August 27, 2015
What to Look for When Hiring a 401(k) Plan Auditor
As the number of participants in your company’s 401(k) plan grows, at some point the plan will require an audit. Also known as an employee benefit plan (EBP) audit, the U.S. Department of Labor generally requires one when the number of participants in your employee benefit plan reaches 100, though there are some exceptions.
This audit, a result of the Employee Retirement Income Security Act of 1974, assesses whether an employer’s plan has the liquidity to meet current and future financial responsibilities. When your business needs to file an annual 401(k) plan audit, you’re going to need a CPA firm with the specialized skill set to perform the service at the highest level.
Know your fiduciary responsibility
The Department of Labor takes this annual audit and filing very seriously. Companies that file late or file inaccurate or incomplete audits could face fines of more than $1,000 per day. Furthermore, as your plan’s administrator, you could be held personally responsible for the failings of your organization’s annual benefit plan audit.
But if done right, the audit can be a positive experience for a plan, identifying shortfalls or other problems that can be corrected before they grow over time.
Demand relevant experience
It can be tempting to take the easy route and use your current CPA firm for the 401(k) plan audit, regardless of its lack of professional experience in this very narrow area of auditing. But a 401(k) plan audit requires discrete proficiencies, and it’s important to hire a firm with the background, training and ongoing professional development to conduct these audits.
Make sure that your prospective firm is a member of the AICPA’s Employee Benefit Plan Audit Quality Center (EBPAQC). As members of this voluntary association of AICPA firms that audit employee benefit plans, EBPAQC auditors have ample resources, tools and peer support to perform their duties with distinction.
There are a number of factors the Department of Labor looks at when determining whether an employee benefit plan audit complies with established professional standards.
- The amount of employee benefit plan audit work in the auditor’s overall practice
- The adequacy of technical training and knowledge of auditors conducting employee benefit plan audits
- The awareness of auditors of the uniqueness of employee benefit plan audits
- The perception of plan administrators and/or auditors of the importance of employee benefit plan audits beyond fulfilling a governmental regulatory requirement
Accounting professionals who are members of the AICPA’s EBPAQC have these characteristics, a fact that is recognized by the government agency for which audits are commissioned. According to a report from the Department of Labor, Assessing the Quality of Employee Benefit Plan Audits, “CPA firms that were members of the AICPA Employee Benefit Plan Audit Quality Center tended to produce audits that have fewer audit deficiencies.”
Evaluating your auditor’s qualifications
An extremely critical step in selecting your plan’s auditor is to evaluate and review the qualifications of the prospective auditor. You should consider the auditor’s experience and practice development, including examining the specific benefit plan types and sizes, to make sure the auditor is suitable to the type and size of your plan. You should also look at the auditor’s practices in regards to continuing professional education.
In a recent government study on the quality of audit work performed by independent, qualified public accountants with respect to financial statement audits of employee benefit plans, 39 percent of the audits reviewed contained major deficiencies that would lead to rejection of the filing of Form 5500. The study further supports the following:
- There is a clear link between the number of employee benefit plan audits performed by an auditor and the quality of work performed. Auditors who performed the fewest number of employee benefit plan audits had a 76 percent deficiency rate.
- Auditors who are members of the AICPA EBPAQC produced audits that have fewer deficiencies.
- Employee Benefit Plan-specific training contributes to better audit quality; the study shows that as the level of employee benefit plan-specific training increased, the percentage of deficient audits decreased.
The most common reason for a deficient audit is because of the failure of the auditor to perform testing in areas unique to employee benefit plans. These areas include but are not limited to:
- Timeliness of employee deferrals
- Compliance with Fee Disclosures
- How plan provisions affect participant loans
- Testing of payroll data
- How plan provisions affect benefit payments
The more training and experience your plan auditor has, the more familiar he or she will be with the uniqueness of the areas listed above, as well as others. Auditors that are members of the AICPA EBPAQC voluntarily adhere to higher standards of audit quality in their training, procedures and policies, which shows their commitment to providing high quality audits.
With the right partner, your 401(k) plan audit will yield a filing that adds real value to your organization while meeting all regulatory requirements of the DOL.
As partner-in-charge of the Employee Benefit Plan Group at Wiss LLP, Craig Erickson is an EBPAQC member who handles audits of defined contribution and defined benefit plans for clients. Reach him at email@example.com.