EBSA report on quality of benefit plan audits performed by CPAs finds deficiencies

The Employee Benefits Security Administration (EBSA) has issued a report on the quality of benefit plan audits performed by certified public accountants (CPA). The report, “Assessing the Quality of Employee Benefit Plan Audits,” reveals serious problems with the current system.

Specifically, the Office of the Chief Accountant (OCA), which is a part of EBSA, has studied the quality of audit work performed by independent qualified public accountants (IQPAs) with respect to financial statement audits of employee benefit plans covered under ERISA through the review of the Form 5500 Annual Return/Report filings and related audit reports for the 2011 filing year (plan year beginning in 2011). In the 2011 Form 5500 database, EBSA found that there were 81,162 filings that contained CPA audit reports. Those 81,162 audits were performed by 7,330 different CPA firms. EBSA selected a statistically valid sample of 400 plan audits from the target population of the 81,162 Form 5500 filings for 2011.

Findings of report

EBSA’s review found that 61% of the audits fully complied with professional auditing standards or had only minor deficiencies under professional standards. However, the remaining 39% of the audits contained major deficiencies with respect to one or more relevant generally accepted auditing standards (GAAS) requirements which would lead to rejection of a Form 5500 filing, putting $653 billion and 22.5 million plan participants and beneficiaries at risk. These figures reflect increases in the amount of plan assets and number of plan participants at risk compared with prior EBSA studies.

In addition, EBSA discovered a clear link between the number of employee benefit plan audits performed by a CPA and the quality of the audit work performed. CPAs who performed the fewest number of employee benefit plan audits annually had a 76% deficiency rate. In contrast, the firms performing the most plan audits had a deficiency rate of only 12%. The accounting profession’s peer review and practice monitoring efforts have not resulted in improved audit quality or improved identification of deficient audits, according to the report. Despite the fact that a number of CPA firms received an acceptable peer review report, EBSA found deficiencies in their audit work. However, CPA firms that were members of the American Institute of Certified Public Accountants’ (AICPA) Employee Benefit Plan Audit Quality Center tended to produce audits that had fewer audit deficiencies. In addition, the percentage of deficient audits decreased as the level of employee benefit plan-specific training increased. Thus, training specifically targeted at audits of employee benefit plans may contribute to better audit work.

Also, of the 400 plan audit reports reviewed, 67 (17%) of the audit reports failed to comply with one or more of ERISA’s reporting and disclosure requirements.

Recommendations

The report makes several recommendations involving increased outreach and enforcement of audit standards by EBSA, and legislation/regulatory changes. EBSA supports increasing outreach with the National Association of State Boards of Accountancy (NASBA), plan administrator organizations (such as American Society of Pension Professionals & Actuaries (ASPPA)), certain plan administrators, CPAs with smaller employee benefit plan audit practices, state boards of accountancy, and individual state societies of CPAs.

Under enforcement, EBSA lists revising case targeting to focus on CPA firms with smaller plan audit practices, working with NASBA and AICPA to improve the investigation and sanctioning process for CPAs with deficient audit work, working with AICPA’s Peer Review staff to improve the peer review process, and amending ERISA to focus the annual reporting civil penalties on the responsible party (i.e., CPAs if their plan’s annual report is rejected due to a deficient audit or if they do not meet the standards for qualification to perform an ERISA plan audit).

In addition to increased outreach to CPAs and enforcement of audit standards by EBSA, the report proposes legislative fixes. “The existing patchwork of regulations and rules needs to be overhauled and a meaningful enforcement mechanism needs to be created,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “The department is proposing, among other measures, legislation that will fix these problems.”

The report recommends that Congress amend the ERISA definition of “qualified public accountant” to include additional requirements and qualifications necessary to ensure the quality of plan audits and give the Secretary of Labor the authority to issue regulations concerning the qualification requirements. Congress is further urged to amend ERISA to repeal the limited-scope audit exemption. An alternative to the repeal of the limited scope audit would be to provide the Secretary with the authority to define when a limited scope audit would be an acceptable substitute for a full audit. According to the report, when auditors have to issue a formal and unqualified opinion, they have a powerful incentive to rigorously adhere to professional standards. Finally, ERISA should be amended to give the Secretary of Labor authority to establish accounting principles and audit standards that address financial reporting issues that are either unique to or have substantial impact upon employee benefit plans.

Source: “Assessing the Quality of Employee Benefit Plan Audits,” May 2015. EBSA News Release, No. 15-1000-NAT, May 28, 2015.

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