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ERISA audit deficiencies raise concerns

CPA profession, Department of Labor join forces to battle the problem

By Bill Sheridan
MACPA Editor

Deficiencies in the audits of employee benefit plans are reaching worrisome levels, and officials with the U.S. Department of Labor and the MACPA are ramping up efforts to train auditors and boost performance.

Three out of every 10 employee benefit plan audits in Maryland fail to meet minimum requirements for professional standards, according to the Department of Labor. That means more than $38 billion in Maryland plan assets are currently at risk due to deficient audits.

“In our view, this rate is both abnormally high and disconcerting,” said Department of Labor Chief Accountant Ian Dingwall.

Dingwall defines a deficient audit as one that is not done in accordance with generally accepted auditing standards. “We at the Department of Labor did not write these standards,” he said. “These are the standards that are written by the accounting profession itself.”

The audits are required under the Employee Retirement Income Security Act, or ERISA, as a way to ensure that retirement and health plans are being properly administered. They also serve as a form of protection for plan participants, ensuring that they will receive the benefits to which they are entitled.

That makes the high failure particularly alarming, said Michael Auerbach.

“No professional wants to stand up and say, ‘Thirty percent of the work I do is deficient,’” said Auerbach, who heads the Division of Accounting Services in the DOL’s Office of the Chief Accountant. “I’m not sure what anyone would define as an acceptable deficiency rate; you would certainly shoot for zero. But 30 percent is unacceptably high. Not all CPAs are doing deficient work, but a third of the work we look at has some deviation from professional standards, and quite frankly, that’s just too high.”

Complexity playing a role?

Maryland Association of CPAs Executive Director Tom Hood believes there may be a direct correlation between the rise in deficiencies and the increased complexity that today’s CPAs face. More rules and regulations have presented increasingly complex compliance challenges.

Clouding the waters is an ultra-competitive staffing environment – one in which companies feel obligated to offer more and better benefits to recruit and retain employees. Now, a firm’s clients want employee benefit plan audits added to the long list of services that their CPAs provide. And some of those CPAs may not be properly trained to provide those types of audits.

“That’s actually the elephant in the room,” said Dingwall. “There is a technical competency that auditors need before they can go out and audit these plans. We’re finding that many failures are caused by practitioners who do very few of these audits each year. Unfortunately, people who do only one or two of these audits may not spend enough time or money educating themselves on exactly how these audits should be done.”

Help is on the way

To help remedy that situation, the MACPA and the Department of Labor are teaming up to help educate CPAs about the nuts and bolts of properly conducting employee benefit plan audits. This effort includes the following:

• A “boot camp” for auditors of employee benefit plans. The one-day event will be run jointly by the MACPA and the DOL in an effort to educate auditors new and incoming auditors about essentials of conducting ERISA audits. The date and location of the “boot camp” will be announced shortly.
• A session at the first-ever Maryland Business and Accounting Expo, scheduled for June 17 and 18 at the Baltimore Convention Center. The session will be led by Dingwall, who will discuss the situation in detail and possible solutions for improving the quality of ERISA audits in Maryland.
• A number of on-site training programs, offered by the MACPA and designed to educate auditors on the proper ways to conduct the audits.
• An “oversight task force” made up of members of the MACPA’s Board of Directors. The task force will take a closer look at the DOL’s initiative and monitor the progress being made by Maryland auditors.

“There are national and local (training) programs that are available to auditors. Unfortunately, we sometimes find that there is not enough training available to local auditors,” said Dingwall. “Frankly, someone who is auditing one or two plans is not going to spend money and give up billable hours to go to a national conference for a week. So the training needs to be more localized. That’s why we’re working with the states, to help them create more training opportunities.”

Maryland's new mandatory peer review law should also help improve the quality of employee benefit plan audits. Peer review programs from the American Institute of CPAs and the MACPA follow the AICPA's Standards for Performing and Reporting on Peer Reviews, and those standards require reviewers to assess employee benefit plan audits at a higher level of peer review risk.

New requirements, more work

Some recent requirements in the auditing arena have created additional training opportunities – and raised concerns among DOL officials about whether auditors are prepared to meet the challenges posed by the new rules.

The rules include:

• Statement of Auditing Standard 103, a documentation rule that requires auditors to document their work so that it can be recreated by third parties. “It’s a rather high standard,” Dingwall said. “It raises the standard for most documentation that auditors historically perform.”
• SAS 112, which requires auditors to report material deficiencies and weaknesses in internal controls to their clients in writing.
• SASs 104-111, the new risk assessment standards that ask auditors to consider the risk that a plan’s financial statements may be misstated and to design their audit steps so that the risk of misstatement is reduced.

And then there’s this: Beginning with the 2009 plan year, the rules that govern 401(k) plans will also apply to 403(b) plans. “If you think about it, they are identical plans,” said Dingwall. “It’s just that one of them (the 403(b)) is administered by a not-for-profit organization, usually at a university, college or hospital. Frankly, every abuse we see in 401(k) plans seems to occur in 403(b) plans as well. So we are sending in the auditors.”

Requiring 403(b) plans to be audited means the amount of work available to CPAs will increase by roughly 10 percent – and that the opportunity for additional audit deficiencies will increase as well.

“We are concerned about audit quality,” Dingwall said. “The new guidance and standards raise concerns that audit quality may dip instead of improve. We are trying to mobilize the CPA profession to implement these standards, to prepare for the 403(b) audits, and to improve the quality of employee benefit plans across the board.”