Selecting Employee Benefit Plan Auditors

Please feel free to launch a video review of this month’s topic above or continue to read on below.  This month’s topic is a review of some of the major audit initiatives recently launched by the DOL with an emphasis on the selection of your auditor.

As you know, you began filing your Form 5500 electronically last year and the DOL now has the ability to search those forms for “targeted concerns”.  We’ve discussed some of these at length but just to review they include:

1.      Delayed investment of employee contributions

2.      Valuation of employer securities

3.      Fees for your service providers

4.      Review of low volume financial auditors

The fourth item is the one I want to highlight today since we are in audit season.

Back in 2004, the DOL’s sample of audits found 30% of them to be defective meaning the auditors did not understand or follow established practices and requirements.  The problem the DOL ran into is that they have no authority to discipline or sanction auditors even though they are the primary overseer of audits for ERISA covered plans.  So they tasked the 2010 ERISA Advisory Council to review the situation since the primary purpose of the audit requirement is to protect plan participants.  The Council recently released their findings and the recommendations included:

1.      The DOL should require Plan administrators to identify on the Form 5500 whether or not the Plan auditor is a member of The American Institute of Certified Public Accountants Employee Benefit Plan Audit Quality Center.

2.      The Department should establish a fiduciary safe harbor in the initial selection of Plan auditors who are members of that same organization.

Please keep in mind that only 20% of the firms that conduct employee benefit plan audits are members of this organization since membership is voluntary.  The recommendation from the Council seems fairly aggressive to me but most professionals work under a self-regulatory organization and it appears that this structure would be a version of that.

For your reference there are three attachments to this email.  One is published by the AICPA called “The RFP and Auditor Evaluation Process” and the second is “Selecting an Auditor” published by the DOL.  My understanding is that you already have a competent auditor engaged for your plan but since this is a priority of the DOL you should quickly review the attachments and keep them in your files for reference.

The third attachment is the 2010 ERISA Advisory Council’s report which highlights another important area that I do not have time to cover this month, which is limited scope audits.  The limited scope audit allows you to instruct your auditor not to audit the investment information prepared and certified by a bank or insurance carrier that is regulated by a state or federal agency and that holds the plan assets.  The Council recommended that the DOL clarify what kinds of entities are qualified to issue certifications and that you include those certifications with your Form 5500.

We’ll see where all of these recommendations go but for now it is a good idea to keep them in mind and I will let you know if the Department issues any guidance on the matter.