Report calls for improvement in employee benefit plan audits

A U.S. Department of Labor (DOL) report released Thursday showed a need for improvement in audits of employee benefit plan financial statements.

The report is the result of a study that examined audits of Form 5500 filings from 2011. The DOL’s Employee Benefits Security Administration (EBSA) found that 61% of audits fully complied with auditing standards or had minor deficiencies. One or more major deficiencies were found in 39% of the 400 audits examined in the study.

Firms that are members of the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC) performed higher-quality work than nonmember firms, the DOL report states.

The AICPA issued a response to the report. “We take the … findings seriously and are committed to working with the DOL and other interested parties to enhance audit quality,” the AICPA statement read, in part. “The audit of an employee benefit plan’s financial statements is an important financial reporting safeguard. Notably, none of the quality issues that the AICPA has reviewed thus far that were identified by the DOL pose a risk to the viability of any plan.”

Employee benefit plan (EBP) audits are part of an ongoing initiative by the AICPA aimed at strengthening audit quality. The AICPA in May 2014 launched its Enhancing Audit Quality (EAQ) initiative. A six-point plan released by the AICPA last month will promote the pursuit of quality throughout a CPA’s journey—from before an individual is licensed to when he or she builds professional competency and engages in peer review and practice monitoring. This road map to improved audit quality for CPAs includes these and other initiatives:

• Prelicensure. Objectives include assessing critical thinking and professional skepticism in the next version of the CPA exam and development of doctoral-level audit professors with practical experience.
• CPA learning and support. Efforts include the creation of competency models for audit engagements, including EBP and governmental audits; development of competency assessment tools; and certificate programs to demonstrate competence.
• Peer review. Increased focus on audits of higher-risk industries and areas. More significant remediation, root-cause analysis, and termination from the peer-review program after repeat quality issues also are a focus.
• Practice monitoring of the future. Long-term initiative for near real-time, ongoing monitoring of firm quality checks using a technological platform.
• Ethics enforcement and NASBA collaboration. Objectives include more aggressive pursuit of reported deficiencies and stronger ties with the National Association of State Boards of Accountancy (NASBA) and state boards of accountancy.
• Standards and ethics code. Actions include support for implementation of quality-control standards, revisions of the auditor’s report, evaluation of implementation of clarified standards, and a recently completed update of the AICPA Code of Professional Conduct (aicpa.org/codeofconduct).

In the DOL study, deficiencies were more likely among firms that performed smaller numbers of EBP audits. Deficiencies were found in about three-fourths (76%) of plan audits performed by firms that audit just one or two plans annually. “Overwhelmingly, most CPAs in the two smallest audit strata are not Employee Benefit Plan Audit Quality Center members,” the DOL report states.

In a speech last month at the AICPA Employee Benefit Plans Conference, Sue Coffey, CPA, CGMA, AICPA senior vice president–Public Practice & Global Alliances, said the AICPA Professional Ethics Division is investigating, on an expedited basis, all the audits from the study that were referred to the AICPA by the DOL. Any disciplinary action by the AICPA is shared promptly with the appropriate state boards of accountancy, which could have an impact on licensure, Coffey said.

As a result of the study, EBSA made 11 recommendations, which would include having EBSA revise case targeting to focus on CPA firms with smaller EBP audit practices that audit plans with large amounts of plan assets, and CPA firms that audit 25 to 99 EBP audits, which had a 42% deficiency rate while auditing substantial amounts of plan assets.

EBSA also proposes working with the AICPA and NASBA to improve the investigation and sanctioning process, and working with the AICPA’s peer-review staff to streamline the peer-review process and make it more responsive in improving EBP audit quality. EBSA also would like to work with NASBA to encourage state boards of accountancy to require specific licensing requirements for CPAs who perform EBP audits.

In addition, EBSA proposes amending the Employee Retirement Income Security Act (ERISA) to give the secretary of Labor authority to: assess civil monetary penalties to auditors under certain circumstances; include additional requirements and qualifications of accountants who audit employee benefit plans; and establish auditing and accounting standards for EBP plans. EBSA also proposes amending ERISA to repeal the limited-scope audit exemption. Eighty percent of the audits sampled in the study were limited-scope audits.

The AICPA, in its statement, recommended that the DOL seek congressional repeal of the exemption allowing limited-scope audits, which the DOL’s Office of Inspector General determined is a major obstacle in providing audit protections for plan participants. The Institute also suggested DOL initiate a comprehensive education program for plan sponsors to help them understand the critical importance of hiring a quality auditor.

“The AICPA’s overarching goal has been—and continues to be—helping individuals and firms perform the highest-quality employee benefit plan audits possible,” the AICPA’s statement said. “We will work with auditors, plan sponsors, state CPA licensing boards, and the Department of Labor to accomplish that.”

The leading areas of audit deficiencies, the report said, were areas unique to EBP auditing, such as testing contributions, benefit payments, participant data, and party-in-interest/prohibited transactions. When CPAs did not meet professional standards, they either were not adequately informed about EBP audits or did not properly utilize the technical materials in their possession, according to the report.

—Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.