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Audits: Eat Your Veggies, DOL Suggests

“Eat your vegetables!” children are told. Many do so reluctantly, despite the fact that it’s good for them. Fast forward: “Have an audit!” federal law tells many employee benefit plans. They may be the brussels sprouts of administrative functions, but a Department of Labor (DOL) publication offers a rationale for internal audits’ usefulness as well as tips for selecting someone to conduct them.

Audits generally are required of employee benefit plans with 100 or more participants as part of their obligation to file a Form 5500. Some pension plans with fewer than 100 participants also may be required to have an audit if they fail to meet certain conditions relating to their plan investments, bonding and disclosure requirements.

The DOL’s Employee Benefit Security Administration (EBSA) argues in “Selecting an Auditor for Your Employee Benefit Plan” that audits, unwelcome though they may be, actually can be beneficial for a plan. “A well-performed audit is a vital protection for an employee benefit plan,” it says, continuing, “it is in the best interest of a plan and its participants to maximize the result of the audit process.”

Drilling down, EBSA argues that an audit will help protect a plan’s assets and its financial integrity, and ensure that the necessary funds will be available to pay retirement, health and other promised benefits to employees. Further, says EBSA, “a quality audit also will help you carry out your legal responsibility to file a complete and accurate annual return/report for your plan each year.”

And EBSA warns of the consequences of avoiding the administrative nutrition: an incomplete, inadequate or untimely audit report can result in penalties being imposed on a plan administrator.

Because of the merits of conducting an audit well and the consequences of not doing so, the EBSA publication argues that choosing an experienced and reliable auditor is very important.

EBSA provides the rationale for these requirements and offers tips in a question-and-answer format.

What You Should Know About the Audit

What is an engagement letter?

In preparation for the audit, the auditor will prepare a contract, referred to as an “engagement letter,” describing the audit work to be performed, the timing of the audit, and fees. This letter also should describe the responsibilities of the auditor and the plan administrator. You should review this letter carefully and resolve any questions with the auditor before engaging with one.

Can what the auditor reviews be limited?

Federal law permits the administrator of an employee benefit plan to limit an audit when plan assets are held by banks or insurance companies and written certifications are provided by the institutions holding those assets.

It may be appropriate for a plan administrator to consult with an accountant, attorney or plan advisor to determine whether limiting the scope of an audit may appropriate.

Do documents have to be furnished or prepared for the auditor?

It is generally the responsibility of the administrator to maintain plan financial and other records. Many of these records will need to be made available to the auditor for review in the course of the plan audit. If a third-party service provider maintains plan records, you will need to arrange for auditor access to these records.

The Audit Report

What happens when the audit is complete?

At the conclusion of the audit, the auditor will issue a report and state an opinion on the plan's financial statements as well as any schedules required to be included as a part of the plan's annual report filing. Auditors will also report on significant problems, if any were found. The auditor may also suggest ways to improve internal controls and plan operations. This is a good time to ask questions about the auditor's work.

What questions should the auditor be asked about his/her work?

Frequently audits are found to be deficient because of the failure of the auditor to conduct tests in areas unique to employee benefit plans. Accordingly, you should make sure that your auditor considered the following areas:

  • whether plan assets covered by the audit have been fairly valued;

  • whether plan obligations are properly stated and described;

  • whether contributions to the plan were timely received;

  • whether benefit payments were made in accordance with plan terms;

  • if applicable, whether participant accounts are fairly stated;

  • whether issues were identified that may impact the plan's tax status; and

  • whether any transactions prohibited under ERISA were properly identified.

About the Auditor

Is a plan auditor required to be licensed or certified?

Federal law requires that an auditor engaged for an employee benefit plan audit be licensed or certified as a public accountant by a state regulatory authority.

Is a plan auditor required to be independent?

Auditors of employee benefit plans should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the financial condition of the plan.

Should a plan auditor have experience in auditing employee benefit plans?

One of the most common reasons for deficient reports is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more training and experience that an auditor has with them, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans.

In some instances, a less experienced auditor may be assigned to perform routine audit procedures in order to reduce audit costs. When this happens, you should confirm that an experienced employee benefit plan auditor will review his/her work, as well as perform the more complicated audit procedures.

Should I request references and check licenses?

When engaging an auditor, you may wish to obtain references and discuss the auditor’s work for other employee benefit plan clients. If you have additional questions, you may also wish to verify with the appropriate state regulatory authority that the provider holds a valid, up-to-date license or certificate to perform auditing services.