In December 2023, the Department of Labor (DOL) released its 2023 Audit Quality Study based on plan year 2020 Form 5500 filings. Previous studies were performed in 1997, 2004, and 2015. According to the DOL, the primary objective of the 2023 study was to assess whether the quality of audit work has improved since the 2015 study.

Section 103 of the Employee Retirement Income and Security Act of 1974 (ERISA) requires employee benefit plans to file a Form 5500, Annual Return/Report for Employee Benefit Plan, with the DOL. Generally, plans with more than 100 participants are required to include an audit report issued by an independent qualified public accountant (IQPA).¹ ERISA specifies that the plan administrator is responsible for selecting and hiring the IQPA on behalf of the plan’s participants and beneficiaries. As a result, it is through the audit requirement that the DOL exercises the authority to perform a study to assess the quality of work performed by employee benefit plan auditors.

The 2023 Audit Quality Study was conducted on a statistical sample of 307 plan audits out of approximately 86,900 audits performed by about 4,300 IQPAs. The deficiency rate in the 2023 Audit Quality Study was 30%; the deficiency rate in 2015 was 39%. To clarify, the 39% in the 2015 study represents what the DOL labeled major unacceptable deficiencies for which, if not corrected, they would reject the Form 5500 filing. The comparative deficiency rates, based on the number of audits performed by the auditor, are presented in the chart on the right.

The 2023 Audit Quality Study showed an overall improvement in audit quality since the prior study, but the chief accountant of the DOL noted that it was “very troubling” that the deficiency rates in the firms that perform 100-749 plan audits and those which perform 750 or more plan audits increased to 18.6% and 17.0%, from 12.0% each, respectively. The firms in these two strata perform almost 50% of plan audits and audit over 86% of plan assets. The 2023 Audit Quality Study also contains a table that illustrates that IQPAs who perform between 1-5 employee benefit plan audits annually had a higher deficiency rate than IQPAs performing 100 or more annually. Of the audit areas reviewed, the DOL found that the highest deficiency rates existed in three areas unique to ERISA plans: participant data, contributions received and receivable, and benefit payments.

According to the 2023 Audit Quality Study, the number of CPA firms performing audits for the 2020 Form 5500 dropped 39% to 4,300 firms from the 7,330 firms performing audits in 2011. Also interesting is that the number of CPA firms performing audits for the 2021 Form 5500 fell an additional 8% from 2020 to 3,940.

The DOL provides many recommendations related to enforcement and outreach in its 2023 Audit Quality Study, including working with state licensing boards and the AICPA Ethics Division to improve the sanctioning process; encouraging the AICPA to require firms performing benefit plan audits to receive an engagement review covering a sample of their benefit plan audits; and encouraging the National Association of State Boards of Accountancy (NASBA) to require specific licensing requirements for CPAs who perform employee benefit plan audits.

The DOL expects to perform another study after the adoption of Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. The agency will assess if audit quality improved as a result of SAS No. 136, which is effective for audits of ERISA plan financial statements for periods ending on or after Dec. 15, 2021.

The full text of 2023 Audit Quality Study should be read for complete information regarding the findings and recommendations of the DOL.² 

¹ Effective for plan years beginning on or after Jan. 1, 2023, the participant-counting methodology changed for determining eligibility for simplified reporting for smaller defined-contribution plans. Plans will use the number of participants with account balances as of the beginning of the plan year. If a new plan, participants with account balances at the end of the year is used. Previously, individuals were considered participants if they satisfied age and service requirements for participation, even if electing not to participate.

² www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/november-2023-audit-quality-study.pdf

David A. Torrillo, CPA/ABV, CVA, is the managing member at Torrillo & Associates in Glen Mills. He can be reached at david@torrillocpa.com.

Julie Verrekia, CPA, is director of quality control with Torrillo & Associates LLC and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at jverrekia@live.com.

