The Department of Labor finds widespread deficiencies in audits of benefit plans
On May 28, 2015, the Department of Labor (DOL) issued a report on its inspection of employee benefit plan audits, “Assessing the Quality of Employee Benefit Plan Audits.” Under the Employee Retirement Income Security Act of 1974 (ERISA), most plans with more than 100 participants must be audited annually by an independent certified public accountant (CPA). The purpose of the study was to determine if audit quality had improved since the last study was conducted in 2004. The study was based on a sample of 400 financial audits filed with the 2011 Forms 5500 (plan years beginning in 2011) of these plans.
There were 81,162 filings that contained audit reports from 7,330 different CPA firms. The following is a summary of CPA firms grouped by the number of plans audited and the total number of audits performed:
Number of Plans Number of CPA Number of Audits
Audited Firms Performed
1 – 2 3,684 4,891
3 – 5 1,519 5,773
6 – 24 1,603 17,747
25 – 99 433 18,910
100 – 749 77 15,418
750+ 14 18,423
Total 7,330 81,162
Approximately 50% of CPA firms audit one or two plans, 93% of firms audit less than 25 plans, and only 1% of the CPA firms audit more than 100 plans.
The 400 audits selected were evaluated against the American Institute of Certified Public Accountant’s (AICPA) Audit and Accounting Guide, Audits of Employee Benefit Plans (With Conforming Changes as of January 1, 2012). The DOL found that 61% of audits fully complied with professional auditing standards or had only minor deficiencies under professional standards. The remaining 39% of the audits contained major deficiencies, which put $653 billion and 22.5 million plan participants and beneficiaries at risk. These figures reflect increases in the amount of plan assets and number of plan participants at risk compared with prior Employee Benefit Security Administration studies.
A summary of the results follows:
Audit Audits With
Strata Reviews Deficiencies
1 – 2 95 75.8%
3 – 5 95 68.4%
6 – 24 95 67.4%
25 – 99 65 41.5%
100 – 749 25 12.0%
750+ 25 12.0%
Total 400 38.8%
The results of this study clearly indicate a distinct correlation between the number of employee benefit plan audits performed and the quality of the audit performed. CPAs who performed only one to two employee benefit plan audits annually had a 76% deficiency rate, as compared to a deficiency rate of 12% for those firms auditing more than 100 plans per year.
Unfortunately, the percentage of plan audits that do not comply with professional audit standards continues to increase, as reflected in the table below:
Audit Quality Study 1988 1997 2004 2008
Audits with deficiencies 23% 19% 33% 39%
Deficiencies are a problem for the plan sponsors and administrators, as fines can reach up to $1,100 per day without limit. Plans sponsors and administrators have a fiduciary responsibility to the plan participants and this is an area that plan sponsors and administrators should be concerned with and aware of as they review their employee benefit plan auditor.
The AICPA also said it would support efforts to repeal the ERISA exemption allowing limited-scope audits, and called for a comprehensive education program to heighten plan sponsors’ understanding of how important it is to hire a good auditor.
Padgett Stratemann is one of the largest auditors of employee benefit plans in the country, auditing more than 130 plans annually. Our employee benefit audit plan practice has been through DOL inspections, as well as Public Company Accounting Oversight Board inspections for our public plans, without any major deficiencies. We take this development very seriously.
For more information on this study, or to learn more about how Padgett Stratemann’s employee benefit plan audit specialists can help, please contact Raul Rios at 210.828.6281 or Raul.Rios@Padgett-CPA.com.