Risks and Rewards in Employee Benefits

Plan audits are an excellent practice niche for firms that can meet the challenge

ANITA DENNIS is a Journal contributing editor.

The United States has approximately 850,000 employee benefit plans that require audits. These plans have more than $3 trillion in assets, according to CPA William LeRoy. But even though employee benefit plan audits present an appealing business opportunity, they are also a challenging one. The Department of Labor, which polices this area, found in its most recent review that 19% of the audits did not conform with GAAS and 33% failed to comply with reporting standards.

The huge demand—coupled with the failure of some audits—spells possibilities for accounting firms that devote themselves to providing top-quality audits for employee benefit plans. One such firm is LeRoy Accountancy Corp., a 12-person San Francisco firm, which performs only employee benefit plan audits and some related services.

Employee benefit plan audits are complex and risky because of the multitude of regulations that apply to them. Due to the failure of so many audits, they have also come under increasing scrutiny from regulators. In order to excel in this challenging field, William LeRoy has resisted all temptations to offer any services outside his chosen niche.

"It's very difficult to become an expert in a number of fields," he observes. "As the different areas become more complex, one begins to feel somewhat inadequate trying to keep up with them all. You realize that you're not keeping up technically. And the employee benefit plan industry is really one of the most complicated from a regulatory point of view." When he launched his firm in 1993, he planned to focus narrowly on this niche, which means "we have not lost sight of our goals in terms of serving clients and keeping up with standards."

Within this niche, clients and plans run the gamut, including both defined-contribution and defined-benefit plans for companies in many different industries. The firm performs audits for about 150 plans that range in size from barely more than 100 participants to over 10,000. Assets might be a few thousand dollars or well in excess of $1 billion. "It's no problem for a small firm to do this kind of work," LeRoy says. "For small plans, we use one person in the field for the audit. Larger plans might take two or three field people."

Problem: How to provide top-quality audits of employee benefit plans.
Solution: Focus exclusively on this niche; know the subject thoroughly.

To keep current, firm members do research on CD-ROMs, which provide access to tax and other services for pension plans as well as industry-specific resources and a proprietary regulatory checklist. Everyone has laptops and the CD-ROMs are available through a server with a capacity for seven disks.

Restricting his business might have meant losing some potential clients, but it also presented opportunities. LeRoy had worked on employee benefit plan audits for a large firm in San Francisco for many years, so his new firm received a lot of referrals from contacts at area CPA firms. LeRoy also seeks to build alliances with these firms, acting as their de facto employee benefits audit arm. LeRoy's firm offers to take over clients' work related to the Employee Retirement Income Security Act of 1974, "and in some cases the firms are very pleased to give it to us." Because ERISA audits were a brand-new practice area after passage of the act, many firms fell into doing these audits for existing clients without much preparation for their complicated requirements. Firms that did not choose to specialize in this area often found it difficult to fully comprehend its complexity.

The alliances work because the practices don't overlap. "We're not competitors with most CPA firms because of the kind of work we do," LeRoy says. Given these close ties, the referring firm can satisfy clients and remain knowledgeable about the audits without taking the risk of doing the work itself. The firm now has alliances with 10 other practices and actively markets them to other CPAs.

Even a perfectly executed audit doesn't cover all the major issues of interest to the DOL and the IRS, LeRoy notes. For example, while the plans usually are well written to conform to standards, operational compliance—which involves daily operation of the plan in accordance with all the relevant laws—does not necessarily fall into the scope of an audit. That has presented a practice opportunity for LeRoy's firm, which performs compliance reviews as value-added, agreed-upon procedures engagements. Nearly 80% of all audit clients get these reviews, which the firm tailors for individual needs and concerns. In addition, some individual plans and bank trust departments engage the firm to perform these compliance reviews without the accompanying audit.

Firm Profile

Name: LeRoy Accountancy Corp.
Year opened: 1993
Location: San Francisco.
Total personnel: Twelve.
Number of partners: Three.
Number of CPAs: Seven and four in process.
Areas of concentration: Employee benefit plan audits.
Percentage of fees in
Employee benefit plan audits and related services: 100%.

Types of clients: Employee benefit plans of various types and sizes.
Advertising and marketing programs: Networking; promoting alliances with other CPA firms.
Best thing we did in the last five years: Retained a narrow focus on employee benefit plan audits.
Worst thing we did in the last five years: Chose a new phone system without sufficient advice from other CPA firms and professionals.
How the practice will change in the near future: The firm will continue to grow within this niche.

Although clients are pleased with the results of these compliance reviews, marketing them can be a challenge, LeRoy says. "We deal primarily with personnel and benefits people. They are aware of the significant risks within their plans, but they are not empowered to authorize a service; that responsibility usually rests with CFOs, who have so many other concerns that pension benefits audits may not be on their radar screens." The firm leaders have learned either to approach the decision maker directly about the service or to ask the benefits people to become involved in advocating it to the CFO. The benefits personnel's knowledge is useful because "many CFOs are unaware of the risks involved in these plans." To help in the education process, the firm has a brochure with the caption, "Greater risk than in your income tax return." For marketing, "we generally use networking to reach the CFO or ask the benefits people to set up a meeting," LeRoy says.

In addition, when the firm audits medical plans, the same client may ask for an audit of claims processing. Payroll audits are another service the firm offers. "We have one partner who specializes in multiemployer union plans, which involves one plan with a lot of employers participating. Payroll audits ensure that each one is contributing to the plan properly."

For more information...
  • The Accounting and Audit Guide on Employee Benefit Plan Audits (product no. 012336JK).

  • The Audit Risk Alert on Employee Benefit Plans Industry Developments (product no. 022193JK).

  • The AICPA continuing professional education course, Audits of Employee Benefit Plans (product no. 737092JK).

All can be ordered through the AICPA publications department at 888-777-7077 or online at www.aicpa.org .

While the work is driven by standards and regulations, there have been some regulatory bright spots, LeRoy says. For example, the IRS has eased the burden on plans through a program known as an Administrative Procedure Regarding Self-Correction (APRSC). According to LeRoy, in the past, even minor violations in pension plans used to mean severe penalties, but that has changed. Now, if a problem is discovered during an audit within two years of the affected fiscal year, the plan may correct it without reporting it to the IRS, as long as it is documented in the files. If the plan is later audited by the IRS, the administrators need only show their documentation of the error and its correction. That has removed the specter of harsh penalties for oversights, but it has also given plans added responsibility to root out problems. "It's a very important change from the IRS, but it's also a double-edged sword," LeRoy notes. "You really need to police yourself now or the penalties may be even more severe. Because the IRS has offered this opportunity, plans had better take advantage of it."


Employee benefit plan audits present an excellent practice opportunity, but those who choose to fill it should have the training—and the personality—the field requires. "You are not in the role of a business consultant," LeRoy says. "This is very technical work. You must like to audit and like working with detailed regulations."

He estimates it takes two to three years of dedicated study to become proficient in the field. One good introduction is through conferences, such as the annual AICPA National Conference on Employee Benefits Plans, and continuing professional education offered by a variety of sources. "Training is relatively inexpensive," he says, "but it takes a lot of time and study to complete." He also recommends that newcomers to this niche get involved in related professional organizations. "Don't just attend; become a part of the leadership." For LeRoy's firm, this approach has meant having a prominent position in a niche where knowledgeable professionals are highly valued.


©1998 AICPA


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