Posted by Maria T. Hurd, CPA, RPA
Testing the work of a specialist in a retirement plan audit: How much expertise does the financial statement auditor need?
Service providers to the employee benefit plan (EBP) industry are often highly intelligent people that talk in “code”: Internal Revenue Code and ERISA Regulation sections. The legislation that regulates retirement plans encompasses thousands of pages covering everything from contribution limits to discrimination testing and fiduciary rules. Service providers with degrees and licenses in specialized fields such as actuarial sciences, investment advisors, and third-party administrators play important, high-level roles in retirement plan administration. Often, plan sponsors and other financial statement users have an unfounded expectation that the auditor is re-performing actuarial computations, re-computing the Third Party Administrator’s (TPA) discrimination testing, and evaluating investment and fee decisions the plan sponsor made in conjunction with the investment advisor. This is not the case.
Auditors only practice one profession
The auditor’s education and experience enable him or her to be knowledgeable about technical matters in general, but the auditor is not expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation. In addition to evaluating the professional qualifications, reputation, and standing of the specialists, the auditor typically:
(a) obtains an understanding of the methods and assumptions used by the specialist,
(b) makes appropriate tests of data provided to the specialist
(c) evaluates whether the specialist’s findings support the related assertions in the financial statements.
How Do You Know How Much Your Auditor Knows?
Understanding the work performed by the specialists requires the auditor to have industry and regulatory knowledge that is not generally taught in college, but that is necessary to properly identify risk factors in testing the inputs used by the specialists. To that end, the BLS retirement plan audit management team has obtained industry group designations that are not required, but that demonstrate a high level of commitment to understanding the regulatory framework for which we are designing audit tests, as follows:
- QKA Designations – American Society of Pension Professionals and Actuaries’ (ASPPA’s) QKA credential provides a comprehensive foundation for plan administration from basic concepts to 401(k) compliance. All QKA credentialed members must acquire 40 hours of continuing education (CE) credits in a two-year cycle and renew their ASPPA Membership annually to retain their credential(s).
- RPA Designation – The International Foundation of Employee Benefit Plans Retirement Plans Associate (RPA) designation is an ideal credential for those who work with defined contribution and defined benefit plans or are involved with the management of plan assets. The courses reflect the most current and relevant information needed to effectively design and manage retirement plans.
- TGPC Designation – The Tax-Exempt and Governmental Plan Consultant (TGPC) is a credential offered by ASPPA to educate professionals who specialize in the 403(b) and/or the 457 marketplace as well as other plans maintained by tax-exempt and government entities.
- AICPA Digital Badges – All supervisors, managers, and the shareholder in the EBP group and some specialized staff have obtained the Advanced Defined Contribution Digital Badge and several team members have also obtained the Defined Benefit and Health and Welfare Digital Badges.
- CPE Credits: EBPAQC Requirement vs. Actual – Membership in the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC) only requires individuals signing audit opinions or managing ERISA employee benefit plan audit engagements to complete a minimum of 8 hours of employee benefit plan-specific CPE every three years. Striving to always deliver more than the minimum requirement, all the specialized members of our EBP audit team (supervisors and above) obtain substantially all their continuing professional education credits in EBP-specific topics to maintain their industry designations.
One Service Provider’s Jurisdiction Ends Where the Other One’s Begins
As industry specialists become engrossed in their world-view of what is important to retirement plans, we hear misplaced expectations that as auditors:
- the first thing we evaluate is the adequacy of the plan investments and related expenses, or that
- the auditor would catch if the actuarial computations were incorrect
Similarly, many plan sponsors assume that the third-party administrator audits the census data and other information the plan sponsor provides for the plan’s discrimination testing and contribution calculations. Often, this is not the case.
Where one service provider’s jurisdiction ends, another one’s begins.
Auditors vs. Investment Advisors
Much like the DOL is interested in process, not results, the auditor verifies that investment policy statements were followed and reads investment committee minutes, but does not evaluate the investment alternatives selected and other decisions made by the plan sponsor in conjunction with the plan’s investment advisor.
Auditor vs. ERISA Attorneys and Plan Document Providers
The auditor does not make legal determinations including rendering opinions regarding the qualified status of the plan or the likelihood of commitments and contingencies of the plan, such as predicting the outcome of plan litigation.
Auditor vs. Actuaries and TPAs
The auditor does not re-perform actuarial computations or the discrimination tests, but the auditor does verify that complete and accurate information was provided to the specialists and analyzes the reasonableness of the results.
Auditor vs. Plan Operations
Regardless of what party performs daily plan transactions in accordance with plan provisions and the legislative framework, the auditor does test the operation of significant plan provisions that affect the financial statements, such as contributions, distributions, participant loan processing, eligibility, payroll information, demographic data, and any other significant audit areas relevant to each plan.
Do What You Know, Know What You Do
In the end, for a plan to run smoothly, all the service providers need to stick to what they know how to do and recruit help from the appropriate specialists when issues or challenges outside their jurisdiction need to be addressed.