Many plan administrators view employee benefit plan audits as a necessary evil, as the Department of Labor (DOL) requires those with 100 participants or more, in general, to obtain an independent audit and attach the audit report to their Form 5500 filing.
But beyond avoiding penalties, a quality audit can help protect the assets and financial integrity of your plan, such as finding errors related to participant accounts or internal control deficiencies.
“It’s much less costly and time consuming when the plan administrator corrects these errors through the independent audit, as compared to when the DOL or IRS find those errors themselves,” says Michelle D’Amico, CPA, assurance senior director at BDO USA LLP.
In addition, a good auditor provides ideas on how to better run the plan.
“Clients don’t always adopt these recommendations, but sometimes clients appreciate the suggestions more than the actual audit,” says Valerie Wawrin, CPA, CFE, MSA, assurance senior director at BDO USA LLP.
Smart Business spoke with D’Amico and Wawrin about getting value from your audit, including finding a quality auditor.
What is the plan administrator’s role?
It is the plan administrator’s responsibility to maintain the plan’s financial and other records, either internally or through a third party. Many of these, which may include plan and payroll records, will be requested prior to or during the audit. Be sure to review all of these materials to ensure they are complete and accurate, especially if you delegate this to staff or a third party.
When you are as responsive as possible, it reduces the time both the plan administrator and auditor spend, which ultimately lowers the overall cost.
What should you look for in the audit report to help better manage your plan?
The auditor will issue a report or opinion on the plan’s financial statements and DOL required supplemental schedules. The plan administrator should review the financial statements, financial activity and footnotes to ensure they reflect your understanding of the plan. If the plan design changed, this should be reflected in all documents. Also, one of the biggest errors relates to delinquent participant contributions, which need to be addressed immediately.
The auditor often provides management recommendations, which are not part of the official report. They are meant to improve internal controls and plan operations.
What happens if an audit is not completed according to established standards?
If the audit report is missing or deficient, the Form 5500 may not be accepted by the DOL and plan sponsors could face late filing penalties. (If the plan operates on a calendar year, the Form 5500s are due July 31, which can be extended to Oct. 15.) The DOL may assess penalties of up to $1,100 a day, which is capped at $50,000 per annual report filing.
Plan administrators are held responsible for ensuring the plan financial statements are properly audited in accordance with generally accepted auditing standards. That’s why it is important to not hire an auditor based solely on price. Not only do plan sponsors have a fiduciary responsibility to ensure audit fees are reasonable, they also have a responsibility to hire a quality firm.
How do you find a quality auditor?
Ask questions. ‘How many employee benefit plans do you audit? What’s the staff’s level of experience? Are new or younger staff supervised and is the work reviewed?’
Auditing firms must have a peer review every three years, so ask to see that report. Get peer recommendations and check references. Make sure the firm doesn’t have state board complaints.
Find out if firm members attend national conferences on benefit plans. In addition, The American Institute of CPAs (AICPA) offers specialty memberships through the Employee Benefit Plan Audit Quality Center. If the firm is a voluntary member of this center, it shows dedication to the arena.
The DOL and AICPA both have good information online about how to prepare a request for proposal for auditing firms.
Remember, a quality audit can help protect the assets and financial integrity of your benefit plans, and ensure the necessary funds are available to pay retirement, health and other promised benefits to employees.
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