How Can Plan Sponsors Evaluate Prospective Auditors?

Posted by Maria Hurd, CPA, PRA

Is your auditor a “Jack of all Trades, but a Master of None?” As the results of the Department of Labor (DOL) study 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 badges mean

Badges are awarded upon the passing of certain AICPA exams. 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, DOL requirements, and IRS requirements. Intermediate level badges are designed for auditors with approximately three to seven years of experience in performing EBP plan audits. Advanced level badges are designed for auditors with seven or more years of experience performing and reviewing EBP audits.

The race to demonstrate expertise

Firms with large enough EBP practice areas quickly moved to ensure that their audit teams were credentialed. The costs associated with these open-book tests were not prohibitive at approximately $239 – 299 per person. Since 2016, over 400 EBP digital badges have been awarded to EBP auditors, pretty much making this designation a minimum requirement that employers should expect when selecting a plan auditor.

Credentialed auditors are not all equal

As in the case with other professions with advanced degrees and certifications, credentialed auditors are not interchangeable. More than a degree or credential are often required to show true expertise. In addition to digital badges, plan sponsors should inquire as to:

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.

The experience of the audit team.

  • How many EBP audits have 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 EBPs. The answer to this question will quickly identify true specialists.

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.

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.

Other references

  • Plan sponsors should ask for a list of not only client references, but references including industry service providers. These could include third-party administrators, ERISA attorneys, and plan sponsors of similar plans that the firm audits.

Continuing Professional Education

  • 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 is another way to reveal whether they are true specialists.

Other industry involvement

  • What is 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 EBP audits should be able to show that a significant percentage of their client time, training, and industry involvement are spent in the retirement plan space. Absent this proof, you should say “Hit the Road Jack!”

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Photo By Viv Lynch  (License)