Reducing Risk and Liability: The Importance of a High-Quality Employee Benefit Plan Audit
October 5, 2017 - By: SC&H Group
The following SC&H Group blog post discusses the function and importance of a high-quality employee benefit plan audit, providing plan administrators with information regarding the risks, causes, and consequences of deficient filings, as well as how to prevent them.
As the plan sponsor and fiduciary for a large employee benefit plan, one of your key fiduciary responsibilities is identifying a high-quality auditor to perform your plan’s annual financial statement audit.
But, are plan auditors really that different from one another? And if so, should it matter much to you and your plan participants? Absolutely.
Administrator Liability and the Function of a High-Quality Audit
A complete, comprehensive audit serves as an important accountability mechanism.
It assures the Department of Labor (DOL), plan management, and other interested parties that your plan’s financial statements provide reliable information to assess whether for plan is operating in accordance with it plan document and DOL/IRS regulations. It also helps you satisfy ERISA and DOL requirements by filing an accurate Form 5500, as well as improve operations by evaluating the plan’s internal control over financial reporting.
Further—and as important—a high-quality audit can help you avoid potential liability due to audit deficiencies. The DOL can not only reject plan filings, but also hold fiduciaries personally liable for restoring any plan losses when standards of conduct are not followed. The DOL can assess penalties of up to $1,100 per day, without limit, on plan administrators for deficient filings.
Enforcement by the DOL Employee Benefits Security Administration (EBSA) has accelerated in recent years. In 2016 alone, EBSA recovered $777.5 million for direct payment to plans, participants, and beneficiaries, and closed 2,002 civil investigations.
The Link Between Deficiency Rates and Firm Experience
While the substantial consequences of inadequate financial statement audits may be surprising, so is the extremely high rate of major deficiencies.
A recent DOL EBSA report found that nearly 40 percent of the over 81,000 employee benefit plan audits performed each year contain major deficiencies that could lead to rejection of a Form 5500 filing. Even worse, those deficiencies put over $653 billion and 22.5 million plan participants and beneficiaries at risk.
The DOL EBSA report also identified a key determinant in how likely an audit will have a major deficiency: the experience level of the firm performing the audit.
Auditors with limited employee benefit plan audit practices have much higher rates of deficient work. In fact, firms that audit over 100 plans annually (2 percent of all firms) maintain a 12 percent deficiency rating, while firms that audit less than 100 plans annually (98 percent of all firms) maintain a staggering 76 percent deficiency rating. The average firm audits only 13 employee benefit plans annually.
This is an important statistic to consider when choosing an auditor, since many firms—from the Big Four to small firms—view plan audits to be low risk. As a result, they often assign personnel with minimal audit plan experience.
To prevent the pain of rejected filings and personal and fiduciary liability, it is important to select an experienced, insightful auditor. The DOL recommends using the following five factors to identify a high-quality firm:
- Amount of employee benefit plan audit work in the auditor’s overall practice (e.g., more than 100 plans audited annually)
- Adequacy of auditor knowledge and technical training (e.g., niche expertise, continuing education, attendance at industry events and conferences)
- Auditor awareness of the uniqueness of employee benefit plan audits (e.g., a dedicated employee benefit plan audit practice, registration with the PCAOB for Form 11-k filers)
- Ability to adapt to new technical guidance (e.g., member of the AICPA’s Employee Benefit Plan Audit Quality Center, subscriptions to plan accounting and regulartory updates and newsletters)
- Perception of auditors of the importance of plan audits (e.g., examination of the firm’s employee benefit plan audit practice by the DOL, with no comments issued)
Ultimately, though the risks of deficient reports and administrator liability are significant, selecting an auditor with the right experience, efficiency, service, and resources can minimize these risks, positioning you and your plan for short- and long-term success.
Do you know how to navigate the changing IRS regulations regarding employee benefit plans? Be sure to read our “Top 10 Issues Affecting Employee Benefit Plans” white paper.
Contact SC&H Group’s Employee Benefit Plan Audit Services team here to learn more about employee benefit plan regulations, standards, and best practices for establishing effective controls and ensuring timely completion of plan audits.