Deficiencies, Quality, and Focus Areas with Employee Benefit Plan Audits

By Brett Sinsabaugh, Business Assurance & Advisory Services Senior Manager | ERISA Team

Employee benefit plan audits continue to be a major focus area in regard to audit quality for regulators and at all plan levels including plan sponsors, auditors, and participants.  Deficiencies in audits can lead to unwanted fines, penalties, and an overall lack in fundamental fiduciary oversight.

Some common items noted in employee benefit audits of lessor quality include deficiencies in the following Plan audit areas:

• Using the work of specialists
• Related parties and parties in interests
• Investments
• Employee and employer contributions
• Notes receivables
• Operating expenses
• Participant data and accounts
• Benefits payments and distributions

In recent years, a national study was performed by the Employee Benefits Security Administration (EBSA), to assess the quality of employee benefit plan audits.  The results were surprising and troublesome as 39% of the 400 plan audits reviewed “contained major deficiencies in regard to one or more applicable GAAS requirements, which would lead to rejection of the Form 5500” (RIA Checkpoint, 108.32 EBSA Study of Audit Quality).

All Plan Sponsors, fiduciaries, and those charged with governance should be aware of the following key findings:

• There is a clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed. Analysis of the data indicates a wide disparity between those CPAs who perform the fewest plan audits and those firms that perform the largest number of plan audits. CPAs who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate. In contrast, the firms performing the most plan audits had a deficiency rate of only 12%. (EBSA Report)
• The accounting profession’s peer review and practice monitoring efforts have not resulted in improved audit quality or improved identification of deficient audit engagements. In 4 of the 6 audit strata, a substantial number of CPA firms received an acceptable peer review report, yet had deficiencies in the audit work that EBSA reviewed. (EBSA Report)
• CPA firms that were members of the American Institute of Certified Public Accountants’ (AICPA) Employee Benefit Plan Audit Quality Center tended to produce audits that have fewer audit deficiencies. Overwhelmingly, most CPAs in the two smallest audit strata are not Employee Benefit Plan Audit Quality Center members. (EBSA Report)
• Training specifically targeted at audits of employee benefit plans (EBPs) may contribute to better audit work. As the level of EBP-specific training increased, the percentage of deficient audits decreased. (EBSA Report)
• Of the 400 plan audit reports reviewed, 67 (17%) of the audit reports failed to comply with one or more of ERISA’s reporting and disclosure requirements. (EBSA Report)

The EBSA report concluded:

• The smaller the firm’s employee benefit plan audit practice, the greater the incidence of audit deficiencies. (EBSA Report)
• Audit areas that are unique to employee benefit plans such as contributions, benefit payments, participant data and party-in-interest/prohibited transactions, continue to lead the list of audit deficiencies. As EBSA found in its two previous studies, CPAs often failed to consider these unique audit areas and, therefore, performed inadequate audit work. (EBSA Report)
• CPAs failed to comply with professional standards either because they were not adequately informed about employee benefit plan audits, or failed to properly utilize the technical materials that were in their possession. Audit partners in firms performing a greater number of plan audits tended to have a greater amount of employee benefit plan specific training. In a number of instances, however, even having the proper technical guidance did not ensure that a quality audit was performed. (EBSA Report)
• The Practice Monitoring Peer Review process established by the AICPA and administered by sponsoring state CPA societies does not appear to be an effective tool in identifying deficient plan audit work and ensuring compliance with professional standards. While selecting an employee benefit plan audit is a required part of the peer review process (where applicable), CPAs who performed deficient audits often received acceptable peer review reports. (EBSA Report)
• Members of the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC) tend to have fewer audits containing multiple GAAS deficiencies. Additionally, non EBPAQC member firms tend to have a larger number of GAAS deficiencies, per audit engagement, than EBPAQC members. (EBSA Report)

Currently, the AICPA is leading the drive to provide a consistent approach to quality audits and are focusing on several different areas with their Peer Review engagement process.  In 2019 these focus areas consist of increased focus areas of internal controls, risk assessment, auditing accounting estimates, documentation, and SOC engagements (2019 Enhancing Audit Quality areas of focus).  A general familiarity with these focus areas will provide a greater Plan and audit understanding from a Plan Sponsor level and lead to a higher level of quality and expectation from the Plan auditor.

For more information regarding employee benefit plan audits including deficiencies, quality, and focus areas, please contact Brett Sinsabaugh, Business Assurance and Advisory Services Senior Manager or another member of Keiter’s Employee Benefit Plan team.

Additional EBP Resources:

• Employee Benefit Plan Advisory: Limited Scope Audits
• Employee Benefit Plan Advisory: Financial Statement Audits
• Unrelated Business Income and Employee Benefit Plans

Sources:

RIA Checkpoint, 108.32 EBSA Study of Audit Quality.

EBSA Report, “Assessing the quality of employee benefit plan audits.”  US Department of Labor Employee Benefits Security Administration Office of the Chief Accountant May 2015.

AICPA Audit Quality Center, “2019 Enhancing Audit Quality areas of focus.”