Speaker: Audit Quality Remains Poor for Employee Benefit Plans, May Have Gotten Worse

Chris Gaetano
Published Date:
Jun 8, 2017

Acting Chief Accountant of the Department of Labor Michael Auerbach said today that, despite efforts to improve the quality of employee benefit plan audits stretching back to the late 80s, audit quality today is no better than when they first started, and in fact might even be worse. 

Speaking to his audience at the FAE's annual Employee Benefits Conference today, Auerbach said that the department's interest in employee benefit plan audit quality began 25 years ago, when the country was still picking up the pieces following the savings and loan crisis in the mid-80s. In the aftermath the Department of Labor Inspector General did a study of employee benefit plan audits and concluded that almost 25 percent of the audits reviewed failed to meet professional standards. 

"The inspector general testified before Congress and said 'this is the next savings and loan crisis. The crooks go where the money is, and the money is in pensions and that is where they will go, and that is what started this interest in quality quality of employee benefit plans," he said. 

Since then, Auerbach said, there have been numerous resources and initiatives developed in service of this goal, many of which auditors today take for granted. he noted that today there is a wealth of technical materials to guide auditors that wasn't there a few decades back. He said that when he started his job, he didn't know much about the Employee Retirement Income Security Act (ERISA) because there was little technical guidance available. Today, however, there are annual audit risk alerts, best practice guides, checklists for financial statement disclosure and footnote disclosure, SOC 1 guidance for plan benefit audits, training courses and self-study courses (he noted that he himself has a self-study course sitting on his desk he needs to get to eventually). There's also the Audit Quality Center, which didn't exist 25 years ago, which provides even more technical resources as well as a forum for auditors to talk out tenacious problems they have. He added that peer review has also become far more prominent over the last few decades, to the point where there are only three U.S. jurisdictions today that don't mandate it. Further, he noted that the number of technical conferences focused on employee benefit plans has flourished, going from zero conferences at all in the late 80s to now dozens across the nation. 

Despite all this, however, Auerbach said that employee benefit plan audit quality has remained consistently poor. Since the Inspector General report, the department has conducted several followup studies to gauge progress but found few signs of improvement. In fact, a study done in the mid-90s saw a significant change for the worse. About a decade later, an unpublished study conducted in 2004 showed similarly poor results. 

"The results were horrible," he said. 

The most recent study, conducted 2014, showed similarly dispiriting results showing that, on average, 39 percent of employee benefit plan audits contained major deficiencies that would be enough for the department to reject the entity's Form 5500 filing. This news, according to Auerbach, was a little demoralizing. 

"For 25, almost 30 years, the department, the profession, everyone has tried to make a concerted effort to improve audit quality but unfortunately folks, at the end of the day, audit quality is no better today than it was when we started doing this and, in fact, it's probably 50 percent worse based on our most recent study. I personally find it very disheartening. It's very frustrating because ... it seems no matter what we do, what the profession does, we just don't seem to be making a dent," he said. 

He noted that the vast majority of audit deficiencies come from firms that don't do a lot of employee benefit plan audits. Very few firms overall have practice areas specializing in these kinds of audits, with Auerbach noting that only about 100 firms in the study sample do more than 100 employee benefit plan audits a year, with the vast majority doing one to two annually. The firms that have large employee benefit plan audit practices have a deficiency rate of about 12 percent, which, while not great, is far less than the vast majority of other firms that do small number of these audits per year. Audit quality in that part of the population, he said, ranges anywhere from 55 to 74 percent deficiency rates. 

So what has the department been doing? For one, it has been reaching out to plan administrators and impressing upon them the importance of selecting a qualified auditors, which he said has generated a lot of feedback and gotten some to start thinking seriously about audit quality. 

"Personally, I believe we need to focus a little more on plan administrators on the demand side of this to make sure we get them focused that they need to hire competent individuals to do this work," he said.

He also talked about enforcement. Deficient work gets rejected, he said, but in the most egregious examples, the department has been making disciplinary referrals to the AICPA's ethics division, as well as state licensing boards. These referrals, he said, have generally led to sanction of the auditor involved. In 95 percent of cases, he said, they either agree with the department on the deficiencies or find even more than initially believed. 

"That's a pretty enormous batting average. That basically means most everything we send them is significant enough that the practitioner needs some level of oversight or remediation," he said. 

Auerbach said that the department is also planning to do another study on firms in order to provide better guidance on how to properly conduct employee benefit plan audits. The research will encompass, he said, between 250 to 300 engagements. For firms that do less than 100 plan audits, he said, they will ask for just one of their engagements to look at and, if there are major issues, they will ask for a second. For those that do 100 to 200 plans annually, the department will ask for two engagements from each firm. Finally, for firms that do more than 200 of these types of audits, the department will inspect them as a firm, saying they plan to do six such inspections this year. The goal, he said, is to give feedback to the firms about what firms of their size do well and not so well. 

He emphasized that, despite critiques he has heard from practitioners, the department in no way thinks that only large firms should do these types of audits; he said they are not trying to drive small firms out of business. The issue, he said, is not the size of the firm itself, but the size of their employee benefit audit practice. 

"I, personally, don't care if you do one, I don't care if you do 1,000, but if you're going to do it, you should know what you're doing and do it properly. It's not our standards we hold people to but your standards. The Department of Labor has no authority to set accounting or auditing standards... so all we're doing is holding all of you to your own professional standards," he said. 

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