Auditing Employment Benefit Plans—Another Factor.

BY BEN PENA

“ERISA Liability for CPAs” ( JofA , Dec.00, page 39) pointed out the delicate issues surrounding employee benefit plans. However, the article did not mention one potential problem area our firm has encountered in auditing such plans—companies’ use of third-party administrators (TPAs).

TPAs handle the day-to-day transactions and final plan-year valuation of participant accounts. In many cases the leading cause of erroneous participant account valuation and reporting is poor communication between plan administrators and TPAs.

To compound the problem, TPAs usually provide services to several plans. Since no two employee benefit plans’ provisions are exactly the same, software packages allow flexibility in changing options or flags to conform to the provisions of any adoption agreement. Any auditor who has audited such plans can attest that if the options selected on the application do not conform to the plan’s adoption agreement, there will be erroneous participant accounts. For example, a plan’s employer contribution and/or forfeiture allocations may depend on an entire participant pool, so one error may cause all participants’ accounts to be wrong. To make matters stickier, terminated employees already may have received their exit distributions based on an erroneous employee account valuation.

The complexity of plans usually requires periodic monitoring by experienced plan administrators to discover such errors. Typically, the plan administrator is the company president or CFO—who may not be readily available for such close monitoring.

When auditing such plans, auditors should take an extremely skeptical approach and become very familiar with the content and flow of payroll data provided to the TPA, the provisions of the plan and what the TPA ultimately reported at the end of each plan year.

Ben Pea, CPA
Burton, McCumber & Cortez, LLP
McAllen, Texas

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