by Carol I. Buckmann
Now that the bulk of 5500 filings and related audits are over (most plans filed on October 15), the usual frantic questions from clients who need to respond to their auditors have abated, and everyone is breathing a sigh of relief and moving to concentrate on other matters until the next filing season. That is not the best response, much as we can understand it. Now, when the experience is fresh in your mind, is the best time to evaluate whether your audit was up to snuff, because the consequences of having a bad auditor are about to go up.
Hiring a Bad Auditor Can Be Expensive.
We already know that bad audits are on the Department of Labor’s radar. Last year, the Department of Labor issued a highly-publicized report concluding that 39% of audits are deficient. There are possible penalties for a really deficient audit, which could be treated as not satisfying the ERISA requirement at all. However, a more likely consequence of a bad audit is that overlooked operational problems can lead to big penalties, particularly if they are allowed to continue uncorrected for years. A good auditor will find problems when they can easily be corrected, and advise you how to do so. A good auditor can also help you set up controls to minimize the risk of future operational problems.
The Stakes Get Higher.
Now that the Internal Revenue Service has decided to discontinue cyclical determination letters, there is a new risk for plan fiduciaries who don’t hire experienced auditors. The plan document will have to be reviewed to determine whether any required amendments are missing and applicable requirements are satisfied, and the prior determination letter is still valid. Cooperation between attorneys advising in connection with the plan and knowledgeable auditors will be required. If a plan document is deficient, the plan’s qualified status is called into question.
Finding a Good Auditor.
The regulations don’t establish much in the way of requirements for an independent plan auditor, and a common mistake is to hire the company’s corporate auditor without inquiring about its ERISA expertise. In addition to reviewing plan finances, ERISA auditors need to be familiar with contribution and compensation limits and understand what a prohibited transaction is. They should be checking compliance items such as benefit and contribution calculations. A good corporate auditor may not have the special expertise to be a good ERISA plan auditor.
Getting a Better Audit.
Here are five ways to have a better audit in 2017:
1) Find out how many ERISA plan audits the firm does. A good way to find a firm that is likely to do a lot of plan audits is to look at its website to see if it highlights ERISA expertise. If you are told that the firm does one or two ERISA audits a year, find another auditor.
2) No matter how many plan audits your accounting firm says that it does, make sure that the specific people assigned to you have experience doing plan audits on a regular basis. I have often seen major accounting firms assign the most inexperienced people to ERISA plan audits, as is evident by the questions that my clients get asked. For example, a common question that indicates a complete lack of familiarity with existing the determination letter process is: did you get this recent amendment approved by the IRS when you adopted it? Of course, plan sponsors have filed on their five year cycle, and no one routinely filed for each and every plan amendment. The IRS would have put us at the bottom of the pile if we had.
3) Find out if the firm is a member of AICPA’s Employee Benefit Plan Audit Quality Center. The Department of Labor determined that members produce audits with fewer deficiencies. These firms strive to do the highest quality audits, and a firm peer review system is not a substitute. The Department of Labor did not find that internal peer review had the same correlation with improved audit quality.
4) Ask whether the Department of Labor has had questions about the firm’s audits and, if so, how the matters were resolved. (They do not need to identify their clients to respond to this question.)
5) Handle the auditor hiring process like the fiduciary responsibility it is. In fact, the auditor’s fees may be coming out of plan assets. Consider an RFP and carefully review fees and service standards of the candidates. (Bear in mind, though, that ERISA does not prohibit paying more for a better audit.) Document the reasons for your choice.
Nothing will make ERISA audits painless, but following these steps can reduce your risk of future plan problems.