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Hire Qualified Employee Benefit Plan Auditors - Or Else


401k, pie charts, calculator, investment_smallThe Employee Retirement Income Security Act of 1974 (ERISA) generally requires employee benefit plans with 100 or more participants to have their annual reports audited. Plan administrators have fiduciary responsibilities to hire independent qualified public accountants to perform quality audits. But recent studies by the U.S. Department of Labor (DOL) found an alarming number of audit deficiencies among benefit plans.

Here are some of the risks plan administrators face if audit deficiencies occur and ways they can evaluate an auditor’s qualifications to minimize those risks.

Auditing plan auditors

In December 2014, the Employee Benefit Plan Audit Quality Center of the American Institute of Certified Public Accountants (AICPA) prepared a briefing paper that describes the importance of hiring qualified auditors to review the financial statements of benefit plans. Independent audits of plan financial statements help stakeholders assess whether they provide reliable information about the plan’s ability to pay retirement, health and other promised benefits to participants. They also help management evaluate and improve internal controls over the plan’s financial reporting.

However, the DOL reported at a recent AICPA conference that more than one-third of all benefit plan audits have deficiencies. Such errors and omissions are often linked to inadequate auditor qualifications. The more specific continuing professional education and experience that an auditor has with benefit plan audits, the more familiar the auditor will be with benefit plan practices, operations and rules.

Gauging risk

Under ERISA, plan administrators are responsible for ensuring that benefit plan financial statements are properly audited in accordance with Generally Accepted Auditing Standards. The AICPA advisory reminds plan administrators about their risks if a quality audit is not performed. Administrators who hire unqualified plan auditors face substantial penalties from the DOL, which have risen in recent years. The DOL currently has the right to reject incomplete, inadequate or untimely plan filings and assess substantial penalties that may reach as high as $1,100 per day on plan administrators for deficient filings.

Hiring an auditor for the plan is considered a fiduciary function. As with all fiduciary responsibilities, there are potential liabilities. Fiduciaries who don’t follow the basic standards of conduct may be personally liable to restore any losses to the plan.

Picking a qualified auditor

The DOL points to extremely low audit fees as a warning signal that an audit may be deficient. So plan administrators should carefully evaluate an auditor’s qualifications, rather than simply accept the lowest-bid contract offer. Only after the technical evaluation is complete and the qualified respondents have been identified should the administrator review the audit fees quoted by the qualified respondents.

Evaluating auditor qualifications requires consideration of licensing and independence rules. Independent plan auditors don’t have any financial interests in the plan (or the plan administrator) that would affect their ability to render an objective, unbiased opinion about the plan’s financial statements. The DOL doesn’t consider a plan auditor to be independent if the audit firm or any of its employees also maintain the plan’s financial records.

Qualified auditors will have expertise and training in the following areas:

  • Definition of compensation as it relates to contributions or plan obligations,
  • Eligibility considerations,
  • Timeliness of plan contributions,
  • Transactions prohibited under ERISA,
  • Fair value of plan assets covered by the audit,
  • Effects plan provisions may have on benefit payments,
  • Allocations to participant accounts, if applicable,
  • Unique aspects of plan obligations and
  • Issues that may affect the plan’s tax status.

In addition to understanding the DOL, ERISA and IRS regulations that apply specifically to benefit plans, qualified auditors must grasp how other matters — such as changes to the plan document; plan mergers, freezes or terminations; and changes in service organizations — may complicate plan reporting.

When evaluating potential auditors, discuss the auditor’s work for other benefit plan clients and obtain references. Also review the audit team’s continuing professional education records over the last three years to determine whether they possess recent benefit-plan-specific training.

The AICPA briefing paper includes recommendations on how to put together a comprehensive request for proposal (RFP) that can be used to evaluate bidders — and helps potential auditors create a proposal that addresses the plan’s specific needs. Comprehensive RFPs provide detailed explanations of the audit engagement, including its objectives, scope, special considerations and expected timeline.

Interviewing finalists

Once a plan administrator has weeded out unqualified respondents to its comprehensive request for proposal (RFP), he or she should invite the finalists to present and discuss their proposal letters. Here’s a list of questions for plan administrators to ask prospective auditors during the interview process:

  • Is the firm a member of the American Institute of Certified Public Accountants (AICPA) Employee Benefit Plan Audit Quality Center?
  • How many benefit plan clients does the firm serve?
  • How many similar plan audits has the firm performed in the last two years?
  • In which states is the firm licensed to practice?
  • Does the firm have references–especially from similar type plans–and specific contact information?
  • Is the firm subject to any current litigation related to its employee benefits practice?
  • Has the firm been the subject of any U.S. Department of Labor (DOL) findings or referrals?
  • Has the firm been the subject of any AICPA or state society ethics referrals?
  • Is the firm registered with the PCAOB, and does it meet the independence standards of the Securities and Exchange Commission, if the plan’s financial statements will be included as part of an 11-K filing?
  • Will the firm provide you with a copy of its latest peer review report and its response, if any?

Protecting your assets

Not every CPA is qualified to audit employee benefit plans. These engagements require specialized training and experience. Plan administrators who prepare comprehensive RFPs to systematically evaluate prospective auditors create a paper trail that documents their commitment to quality and due care.


Brown Smith Wallace is committed to employee benefit plan (EBP) audits as a key focus of our audit practice. We specialize in this area—EBP audits represent approximately 25% of our firm’s external audit revenues. For more information on our benefit plan audit services, contact Matt Powell, Partner, Audit Services, at 314.983.1224 or


Brown Smith Wallace is a member of the AICPA Employee Benefit Plan Audit Quality Center where we have access to continually updated information and seminars provided by the AICPA. The management employees of the employee benefit plan audit group attend the AICPA National Employee Benefit Plan Conference annually to determine current best practices and changes in legislation affecting employee benefit plans and employee benefit plan audits.


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