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November 1999

Employee Benefit Plan Audits

By Sheldon M. Geller, Esq., Geller Group Ltd.

The Pension and Welfare Benefits Administration (PWBA) of the Department of Labor is responsible for administrating and enforcing the fiduciary, reporting, and disclosure provisions of Title I of the Employee Retirement Income Security Act of 1974 (ERISA). The PWBA is conducting a quality review program to determine the quality of work performed by independent auditor in the audits of financial statements for qualified plans.

Practitioners who are deemed by the PWBA to have performed significantly substandard audit work are referred to either the applicable state licensing boards or the AICPA Professional Ethics Division for further investigation. ERISA imposes upon plan administrators (i.e., employers sponsoring qualified plans) the responsibility for making certain that plan financial statements are audited in accordance with generally accepted auditing standards.

These practitioners could face severe consequences, including loss of license and AICPA membership, if found to have performed deficient employee benefit plan audits. Plan administrators could face monetary civil penalties under ERISA if found to file deficient audit reports.

Common Deficiencies

The PWBA has continued its aggressive program to make certain that plan administrators comply with ERISA's reporting and disclosure requirements. Employee benefit plans need to satisfy specialized financial, operational, and regulatory requirements. Auditors are responsible for testing compliance with these requirements. The PWBA, in their review of employee benefit plan audits, have noted the following common deficiencies:

The failure to obtain, recognize the need for, or properly use, a report from a service organization's auditor under SAS No. 70, Reports on the Processing of Transactions by Service Organizations. Employee benefit plans often use service organizations to account for investments and investment income, which are typically significant items of the plan's financial statements.

The failure of audit program design to address deficiencies in plan documentation and identify prohibited transactions

Inadequate documentation regarding the auditor's understanding of the plan's internal controls

Inadequate documentation reporting the audit work performed, including a failure to adequately document the performance of sufficient audit work related to eligible employee data, benefit payments to plan participants, and fair market value of plan assets

The failure in a limited engagement to obtain proper certification from the plan custodian

Deficiencies in the auditor's report, including a failure to reflect a departure from generally accepted accounting principals

Deficiencies in the notes to financial statements, including a failure to disclose reportable transactions, the existence of a favorable IRS tax determination ruling, and the funding policy of the plan

The failure to comply with reporting and disclosure requirements, including the preparation of supplemental schedules; failure to apply the limited scope audit exemption; and failure to provide a statement of net assets in comparative form, a reconciliation of the financial statements with information reported on IRS Form 5500, and a reference that the audit was conducted with respect to the trust established as a part of the plan, rather than of the plan.

Best practices to improve audit quality would include, but are not limited to, the assignment of professionals trained in auditing employee benefit plans and the coordination with other professionals experienced in the area. Plan sponsors need to coordinate all phases of the plan audit and introduce the plan's auditor to the plan's third-party administrator and benefit consulting firm.

Implementing best practices can significantly improve audit quality and client service, while reducing related enforcement and litigation risks.