DOL Benefit Plan Audit Quality Study Results Generate Concern, Displeasure From Officials


Department of Labor officials expressed their displeasure at the recent results of an employee benefit plan audit study that showed an increase in major deficiencies in those audits in the past 10 years.

The study, expected to be released May 18, but not yet available as of early evening, was the subject of two sessions of a conference on employee benefits plans held by the American Institute of CPAs. According to the DOL officials, the report showed that 39 percent of audits were deficient, up from 33 percent in 2004.

Additionally, the report showed that many of those deficient audits had clean peer review reports, the DOL officials said, which they also pointed to as an element of concern.

Phyllis C. Borzi, the assistant secretary of labor for the DOL's Employee Benefits Security Administration, speaking at a morning session to provide an outlook on the EBSA's priorities for the coming year, emphasized the need for broader oversight of auditors.

“We've been trying to work on this issue; we haven't been successful. Actually, it appears from this study that we did that we're moving in the wrong direction,” Borzi said.

While the AICPA has worked with the DOL and made efforts to improve audits, the study also found that the efforts, “while worthy and important,” haven't done much to improve quality, she said.

The declining quality of audits underlines the need for “effective and efficient enforcement” methods to encourage auditors to “do the right thing,” Borzi said. While the DOL and the AICPA have taken steps to train auditors, large numbers of auditors still haven't gotten the message, she said.

“We don't really have any way under current law to discipline or in any way take action against the auditor,” Borzi said.

The DOL has supported several legislative proposals that would give it broader oversight over auditors, but “so far, Congress hasn't been willing to change” the Employee Retirement Income Security Act to give the agency that authority, she said.

Regardless of whether Congress takes action—something that Borzi sees as unlikely, calling Congress “toothless tigers”—the poor quality of audits needs to be dealt with, she said.

“This puts assets at risk, it's not fair to the plan sponsors, particularly smaller plan sponsors,” she said.

“The bottom line here folks is, unless people think that if they fail to meet professional standards something will happen to them, they're not going to have that diligence,” she said.

Small Firms Main Culprits

In an afternoon session focused on a deeper dive into the results detailed in that report, Michael Auerbach, chief of the Division of Accounting Services in the EBSA's Office of the Chief Accountant, said that the report results provided a “disheartening” view of the competency of most small firms to perform an audit of ERISA-governed plans under generally accepted accounting standards (GAAS) and generally accepted accounting principles (GAAP).

Auerbach presented the report's findings to the conference, pointing out that the fewer audits that a firm performed annually, the more likely there were to be deficiencies in the audits.

The report breaks the data down by the number of audits performed annually, providing results across six strata, including firms that annually perform only one or two audits, three to five audits, six to 24 audits, 25 to 99 audits, 100 to 749 annual plan audits and more than 750 audits.

In particular, Auerbach pointed to the report's finding that nearly 76 percent of the audits performed by firms that only perform one or two ERISA plan audits a year have major deficiencies.

“That's disgusting,” Auerbach said. “That's almost eight out of 10 of the audits in that strata that would be deficient.”

He added that “because our sample is statistically valid, linearly across the strata, so our statisticians have told us what this means is that if you're a plan administrator and you hire somebody who only does one or two plan audits on an annual basis, you have a 76 percent chance of hiring somebody who isn't going to perform a proper engagement.”

Marcus J. Aron, a senior auditor in charge of the implementation of the EBSA's CPA Firm Inspection Program, however, pointed out that the purpose of the report wasn't to demonize the small audit firms.

After asking the audience members to raise their hands if any of them were employed by firms that only performed between one and five audits in a year, he said that “I don't believe anyone is to be applauded more” than the auditors who have only one or two plans and still make the effort to attend a three-day conference on employee benefit plans.

“This is what we need to replicate for those people that are going to be in this practice that have very small practices,” he said. “This is the piece that we need to build on and not just look at the eight out of 10 as a whole, as a group of people who do not belong here.”

Excerpted from a story by Kristen Ricuarte Knebel and Matthew Loughran that ran in Pension & Benefits Daily (05/18/2015).

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