Speaker: Fewer CPA Firms Auditing Employee Benefit Plans, But That's Not Necessarily a Problem

Chris Gaetano
Published Date:
Jun 6, 2019
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Michael Auerbach, the chief accountant of the U.S. Department of Labor's Employee Benefits Security Administration, speaking at the Foundation for Accounting Education's Employee Benefits Conference on June 6, noted that, since 2011, there have been about 2,000 fewer CPA firms taking on such engagements, but much of the drop came from practices that were found to have had serious issues in their work. 

In 2015, the Department of Labor (DOL) released the results of a study looking at a sample of 400 audits of Form 5500 filings in 2011 from a target population of 81,162 in which an accountant’s report or audit opinion was attached. What it found was that 61 percent of audits either fully complied with professional auditing standards or had only minor deficiencies, but 39 percent contained major deficiencies that would be enough to lead to a rejection of the entity’s Form 5500 filing.

Plan audit deficiencies tended to be concentrated in areas that were unique to plan audits, such as contributions, benefit payments, participant data and party-in-interest/prohibited transactions, with practitioners often failing to consider these particular areas, which led to poor audit quality. Consequently, it was found that firms with the least developed employee benefit plan audit practices tended to accumulate the most deficiencies: Firms that performed the fewest number of plan audits annually had a 76 percent rate of deficiency, as opposed to those that performed the most annually, with only a 12 percent deficiency rate.

Since that time, Auerbach said, if the department found serious problems with a CPA firm's audit of an employee benefit plan, and the firm communicated those issues with a client, the statistics indicated that if that firm performed only one to two such audits on an annual basis, in 52 percent of cases the CPA firm simply got out of that practice area altogether. This was in line with the observations in the DOL's study, which found that the most deficiencies were found among those firms that mostly dabbled in this area, versus those with dedicated practices. However, Auerbach pushed back against rhetoric saying that this meant the department was necessarily against small firms doing this work and that it would rather only have large players involved. 

"Let me make it very clear: that is not the position of the department," he said. "It is not the position of my office. It is not my personal position. All we want is qualified auditors performing quality audits. If your firm does one employee benefit plan and does it well, that's great. If you do 100 of them and you do them poorly, that's not so great. We see audit work from practitioners that only do a couple of these engagements, and you could teach auditing 101 from those work papers. They do a great job. Unfortunately, we also see a lot of work from practitioners whose work is really, really poor." 

Auerbach conceded that, when it came to the drop in the number of firms doing employee benefit plan audits, some of it was also due to mergers and acquisitions, especially among smaller firms. He also pointed out that while the absolute number of such firms doing this work is down by 2,000, the overall proportion of small, medium and large firms has not changed dramatically. 

Right now, he said, about 80 percent of plan assets are covered by audits, and there are 5,484 firms nationwide that perform them. Of those, the 54 firms performing 200 or more such audits per year account for 40 percent of the total number of employee benefit plan audits and 71 percent of plan assets. Conversely, he said, 90 percent of firms audit fewer than 100 plans on an annual basis, and about 55 percent of them do fewer than five per year. 

He added that, contrary to what some might think, the Big Four don't do many of these audits, with only PwC being even in the top 10 when it comes to plans audited, (He added, however, that in terms of absolute dollars, PwC is number one, but that's because its clients are so big.)

Despite all the talk of audit deficiencies, however, Auerbach also said that if a company is faced with a choice of filing poorly and not filing at all, the department would prefer the former to the latter. 

"Your client has a filing due Oct. 15. They don't necessarily have the audit done. We will always tell them, tell you, 'Make sure you file timely, even if you're filing deficiently because if you don't file, you run the risk of late filing penalties with us and with the IRS and with the [Pension Benefit Guaranty Corporation].' But if you file timely, you don't have that risk," he said. 

However, in the event a company does not file, he said it could also turn to the Delinquent Filer Voluntary Compliance Program, which allows clients to be able to address their nonfiler or late filer status. Coming clean means reduced penalties. He said it's better to approach this program first, because if enforcement officers find a delinquency first, then the company loses eligibility for the program. He also cautioned against applying for the program but then not filing a corresponding EFAST 2 form, or even not paying the reduced penalty. 

"We send a very polite inquiry letter saying you did ... this but didn't do the other, and I think give them 15 or 30 days voluntarily to fix that," he said. "You would be amazed how many people don't fix this! It's just shocking to me. When that happens, then we recalculate the penalty as if they had not come under the DFVC program and send a proposed penalty letter. I think the highest one I signed was for $750,000." 

Any penalties are assessed personally against the plan administrators. While the company or insurance can pay the penalty, it is illegal to pay it using plan assets, though he noted that this prohibition doesn't stop some people from trying; he said recently there was a case where a plan administrator sent a check with whiteout over the business name on the upper-left hand corner, which happened to be the actual plan. He said this turned a civil matter into a criminal prosecution. 

Auerbach noted, however, that many firms do very good work on employee benefit plan audits. The firms that did the best work, whether large, medium or small, have two consistent attributes: First, they have a commitment to doing quality work regardless of the type of engagement; second, they have a robust internal inspection program whereby "they are toughest on themselves." 

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