If you’re a CPA who conducts audits of employee benefit plans, I’ve got some good news and some bad news.
Let’s start with the bad news.
The U.S. Department of Labor has released a report that indicates nearly 40 percent of all employee benefit plan audits conducted in the United States fail to meet minimum requirements for professional standards.
It’s not a new problem. The DOL releases similar reports about every 10 years or so, and previous deficiency ratings have hovered between 25 and 35 percent. The last report, released in 2008, found a deficiency rate of about 30 percent, which DOL Chief Accountant Ian Dingwall at the time called “both abnormally high and disconcerting.”
According to the latest report, the biggest concerns lie with firms that perform relatively few benefit plan audits.
- For firms that perform between one and 24 plan audits, the deficiency rates range from a low of 67 percent to a high of 76 percent.
- For firms that perform 25 to 99 plan audits, the deficiency rate is 42 percent.
- For firms that perform 100 audits or more, the deficiency rate is 12 percent.
One possible explanation for the higher deficiency rate in the latest report: 403(b) plans are now being audited just as 401(k)s are. That has increased the number of audits being done by up to 10 percent, and the number of deficient audits may have risen as a result.
Now the good news
As bad as the report is, there are some bright spots. Chief among them has been the profession’s response to the DOL’s reports.
Topping the list, MACPA Executive Director Tom Hood said the association will recommend a “pre-issuance peer review” for firms that conduct very few employee benefit plan audits, as well as those that are considering adding the service for the first time.
Among the profession’s other responses:
- After the 2008 report was released, the AICPA created its Employee Benefit Plan Audit Quality Center, a voluntary membership center for firms that audit employee benefit plans.
- The AICPA and many state CPA societies, including the MACPA, have begun holding annual conferences and numerous seminars that focus on improving the quality of employee benefit plan audits.
- In particular, the MACPA now holds an annual Employee Benefit Plan Conference in conjunction with the DOL, and has stepped up communications efforts with managing partners of Maryland CPA firms.
- The AICPA has published a six-point plan that outlines a road map to enhanced audit quality. The plan covers several stages in the process of becoming or being an auditor, including pre-licensure, standards and ethics, CPA learning and support, peer review, practice monitoring, and enforcement.
- The MACPA is working with its Peer Review Committee to create a webcast that examines the biggest challenges peer reviewers see in relation to employee benefit plan audits.
- The profession is working closely with the National Association of State Boards of Accountancy and the DOL to lower the deficiency rate.
- The MACPA has created an executive-level task force that will evaluate the future of peer review and provide appropriate comments to the AICPA.
- The AICPA has stepped up its efforts in a number of areas, including practice monitoring, ethics enforcement, and the termination of non-compliant firms from membership in the Audit Quality Center.
And here’s one more bit of good news: Despite the DOL’s claims to the contrary, not a single employee benefit plan audit failure or material financial restatement has resulted in even one plan participant losing money. As important as the audits are, deficiencies do not affect a plan’s ability to pay benefits.
Quality starts with ‘tone at the top’
Meanwhile, the profession’s bid to help auditors improve the quality of their work continues, and the MACPA is right there at the head of the class.
“We are working in lock step with the AICPA and other state societies to do everything we can to communicate the importance and increase the level of quality in this critical area,” Hood said.
CPAs themselves have some very specific roles to play in improving audit quality, Hood said.
“You can help us,” he said, “with your continued support and, most importantly, with a ‘tone at the top’ that emphasizes continued and increased audit quality, a commitment to the highest standards of ethics and integrity, commitment to developing your staff to be competent and up to date on the latest standards and regulations, and active participation in peer review and the profession’s quality initiatives.”
Stay tuned for further developments as reactions to the DOL’s report roll in.