Findings from a recent Department of Labor Report, Assessing the Quality of Employee Benefit Plan Audits: 2014 Audit Report suggest a strong correlation between the number of employee benefit plan audits a firm performs and audit quality. At 76%, audit deficiency rates among firms that performed one or two audits per year were almost twice as high as the deficiency rate of the report’s population as a whole, which registered at 39%. Deficient audits affected $653 billion in plan assets and 22.5 million participants.
The vast majority of CPA firms that audit plans subject to the Employee Retirement Income Security Act of 1974 (ERISA) audit requirement perform less than 25 audits per year. Previous DOL studies have shown that the certified public accountants performing the fewest number of audits had the highest proportion of deficiency rates. The DOL considered this when determining its sample for the 2014 audit report. It divided the number of all plan types audited in 2011 into six strata based on the number of audits the CPA firm performed each year. Researchers then took a random sampling from each stratum, reviewing 400 plans in total.
Deficiency rates were reviewed for each stratum, and the DOL found deficiency rates among firms that performed the fewest audits were significantly higher than the average. For example, firms that performed between six and 24 audits per year had a 67% deficiency rates, and 39% of the deficient audits had five or more major deficiencies. Firms that performed between 25 and 99 plan audits per year had an almost 42% deficiency rate, and 22% of deficient audits had five or more deficiencies. Firms that performed more than 100 employee benefit plan audits per year tended to have fewer deficiencies total as well as fewer major deficiencies per audit.
A plan administrator who hired a CPA firm that provides one to two audits per year had a 64% greater chance of hiring a firm with deficient audits than if the plan administrator had hired a firm that performed more than 100 plan audits per year.
Predictors of Audit Quality
Beside the number of audits performed, the DOL found certain correlations between the quality of the audit and the characteristics of the CPA firm. The more specialized training a CPA firm had, the lower the percentage of deficient audits. Firms that audited fewer plans per year tended to have less training than the specialized training than firms performing the most ERISA audits per year.
On average, members of the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan Audit Quality Center (EBPAQC) also had lower audit deficiency rates. Firms that performed between six to 24 plan audits per year and were members of the EBPAQC had a nearly 61% deficiency rate. Nonmember firms in that stratum had almost a 91% deficiency rate. For firms auditing between 25 and 99 plans per year, the difference was much more notable. Member firms had a 37% deficiency rate while nonmember firms had a 100% deficiency rate. Smaller firms were less likely to members of the EBPAQC than firms in the largest stratum.
The AICPA created the EBPAQC in 2003 because previous surveys of employee benefit plan audit quality revealed that the most common areas of audit deficiency were unique to employee benefit plan audits. Similar patterns emerged in the 2014 audit quality study. Contributions, planning and supervision, internal controls, participant data, investments, party-in-interest transactions and benefit payments ranked among the top deficiencies, suggesting CPAs did not properly consider in performing their audits. We are pleased to report that Mayer Hoffman McCann P.C. is a member of the EBPAQC.
How to Pick Your Auditor
Continuing education in employee benefit plan auditing is an important trait for your auditor, so much so that the DOL is recommending that it be required for all auditors of employee benefit plans. In the 2014 report, the DOL recommended that the ERISA definition of qualified public accountant be amended to include additional qualifications. It is also asking state boards of accountancy to require specific licensing requirements for CPAs who perform ERISA audits.
Plan administrators need to make sure that the auditor they engage for their ERISA audit has the expertise to perform the work. When meeting with your audit team, ask how many benefit plans they audit per year and whether the firm is a member of the EBPAQC. You should also ask about the level of employee benefit plan audit training completed by their audit team.
For More Information
If you have specific comments, concerns or questions about how to select an employee benefit plan audit firm, contact your CBIZ Tofias advisor, or you may reach us at 617-761-0600 and by clicking here.
Kevin is a Managing Director/Shareholder in the Employee Benefit Plan Audit Practice. He can be reached at 617.761.0780 or KPetrosino@cbiztofias.com.