A report from the American Institute of CPAs (AICPA) reminds
plan sponsors at mid- and large companies of the importance of their duty to hire
a qualified independent auditor to examine the plan each year.
Generally, the Employee Retirement Income Security Act (ERISA) requires employee benefit plans with 100 or more participants to have
an audit as part of the obligation to file an annual return/report via the Form
5500 Series. As the AICPA report explains, the plan administrator must hire an independent
qualified public accountant to do the job—known as a financial statement
A financial statement audit provides an independent,
third-party report to participants, plan management, the Department of Labor (DOL)
and other interested parties. The report is meant to indicate whether the plan’s financial statements
provide reliable information to assess the plan’s present and future ability to
pay benefits. The AICPA says the process helps protect the financial integrity
of the employee benefit plan, which in turn helps plan sponsors determine
whether the necessary funds will be available to pay retirement, health, and
other promised benefits to participants.
The audit also may help plan management improve and
streamline plan operations by evaluating the strength of the plan’s internal
control over financial reporting and identifying control weaknesses or plan
operational errors, AICPA says. And again, the audit helps the plan
administrator carry out its legal responsibility to file a complete and
accurate Form 5500 for the plan with the DOL.
As noted in the report, ERISA holds plan administrators
responsible for ensuring that plan financial statements are properly audited in
accordance with generally accepted auditing standards (GAAS). Despite this, AICPA
researchers say DOL studies of audit quality have identified significant
deficiencies in plan audits. The penalties for such audit failures can be
substantial: the DOL has the right to reject plan filings and assess penalties
of up to $1,100 per day, without limit, on plan administrators for deficient
filings. In recent years, the DOL's Employee Benefits Security Administration
(EBSA) has significantly stepped up its enforcement of the audit requirement
for employee benefit plans, the report warns.
Klein, a partner with ERISA auditing and consulting firm Babush Neiman Kornman
& Johnson, tells PLANSPONSOR that hiring a firm lacking knowledge of
the specialized nature of the retirement planning industry conflicts with the stated goal of ERISA to protect plan
participants. For this reason, only after technical evaluation is complete
and a list of qualified potential auditor firms has been identified should the sponsor factor in
the prices offered by each firm. As the AICPA research notes, ERISA
requires all fees to be “reasonable” given the scope and quality of the service provided, not necessarily the cheapest available.