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By William J. Hayes, managing editor, Pennsylvania CPA Journal

We would all like to think that we go about performing our jobs without making mistakes. However, as the old adage goes, nobody’s perfect. Looking for the imperfect is important to those tasked with auditing employee benefit plans. We were able to sit down with Deborah A. Schneider, CPA, director of accounting and assurance services at Morris J. Cohen & Co. PC, and ask her a few questions about the common errors found by auditors and how to make the “We found errors” conversation less difficult for clients. Schneider will be a presenter along with Roland J. O’Brien, CPA, at the May 1 PICPA Changing Landscape of Employee Benefit Plans Conference.

PICPA: When performing compliance testing on an employee benefit plan offering, how common would you say it is that an auditor finds errors? And are these usually small errors or can they be bigger?

Schneider: This can depend on many factors, including, but not limited to, the complexity of the plan document itself; the skills, knowledge, and experience of the plan sponsor personnel charged with carrying out the administrative processes of the plan; plan sponsor personnel and management’s working knowledge of Department of Labor (DOL) and Internal Revenue Service (IRS) rules and regulations; and the degree of reliance on and monitoring of service providers. There is further risk when a long-established plan does not meet the participant threshold to require an audit for several years and then eventually meets this threshold. In my personal experience, rather than arising from one specific factor, compliance errors frequently arise from a combination of factors.

The more complex the plan document, the more it lends itself to compliance errors. When sponsor personnel, including management, who are charged with administrating the plan do not fully understand the terms of the plan document or the effects of noncompliance with the terms of the plan document and related regulatory requirements, this can be the perfect storm for compliance errors.

Our client base generally includes defined contribution plans for privately held businesses, and we frequently uncover compliance issues in our testing. These errors generally impact one participant or a limited number of participants, and usually have no material dollar impact on the amounts reported in the plan’s financial statements. However, materiality as it pertains to a participant and to compliance with DOL and IRS is, for all intents and purposes, nonexistent, and requires correction. In other cases, material adjustments may be required. For example, we worked with a plan in which sponsor personnel mistakenly excluded certain compensation that was includable under the plan document’s definition of compensation, resulting in a material adjustment to the plan’s financial statement to record a corrective contribution receivable. In another instance, plan sponsor management believed that the plan required one year of eligibility for matching contributions; however, the plan document actually provided for immediate match eligibility, resulting in a significant correction.

Can you give us a couple of examples of errors that are more commonly found when conducting an employee benefit plan audit?

Common compliance errors that we have encountered include, among other things, the plan not utilizing the plan document definition of compensation in determining contributions, contributions posted to the incorrect participant’s account, payroll withholdings for participant loan payments not commencing timely, failure to stop a participant’s deferrals for a six-month period after the participant receives a hardship distribution, failure to obtain appropriate documentation for a hardship distribution or providing a hardship distribution for a situation that does not qualify, failure to use forfeitures in accordance with regulations or failure to use forfeitures as specified in the plan document, and failure to remit participant deferrals and loan repayments in a timely manner.

If and when an auditor finds an error in such a plan, what is the first thing he or she should do to limit the impact of the mistake?

I cannot stress enough the importance of communicating errors and noncompliance to the appropriate client personnel immediately. If it is something that is ongoing, they can correct it going forward so that it has no further impact. However, they will also need to take appropriate corrective action for prior years, and may require the assistance of qualified ERISA counsel to assist them. In addition, plan sponsor personnel will need to quantify the impact of the error so that the auditor can make a determination as to whether it is material to the financial statements.

Say you find some errors in the employee benefit plan, and now you have to present your findings to the client. It has to be a fairly tough conversation. What tips would you give an auditor to make that conversation as easy and productive as possible?

First and foremost, errors are frequently detected during testing performed by less-experienced engagement personnel. Before anything is communicated to the sponsor, the work should be thoroughly reviewed to ensure that there is, in fact, a compliance issue. If there is, this will require an immediate discussion with the appropriate sponsor personnel so that the impact of the error can be quantified. This can be a difficult conversation, but when approached with the mindset to help the plan sponsor carry out its responsibilities, it can be well received. The CFO of one of our plan sponsors said, in regard to a situation with numerous compliance issues, something to the effect of “We threw ourselves into the fire, and you reached in and pulled us out.” As a reminder, when noncompliance errors are considered material weaknesses or significant deficiencies, they must be communicated in writing. It is a best practice to discuss the errors and the findings prior to finalizing the written communication so that any misunderstandings or inaccurate descriptions can be addressed. If the client so desires, they can provide responses and corrective actions to the findings.