Some concern about plan audits

A good friend of mine in the business, Al Lutfy, CPA (one of the best auditors out there, especially at the price) sent me a short note regarding plan audits that certainly piqued my interest.

For those who are unaware, any retirement plan with 100 or more participants (I will forego the 80/120 rule for this discussion) is required to include an independent audit report from a certified public accountant with their Form 5500.  There is a lot of confusion of what the audit covers and won’t cover.

The plan audit is a set of audited financial statements for the Plan, complete with the auditor’s opinion, footnote disclosures and supplemental schedules required under ERISA. These financials will be attached to the Plan’s Form 5500 filing. A plan that should have an audit that doesn’t include one is treated as if they didn’t file that Form 5500, which means no statute of limitations and huge penalties.

The auditors will use their judgment to determine the nature and scope of the audit tests to be performed, based on their knowledge of the Plan’s control environment, nature of the Plan and other various factors. The auditors will look at contributions to the plans (amounts and timeliness of deposits); distribution from the plan; participant loans from the plan; a look at plan expenses; plan investments and income; participant data; any related party transactions; and participant data.

The audit covers a lot of areas, when it relates to the financial health of the plan. It won’t review plan investments for prudence; it won’t address the overall fiduciary process; the prudence of the plan’s design; or care that much about fee disclosure. An audit is an audit; it is not a review of the service providers or the plan as a whole.

Al pointed out that the Department of Labor (DOL) has been concerned for the past couple of years with the quality of audits. I know this from personal experience as the DOL effectively shut down a CPA a few years back from ever doing plan audits again because of its lack of quality (81 audits performed by 3 auditors) and ties with a third party administrator (TPA) that questioned the CPA’s independence. While the independence issue was a biggie for the DOL, there was a greater concern that the actual testing hat the auditors should have done to review the TPA’s work wasn’t being done.

Al’s concern is that the DOL is know more interested in the testing of documents than they were in the actual financial statement numbers. Bottom line is that the DOL is more concerned with the testing and the work-papers than they are with the actual financial statements.

What does this mean? It means that plan sponsors need to find quality auditors because deficient audits can be a big problem for the plan sponsors that need it. Plan sponsors need to find auditors who have a knack and expertise in retirement plans and it should be noted that there is a lot of great auditors out there (including Al) that can perform the audit at a great quality and price that aren’t part of the Big 4. While the Big 4 have a nice ring to it, their fees are in the high end and I have seen a couple of deficient audits from that part of the accounting world.

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