The U.S. Department of Labor (DOL), generally requires employee benefit plans (EBP) with 100 or more participants to have an audit as a part of the annual filing of their Form 5500.
Employee benefit plan audits are unique in various ways. Most important, employee benefit plan audits must do more than substantiate the financial statements; they must also evaluate plan operations. These unique attributes of employee benefit plan audits require intimate knowledge of the specific plan being audited, Employee Retirement Security Act (ERISA) of 1974 and the U.S. Department of Labor reporting and disclosure requirements, in addition to generally accepted accounting principles and the AICPA auditing standards.
Employee benefit plan audits represent an area of significant opportunity for auditors. In an article published in April 2015, Accounting Today reported there are currently more than 83,000 employee benefit plan audits performed by approximately 7,300 firms.
The Office of the Chief Accountant for the Employee Benefits Security Administration (EBSA) of the DOL found in 2004 that approximately 30 percent of plan audits did not comply with professional audit standards or reporting requirements. The DOL is expected to issue the results of a study on EBP audit quality in the near future. In response to what questions plan administrators should ask an auditor about his or her work, the DOL’s EBSA made the observation that EBP audits are often found to be deficient because of the failure of auditors to conduct tests of areas unique to employee benefit plans, including:
- Whether plan assets covered by the audit have been fairly valued. Generally, fair value is the appropriate measurement of plan assets. However, benefit responsive assets should be valued at contract value. Additionally, special consideration must be given to the valuation of certain securities such as investments in real estate investment trusts and junk bonds, for which readily available market prices do not exist.
- Whether contributions to the plan were timely received. The DOL requires that employers transmit employee contributions as soon as they can be segregated from the employers’ assets, but in no event later than the 15th business day of the month immediately following the month in which the contribution was withheld or received by the employer. Many plan administrators and auditors mistakenly believe that this provision creates a 15-day safe harbor for the remittance of employee contributions. Late remittance of employee contribution is the most common example of a prohibited transaction as defined by the DOL.
- Whether benefit payments were made in accordance with plan terms. Participants’ eligibility for benefits and the amount and timing of benefit payments must be consistent with the provisions of the plan.
- Whether participant accounts, if applicable, are fairly stated. The auditor must consider whether participants’ contributions were invested in accordance with the participant’s elections, and the accuracy of the amount of investment income and administrative expenses charged to participants’ accounts.
- Whether issues were identified that may impact the plan’s tax status. Amendments to the plan must comply with the latest tax laws and regulations as evidenced by an IRS determination letter relevant to the most recent version of the plan. Moreover, the plan must perform certain compliance testing annually and take measures to remedy any failures.
- Whether any transactions prohibited under ERISA were properly identified. ERISA imposes a requirement for auditors to provide specific disclosures with regard to prohibited transactions. These requirements can be satisfied by adding certain supplemental schedules to Form 5500. Because the auditor’s report and opinion are made a part of the plan’s annual report, the supplemental schedules are subject to the audit procedures applied in the audit of the plan’s basic financial statements.
Audit professionals who perform employee benefit audits are subject to the EBSA Enforcement Programs Procedures. As such, deficiencies identified by EBSA’s review of an auditor’s work papers may result in disciplinary actions enforced by the AICPA, the practitioners’ state society and/or the assessment of civil penalties by the DOL.