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Employee benefit plan (EBP) administrators are hearing a lot about their fiduciary responsibility requirements from service providers (See April 14th Blog Post – Employee Benefit Plans & Responsibilities of Plan Fiduciaries), and the recent case of Lockheed Martin being sued by participants for mismanagement of their plan (Lockheed Martin) further illustrates the importance of fiduciary oversight.
Generally, the Employee Retirement Income Security Act of 1974 (ERISA) requires EBPs with 100 or more participants (120 participants in the first year of qualification) to have an audit performed by an independent auditor and to file the audit report with the annual Form 5500. If your EBP is required to have an audit, one of the most important duties for the plan administrator is to hire an independent qualified public accountant and to ensure that the plan has obtained a quality audit in accordance with ERISA and U.S. Department of Labor (DOL) requirements.
While ERISA requires that "reasonable" compensation be paid for audit services, the price should not be the sole determining factor when comparing potential auditors. Rather, the reasonableness of fees must be analyzed giving consideration to the quality of services to be provided. When evaluating potential plan auditors, the American Institute of Certified Public Accountants (AICPA) recommends comparing the auditors' specific EBP experience and continuing professional education (CPE) before comparing price.
The AICPA also reports that one of the most common reasons the Department of Labor has identified an auditors' reports as deficient, is due to the failure of the auditor to perform tests in areas unique to EBP audits. The more specialized training and experience that an auditor has with EBP audits, the more familiar the auditor will be with EBP practices and operations, including special auditing considerations and rules that apply to EBPs. As a result, finding an auditor with extensive EBP-specific audit experience may increase accuracy in reporting, and the overall quality of the audit.
To help CPAs meet the challenges of performing quality EBP audits, the AICPA has established the Employee Benefit Plan Audit Quality Center, a firm-based voluntary membership center for firms that audit EBPs. The AICPA Employee Benefit Plan Audit Quality Center member firms demonstrate their commitment to providing quality audit services to EBPs by voluntarily adhering to higher standards of audit quality in their policies, procedures, and training related to the performance of EBP audits. For example, member firms are required to designate an audit partner to have firm-wide responsibility for the quality of the firm's EBP plan audit practice, all partners and managers are required to have 8 hours of EBP-specific CPE in a three year period, and the firm is required to include EBP audits in the firm's annual internal inspection. Check out the full list of membership requirements and a member firm in your area on the Center's website at.
Plan administrators frequently view the plan audit as a burdensome requirement. However, it is important to consider that an EBP audit can provide more than just a compliance report to file with the Form 5500. An audit can help a plan's management improve and streamline plan operations by evaluating the strength of the plan's internal control over financial reporting, and identifying any control weaknesses or plan operational errors. The failure to identify and correct operational errors, or file timely and accurate reports could result in the DOL assessing penalties or in lawsuits from participants. The more EBP-related experience an audit firm has, the more likely they are to identify any such potential pitfalls.
For a more detailed discussion regarding hiring a quality auditor, check out the AICPA's Plan Advisory: The Importance of Hiring a Quality Auditor to Perform Your Employee Benefit Plan Audit.
Can’t get enough about employee benefit plan audits? As a member of the AICPA Employee Benefit Plan Audit Quality Center, our team of nerds at Delap is happy to answer any questions you may have. Reach out today!