DOL Audit Quality Study and Recommendations for Improvement

Posted by Chris Ciminera, CPA, QKA

2600345868_262549854d_mThe Department of Labor (DOL) released its report on employee benefit plan audits (Assessing the Quality of Employee Benefit Plan Audits) on May 28, 2015.  As I discussed in my last blog, DOL Audit Quality Study: Employee Benefit Plan Auditors Are not Making the Grade, the report is not favorable to auditors. The American Institute of Certified Public Accountants is making an effort to address these quality issues through its Enhancing Audit Quality initiative. This 6-point plan addresses specific quality issues with a major focus on audits of specialized industries including employee benefit plans.  The 6 points in the plan include:

  1. Pre-licensure  (Updates to CPA exam, add high school AP accounting courses, changes to college-level accounting education, etc.)
  2. Standards and Ethics (Quality control standards implementation support, auditor’s report revisions, ethics code codification, etc.)
  3. CPA Learning and Support (Competency models for audits, including employee benefit plans, certificate programs, etc.)
  4. Peer Review (Focus on greater risk areas including EBP audits, more significant remediation and aggressive follow-up, termination from peer review after repeat quality issues, etc.)
  5. Practice Monitoring of the Future (Focus on more real-time, ongoing monitoring of firm quality)
  6. Enforcement (Aggressive investigation of referrals, enhanced coordination with state board of accountancy having the ability to restrict license to practice, reinforced Code of Professional Conduct rules on due care)

The 6-point plan is a great start to address these issues.  However, the underlying problem is that many plan sponsors see no value in the audit and only see it as a compliance hurdle that needs to be overcome.  The main concern of a plan sponsor is to obtain an auditor report so that it can be included in its Form 5500 filing.  As such, there are pressures on accounting firms to reduce fees as plan sponsors may only hire accounting firms based on the lowest price.  Two of the key points in the 6 point plan, practice monitoring and enforcement, may weed out accounting firms that are taking on low fee engagements and cutting corners.

The Department of Labor has made eleven recommendations based on the findings of its study, as follows:

  1. Increased focus on CPA firms with small benefit plans.
  2. Work with the National Association of State Boards of Accountancy (NASBA) and AICPA to improve the investigation and sanctioning process for CPAs who perform deficient work.
  3. Amend ERISA to authorize the Secretary of Labor to assess all or part of the current annual reporting civil penalty of up to $1,100 per day against the accountant engaged to perform the work if the plan’s annual report is rejected due to a deficient audit or because the accountant failed to meet the standards for qualification to perform an ERISA plan audit.
  4. Work with the AICPA to improve Peer Review.
  5. Amend the ERISA definition of “qualified public accountant” to include additional requirements and qualifications necessary to ensure the quality of plan audits.
  6. Amend ERISA to repeal the limited-scope audit exemption.
  7. Amend ERISA to give the Secretary of Labor authority to establish accounting principles and audit standards.
  8. Encourage state boards of accountancy to require specific licensing requirements for CPAs who perform employee benefit plan audits.
  9. Expand the EBSA’s (Employee Benefit Security Administration) outreach activities to work with plan administrator organizations on the importance of hiring competent CPAs and target correspondence to plan administrators in the 1-2 and 3-5 plan strata.
  10. Communicate with each state board of accountancy regarding the results of the study and the need to ensure only competent CPAs are performing employee benefit plan audits.
  11. Expand EBSA’s outreach with individual state societies.

These eleven recommendations also include points that I believe that can make a difference including: increased work with state boards of accountancy to improve the investigation and sanctioning process, assessing penalties against auditors who perform deficient work, improving peer review, adding requirements and qualifications necessary to ensure the quality of plan audits, and increased outreach to plan sponsors.  The one point I disagree with is the repeal of limited-scope audits.  The assistant secretary of labor, Phyliss Borzi, has made it known that she does not believe limited-scope audits have any value, but I believe this is a misfounded judgment.  See our previous post Limited Scope Audits: Worthless or Worthwhile?  At the AICPA National Employee Benefit Plan Conference, Ian Dingwall, the Chief Accountant, made a more poignant statement that may address the real problem of limited-scope audits, saying that CPA audit reports may not provide enough information on the work that is performed in these types of audits.  I agree more with this statement and it seems like a change to the auditor report may be addressed soon based on point 2 of the AICPAs 6 point plan.  I agree that the audit report can be enhanced to show what work was performed in these limited-scope audits, instead of emphasizing what was not done.

It appears that there may be some changes coming very soon as the AICPA begins implementing the 6-point plan.  Some of the eleven recommendations made by the DOL in its report may have more trouble being implemented, such as the recommended changes to ERISA needing congressional agreement.  However, the increased focus on audits performed by firms in the lower strata is sure to be implemented more quickly.  Ultimately, plan sponsors need to recognize their fiduciary duty to hire quality service providers and consider factors other than which audit firm charges the cheapest price.

Photo by Tnarik Innael (License)