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