Posted by Maria T. Hurd, CPA
The DOL has released the report on its fourth study of audit quality. Revealing a shocking turn for the worse, 39% of the plan audits in the sample did not comply with professional audit standards, up from 33% in the 2004 study, 19% in 1997 study, and 23% in the 1988 study. The population of over 7,300 audit firms was divided into different strata, based on the number of plans audited. The results show that there is a clear correlation between the number of retirement plan audits performed by firms and the number of audit deficiencies.
One thing is for sure: employers who hire a firm that audits five retirement plans or fewer have a 76% chance that their audited financial statements are deficient. In the past, it may have been worth it to roll the dice, given the low rate of DOL audits, but now, plans audited by CPAs with five retirement plans or fewer are a target. As a practical matter, filings rejected because of deficient audits can cause great inconvenience to the employer in the form of required re-audits, penalties of up to $1,100/day, time and resources to handle the situation.
The clear solution is to hire an experienced retirement plan auditor. However, firms that perform the most plan audits still had a deficiency rate of 12%, so how can an employer identify a quality audit firm?
Specialized Team
The first important question to ask is how many retirement plan audits the audit team members have performed, not just at the partner level, but also the other members of the team. Firms who take retirement audit plan audits seriously have a dedicated team.
A clear indication of a specialized niche is that the team assigned to the retirement plan audit is different than the one assigned to the regular corporate audit. In my experience with takeover clients, firms with a specialized niche perform a higher quality audit than those that treat the plan audit as an add-on to the other plan sponsor work. The most important work performed by a specialized retirement plan audit team is retirement plan audits. That cannot be the case with CPAs who try to be jacks of all trades because a specialized field requires specialized training.
Specialized Continuing Education
More training leads to better qualifications. Membership in the AICPA EBPQAC requires eight hours of employee benefit specific training every three years. In my view, that is not sufficient. In our audit team, both the supervisor and I get 100% of our continuing professional education (CPE) in retirement plan topics, and the audit seniors attend regional or national EBP conferences every year. Education, however, is best assimilated in conjunction with experience.
Experienced Team Members
One of the main complaints I hear from takeover audit clients is that they felt like they were paying to train inexperienced auditors. A good question to ask the audit firm every year is how much experience the team assigned to the retirement plan audit has. Turnover within the firm can affect audit quality, even in a large firm that performs many retirement plan audits. Also, national firms may perform hundreds or even thousands of retirement plan audits at other branches. It is important to know the qualifications of the team assigned to the audit, not just at the firm level. For example, our specialized team supervisor has been exclusively auditing retirement plans for nearly a decade, and the seniors all have over four years of experience. Like every firm, our firm hires new recruits annually, but the seniors and the supervisor retain client contact responsibilities to avoid unnecessary disruption and unnecessarily basic questions.
Minimizing Risk
95% of the 7,330 firms in the population from which the DOL selected its sample perform fewer than 25 plan audits. In my opinion, employers would be best served to select a firm in the top 5%. Specifically, any firm that can offer a specialized team of retirement plan auditors offers the most value. Using the same firm that performs other audit, accounting, or tax work for the employer is not necessary. Plan sponsors evaluating auditors should do their due diligence:
ask for references from existing clients and other service providers
inquire about the latest industry-specific conferences attended by the audit team
inquire about the experience of all members of the audit team
Not only will the plan sponsor be exercising its fiduciary responsibility when hiring a service provider, it will also be avoiding the inconvenience, embarrassment, and potential penalties of a rejected filing as a result of a deficient audit.
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