Employee Benefit Plan Audits: Are You Putting Your Firm (and Your Client) at Risk?
An audit issued by a firm that does not meet professional standards can result in a failed peer review report, professional liability to the firm, and even put your client’s at risk. It is increasingly important for accounting firms to stick to their core competencies and not to dabble in other areas. A common example of this is firm’s that only conduct a few employee benefit plan audits.
In 2015 the Department of Labor (DOL) published their assessment of the quality of audit work performed by certified public accountants (CPAs) with respect to financial statement audits of employee benefit plans covered under the Employee Retirement Income Security Act of 1974 (ERISA). The DOL determined that 39% of all employee benefit plan audits contained significant deficiencies and that audit quality was correlated with the size of the firm’s employee benefit plan audit practice. Firms that only issued 1-24 audits had approximately 67%-75% deficiency rate.
Why are the deficiency rates so high? Because employee benefit plan audits are unique from commercial audits, and the audit areas with the highest deficiency rates were employee benefit plan related including employee contributions, employer contributions, participant data, and party-in-interest/prohibited transactions. Auditing these areas requires an investment in the audit team taking the proper amount of continuing professional education, the firm having the correct quality control material, and the appropriate level of experience staffed on the engagement. Often this investment is difficult to recoup over only a few audits and firms that do not specialize in the field do not make this investment and the audit quality suffers.
What happens if DOL finds my audit deficient? The Department of Labor has an ongoing program to review employee benefit plan audits taking advantage of enhanced targeting that identifies the types of firms that need the most attention. If your firm's work is selected for review, the DOL will request access to the firm's workpapers, conduct a review of the audit work, and determine whether your firm meets both licensure and peer review requirements. Performance of substandard audit work or licensing violations may result in the referral of your firm to disciplinary bodies such as the AICPA's Professional Ethics Division and your state board of public accountancy. Additionally, your clients may be subject to civil penalties for filing deficient Forms 5500 that are rejected by the Department.
How does this relate to peer review? Employee benefit plans are “must select” audits. If your firm issues employee benefit plan audits, at least one of them will be selected. In the last few years, the AICPA has made employee benefit plan training mandatory and have stressed to peer reviewers the importance of employee benefit plan audit quality. In addition. the AICPA has increased the use of their enhanced oversight program where an industry specialist will review peer reviewer’s work related to employee benefit plans. As a result of these efforts, the rate of nonconforming employee benefit plan audits has increased dramatically. This could result moving your firm’s rating to a Pass with Deficiencies or a Fail.
Why do firms dabble in employee benefit plan auditing? The most common reasons why people are subjecting themselves, their firms, and their clients to risk are that 1) the professional does not understand the level of risk they are assuming, and/or 2) the professional is concerned that if the firm cannot perform the service, then the client may shop the rest of the business with other firms. The bottom line is that no one client is more important than your license and the firm’s reputation. Continuing to dabble in the field is no longer an option.
So, what do I do? Firms who fit this profile have two options: 1) Make the investment in providing quality employee benefit plan audit services. Your firm should the AICPA Employee Benefit Plan Audit Quality Center and use their training and tools. Also, attend the AICPA Employee Benefit Plan Conference and contact your state society about joining their committee and attending their conference. Ensure your firm has current quality control material and have your firm develops a specialized staff to work on all employee benefit plan audits. 2) Find a specialist firm to work with. Firms that specialize in employee benefit plan auditing can conduct the audit with a high level of quality that reduces both yours and your client’s professional risk. If you are concerned about the relationship you have with the client, you can have the specialist firm sign non-compete agreement to ensure that you are protecting your relationship.
Auditing employee benefit plans is a risky business. Firms should decide if this is an area that the firm wants to focus on or exit.