5500 Filing Rejected! How could plan sponsors have known their auditor was deficient?

Posted By Maria T. Hurd, CPA, RPA

It’s not easy!

2,582 CPA firms stopped auditing retirement plans between 2011 and 2018. That is a 35% percent reduction from 7,330 EBP (Employee Benefit Plan) audit firms in 2011 to 4,758 firms in 2018. Each year, we get new clients whose previously accepted Forms 5500 have been rejected when the Department of Labor determined that their auditor’s work was deficient. Each time, our new client is flabbergasted by the news that they had a responsibility to assess their CPA’s qualifications to perform a retirement plan audit. Like going to a new doctor, how can you know whether a licensed professional is good at his or her job? It’s not easy.

To help, the DOL has prepared the following resource – DOL: Selecting an Auditor for Your Employee Benefit Plan and the AICPA has prepared AICPA: The Importance of Hiring a Quality Auditor.

Similarly, professional standards instruct CPAs to use their judgement in so many audit areas: risk assessment, audit sampling, designing the nature and extent of testing performed, and that’s only just the beginning. The DOL and the IRS hold the plan sponsors to numerous reasonable standards: to segregate and deposit participant deferrals, to establish non-discriminatory definitions of compensation, to estimate corrective contributions when an exact amount cannot be computed. How does an auditor know that the regulatory agencies would agree that they have used good judgment in their audit design? How does an auditor establish what reasonable means for each plan sponsor? It’s not easy!

The DOL Audits the Auditors

Fortunately, the DOL’s audit-the-auditor initiatives have given us implicit approval of:

  1. our good judgment in designing audit tests and
  2. evaluating the reasonableness of our clients’ choices.

When plan sponsors hire us to re-audit their plan for the rejected Form 5500 years when the clients used a deficient auditor, we are required to turn in our audit workpapers to the Department of Labor for them to assess whether the plan sponsor now has a qualified auditor. I can see why the DOL would not want to send auditors a written approval of their audit approach, but the fact that they accept the amended filings that include our audited financial statements and close the case speaks volumes without words.

Separately, the DOL has performed audit quality reviews of our audit workpapers three times in the past ten years, each time reiterating that our workpapers show very high quality work. We were one of the 300 firms they expect to review during 2021. Each time I get nervous, hoping this new agent too will agree that our efforts to excel at least constitute sufficient audit work. Each time I sigh with relief when the personable agent says that our work is not just sufficient, it’s excellent. Thank you, EBP audit team.

Not wanting to let our guard down, each year when we plan the new audit season, we study the list of deficiencies the DOL finds during the audit-the-auditor initiatives, to make sure we are not making any of them. At this year’s AICPA national conference, the DOL listed the following common deficiencies in audit work.

Top deficiencies by audit area:

Participant Data

  • Failure to test contributions
  • Failure to test income allocations to participant accounts
  • No testing or insufficient testing of payroll data
  • No testing or insufficient testing of timely response to investment option selections by participants
  • No reconciliation of participant accounts to total plan assets
  • Failure to test eligibility both for contributions and distributions
  • Failure to test improper exclusions

Contributions

  • Failure to test timeliness of remittances
  • Failure to test compliance with the definition of compensation
  • No testing or inadequate testing of forfeitures
  • Inadequate recalculation of contributions
  • Failure to extrapolate findings to the rest of the population

Benefit Payments

  • No recalculation of benefit payments
  • No consideration of vesting provisions
  • No work or inadequate consideration of eligibility for benefits
  • No work performed at all

Internal Controls

  • No or inadequate documentation of internal controls
  • No or unsupported risk assessment
  • No or inadequate consideration of service provider controls

Picking a good auditor….it can be easy!

It’s a tough job to be put in a position to assess the qualifications of a professional you hire to perform work that you are not licensed or qualified to perform yourself. As a baseline, the DOL has stated that the size of the retirement plan audit practice has an impact on the amount of training the professionals receive, the experience and knowledge of how to audit this specialized field and the quality of the work performed. The best employee benefit plan audit practices show a commitment to the specialty area through industry-specific training, specialization of the audit team, internal inspection, and peer review. In addition to asking basic questions about the size of the practice, as well as the experience and specialization of the audit team, I would pay attention to what they want to talk about during the interview. A CPA with a year-round specialty in EBP audits is not likely to be interested in servicing a client’s other tax and accounting needs. When a professional has a passion for what he or she does, it shows. It’s that easy!

 

Photo by: Judith E. Bell (License)