform hundreds of EBP audits nationwide can have deficiencies in their retirement plan audits if the team used at a specific branch of the national firm is inexperienced with respect to the industry.

In conclusion, the DOL Audit Quality Study showed that general practitioner auditors do not have enough experience or knowledge to perform audits that comply with professional standards.  The DOL Audit Quality Study reported that 75% of plan audits in the 1-2 plan strata were deficient.  Deficient audits expose plan Form 5500 filings to rejection by the DOL, possibly subjecting plan sponsors to large penalties.  A quality auditor will not only provide insurance against steep penalties, but will be a valuable resource to plan sponsors, assisting with the implementation of processes that ensure controls are properly designed to minimize errors in plan operations, and ultimately ensure that the financial statements are complete and accurate.

Photo by Thomas Hawk (License)

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