How Can Plan Sponsors Evaluate Prospective Auditors?

Posted by Maria T. Hurd, CPA, RPA

The AICPA Employee Benefit Plan Digital Badges: How can plan sponsors evaluate prospective auditors who are equally credentialed with digital badges? 

Is your auditor a Jack of all trades, but a master of none? As the results of the DOL studies on audit quality shift the industry focus to the qualifications of employee benefit plan auditors, CPA firms with specialized retirement plan audit practices choose to demonstrate their commitment to quality employee benefit plan (EBP) audits by displaying their auditors’ badges on marketing materials, social media, and email signature lines. What do the badges mean and how does a plan sponsor differentiate between prospective audit teams that are equally credentialed?

What the tests mean

The Advanced Defined Contribution Plans, Defined Benefit Plans, and Health and Welfare Plans Audit Certificate Exams test an auditor’s ability to plan, conduct, and report on each type of plan audit in accordance with the latest AICPA standards, Department of Labor, and IRS requirements. The advanced tests are designed for auditors with seven or more years of experience performing and reviewing EBP audits. The intermediate level certificate is designed for auditors with approximately three to seven years of experience in performing EBP plan audits.

The race to demonstrate expertise

Since the open-book credential tests only cost between $239 to $299 per person, firms with large enough EBP practice areas quickly moved to ensure that their audit teams were credentialed. Since 2016, over 400 employee benefit plan digital badges have been awarded to EBP auditors, making this designation a minimum requirement that employers should expect when selecting a plan auditor, in my view.

Credentialed auditors are not all equal

Just as all doctors and lawyers have a degree, but not all of them are excellent at their job, credentialed auditors are not interchangeable. In addition to digital badges that show this minimum level of commitment to the industry, plan sponsors should inquire as to:

1. The size of the EBP audit practice. – The DOL audit quality study shows a correlation between the number of EBP audits performed and the rate of deficiency in the audits.  93% of the nation’s CPA firms perform less than 25 EBP audits and the study showed deficiency rates ranging from 67.4% to 75.80%. The following link has more information on the results of the DOL Audit Quality Study.
2. The experience of the audit team. – How many EBP plan audits do the members of the audit team assigned to the audit perform? Some of our takeover clients’ predecessor audit teams were not specialists and missed important audit steps, even though their firm audited numerous plans. Plan sponsors should inquire what percentage of their total chargeable time the audit supervisors, managers, and engagement partners spend auditing EBP plans. The answer to this question will quickly identify the true specialists.
3. Has the DOL reviewed the firm’s workpapers? – Although the DOL does not issue approvals in writing when audit quality is satisfactory, the prospective auditors should be able to provide several examples of successful DOL reviews of its workpapers.
4. IRS Audits – References listed on the proposal should include clients whose plans have been audited by the IRS. Plan sponsors should inquire of the reference if the IRS had findings that the auditor had failed to identify.
5. Other references – Plan sponsors should also ask for a list of references including industry service providers, such as third-party administrators and ERISA attorneys, as well as references from plan sponsors of similar plans that the firm audits.
6. Continuing Professional Education – Plan sponsors should inquire what percentage of the CPE credits obtained by the supervisors, managers, and partners of the audit team is EBP-specific. The answer to this question will also reveal whether they are true specialists.
7. Other industry involvement – The plan sponsor should inquire as to the extent of the prospective audit firm’s involvement in the retirement plan industry in the form of published articles, industry organization memberships, teaching engagements, etc.

As with any other profession, the piece of paper or digital badge indicating the person can do a type of work should be a minimum requirement. True expertise and commitment to a specialty requires continued education and extensive experience in that specific area. CPAs who truly specialize in auditing retirement plans should be able to show that a significant percentage of their client time, training, and industry involvement is spent in the retirement plan space. Otherwise, you will have hired a Jack of all trades and a master of none.

Photo by Steve Snodgrass (License)