In December 2023, the Department of Labor (DOL) released its 2023 Audit Quality Study based on plan year 2020 Form 5500 filings. Previous studies were performed in 1997, 2004, and 2015. According to the DOL, the primary objective of the 2023 study was to assess whether the quality of audit work has improved since the 2015 study.

Section 103 of the Employee Retirement Income and Security Act of 1974 (ERISA) requires employee benefit plans to file a Form 5500, Annual Return/Report for Employee Benefit Plan, with the DOL. Generally, plans with more than 100 participants are required to include an audit report issued by an independent qualified public accountant (IQPA).¹ ERISA specifies that the plan administrator is responsible for selecting and hiring the IQPA on behalf of the plan’s participants and beneficiaries. As a result, it is through the audit requirement that the DOL exercises the authority to perform a study to assess the quality of work performed by employee benefit plan auditors.

The 2023 Audit Quality Study was conducted on a statistical sample of 307 plan audits out of approximately 86,900 audits performed by about 4,300 IQPAs. The deficiency rate in the 2023 Audit Quality Study was 30%; the deficiency rate in 2015 was 39%. To clarify, the 39% in the 2015 study represents what the DOL labeled major unacceptable deficiencies for which, if not corrected, they would reject the Form 5500 filing. The comparative deficiency rates, based on the number of audits performed by the auditor, are presented in the chart on the right.

The 2023 Audit Quality Study showed an overall improvement in audit quality since the prior study, but the chief accountant of the DOL noted that it was “very troubling” that the deficiency rates in the firms that perform 100-749 plan audits and those which perform 750 or more plan audits increased to 18.6% and 17.0%, from 12.0% each, respectively. The firms in these two strata perform almost 50% of plan audits and audit over 86% of plan assets. The 2023 Audit Quality Study also contains a table that illustrates that IQPAs who perform between 1-5 employee benefit plan audits annually had a higher deficiency rate than IQPAs performing 100 or more annually. Of the audit areas reviewed, the DOL found that the highest deficiency rates existed in three areas unique to ERISA plans: participant data, contributions received and receivable, and benefit payments.

According to the 2023 Audit Quality Study, the number of CPA firms performing audits for the 2020 Form 5500 dropped 39% to 4,300 firms from the 7,330 firms performing audits in 2011. Also interesting is that the number of CPA firms performing audits for the 2021 Form 5500 fell an additional 8% from 2020 to 3,940.

The DOL provides many recommendations related to enforcement and outreach in its 2023 Audit Quality Study, including working with state licensing boards and the AICPA Ethics Division to improve the sanctioning process; encouraging the AICPA to require firms performing benefit plan audits to receive an engagement review covering a sample of their benefit plan audits; and encouraging the National Association of State Boards of Accountancy (NASBA) to require specific licensing requirements for CPAs who perform employee benefit plan audits.

The DOL expects to perform another study after the adoption of Statement on Auditing Standards (SAS) No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA. The agency will assess if audit quality improved as a result of SAS No. 136, which is effective for audits of ERISA plan financial statements for periods ending on or after Dec. 15, 2021.

The full text of 2023 Audit Quality Study should be read for complete information regarding the findings and recommendations of the DOL.² 

¹ Effective for plan years beginning on or after Jan. 1, 2023, the participant-counting methodology changed for determining eligibility for simplified reporting for smaller defined-contribution plans. Plans will use the number of participants with account balances as of the beginning of the plan year. If a new plan, participants with account balances at the end of the year is used. Previously, individuals were considered participants if they satisfied age and service requirements for participation, even if electing not to participate.

² www.dol.gov/sites/dolgov/files/ebsa/about-ebsa/our-activities/resource-center/publications/november-2023-audit-quality-study.pdf

David A. Torrillo, CPA/ABV, CVA, is the managing member at Torrillo & Associates in Glen Mills. He can be reached at david@torrillocpa.com.

Julie Verrekia, CPA, is director of quality control with Torrillo & Associates LLC and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at jverrekia@live.com.