Department of Labor Looks Closely at Benefit Plan Audit Quality

Summer 2010

By Craig D. Winters, CPA

There are many new requirements for the accounting and auditing of employee benefit plans. The list includes guidance on fair value measurements and reporting, disclosures regarding derivative instruments, treatment of tax positions, disclosure of subsequent events, and overhaul of the audit and accounting guide for employee benefit plans. These and the so-called risk assessment suite of audit standards create the requirement that audit planning and workpapers must provide full, clear, and proper documentation of a long list of issues.

For practices that provide assurance services to employee benefit plans, audit quality must be their focus. It certainly will be the focus of the U.S. Department of Labor (DOL) Employee Benefit Security Administration’s (EBSA’s) program for review and inspection of CPA firm audit quality.

The EBSA is concerned with the error rates it is finding in its assessment of CPA firm audit quality, including for firms that received reports through the peer review process that do not identify deficiencies in the quality control system. Some results show failures at a basic level. The No. 1 deficiency identified in EBSA workpaper reviews is the lack of any audit work performed for one or more particular audit areas. The audit workpaper reviews are performed by EBSA CPAs, and they have identified technical deficiencies even in apparently detailed audit workpapers as well as planning and other audit documentation.

Some of the more prevalent findings have been inadequate planning, failure to understand the plan, failure to properly address internal control, including user controls related to work performed by service providers, and excessive reliance on SAS 70 reports. Before finalizing an audit workpaper that addresses internal control findings and assessments, consider that it may be reviewed by an EBSA CPA, and as directed under SAS 115, prudent officials having knowledge of the same fact would have to “likely reach the same conclusion.”

The EBSA has changed its process and is taking a fresh look at how it evaluates audit quality. The program focuses on the number of employee benefit plan audits performed by a firm to ensure all strata of CPA firms are addressed. The process of firm inspections has been described as similar to PCAOB inspections. They focus on policies and procedures, and include a detailed questionnaire, visit to the firm, and detailed review of audit workpapers of selected engagements.

For firms with fewer than 100 employee benefit plan audits, EBSA’s CPAs perform Augmented Workpaper Reviews. The process begins with an inquiry letter to the plan administrator requesting that the auditor provide, normally no later than 10 to 15 calendar days from the date of the letter, all audit documentation for selected audit areas. This may be essentially all areas that could be considered significant.

The detailed review of audit workpapers may result in EBSA’s rejection of the plan’s Form 5500 filing, an assessment of civil penalties, and referral to the AICPA and state regulators. EBSA’s published results reflect audit deficiency rates in excess of 30 percent for many strata of audit firms.

While the EBSA’s program of review and inspections is a compelling reason in and of itself to refocus on performing at peak quality, other issues must also be noted for employee benefit plan practices. Increased disclosure of direct and indirect expenses and fees are now required with Form 5500. This will require additional effort by plan management to gather the additional information. The overhaul of the system for filing Form 5500, now called EFAST2, calls for an entirely new process of electronic filing, including the use of personal identification numbers that may not be shared with others and not allowing paper filings of Form 5500 in the future.

Resources are available to assist auditors of employee benefit plans. The PICPA Employee Benefits Plan Committee has many members capable of providing guidance and advice, and can be reached via PICPA’s Officer and Committee Directory at www.picpa.org. The Members Consultation Directory provides an additional resource. In addition, the AICPA Employee Benefit Plan Audit Quality Center provides many tools, aids, and resources specific to employee benefit plans.

Craig D. Winters, CPA, is a partner with Daniel A. Winters & Co. in Chadds Ford, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at cwinters@dwcocpas.com.

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