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An introduction or “refresh” to the Employee Benefits Plan audit process

Updated: Nov 20, 2023

Every year as temperatures cool down, the need to complete Employee Benefit Plan (EBP) audits heats up. Since the drop-deadline (of October 15) for filing associated paperwork will be here before we know it, the team at O’Donnell, Ficenec, Wills & Ferdig is acquainting or re-acquainting our valued community with the following:

  • Why these audits are so important

  • Why it’s equally important to partner with a skilled auditor with keen knowledge in this area

  • And the part you can play in ensuring this process goes off without a hitch

About EBP Audits

The audit process is an outgrowth of legislation; specifically, the Employee Retirement Income Security Act of 1974. ERISA was enacted to mitigate fraud and other abuses within the country’s private pension and welfare system. A specific requirement was carved out for employee benefit plans, those incentives that are extended to both attract and keep top talent. This requirement largely tasked relevant organizations with filing annual reports that, among other items, include formal audit information issued by independent and qualified public accountants. These audits have been established to support that the EBP’s financial statements and associated schedules are fairly presented and conform with GAAP (or “Generally Accepted Accounting Principles”).

Do you need to file?

Federal legislation generally requires that those plans with at least 100 participants must comply with the audit and related provisions as referenced in the above. This reporting is submitted with the annual return and Form 5500. As with most things, there are some exceptions to the rule. Commonly, those plans that are exempt from such returns and reporting include EBPs with 99 or fewer participants, or those plans that meet other investment-, fidelity bonding- and disclosure-related conditions. Additionally, some EBPs may be eligible to file “simplified reports,” or the “Short Form Annual Return/Report of Small Employee Benefit Plan” found here.

So, you need to file. What next?

It is essential to partner with a team of independent, highly-qualified professional accountants. The requirements around eligible EBPs should not be ignored, nor taken lightly. Consider the following:

  • A properly-performed and compliant audit serves to protect one’s plan and its associated assets and financial integrity.

  • Such annual vehicles to protect plans also provide vital information; you are doing your part to assure that the appropriate funds are at-the-ready to pay for those retirement, health and other benefits that have been promised or are due to employees.

  • These requirements aid in additional business intelligence. They can provide crucial insights that may be used to improve the organization and its operations a as a whole. One gets a good gauge of how well the EBP’s internal controls are working; for instance, related to financial reporting, pinpointing control weaknesses that need attention, or addressing and resolving “operator errors.”

  • Additionally, these audits can serve as a launchpad to further improve and streamline EBP management and its sustained operations.

  • On a compliance front, quality audits inform the full and accurate completion and filing of the aforementioned Form 5500 series of reports.

  • With an audit in hand that you can trust, courtesy of a qualified and knowledgeable team like OFWF, your organization minimizes or avoids the costly penalties and other negative consequences and sanctions associated with providing a partially-complete, inferior, past-due, or otherwise “deficient” audit report. It should be noted that legislation in recent years increased relevant penalties, which are assessed on a daily basis and differ depending on the nature of the compliance failure.

Again, it is absolutely a must to select a properly licensed, certified, and independent (read: no financial or other conflicts of interest with the plan or plan sponsor) public accountant. Furthermore, the U.S. Department of Labor Employee Benefits Security Administration issues reports associated with their own “audits” of EBP audits on an ongoing basis. They have consistently found a range of deficiencies associated with the quality of these audits. The nature and severity of such deficiencies are “classed,” and include “unacceptable, major findings” like a failure to present supplemental info, incorrect or incomplete info related to Fair Value Measurement disclosures, poorly-presented financial information and statements, and audit opinions that do not include appropriate language. As noted by the DOL’s Employee Benefits Security Administration, one of the most common deficiencies has to do with the failure on the part of the auditor to “test” areas that may be unique to such audits due to their lack of experience with EBPs and their audit processes.

Steps to a healthy partnership

When we engage with clients, we engage for life. It is not sufficient for us to merely dot the i’s and cross the t’s, as essential as such compliance is to protect invaluable assets and brand reputation, and to avoid penalties in the nearer term. Whenever members of our team take a deep dive into one’s operations, there are numerous opportunities to then use that information to enhance the health and vitality of the firm over the longer term, not just during this “event” or season as a deadline approaches. “Good to know” information related to the EBP audit process includes:

  • We will prepare a contract or “engagement letter” prior to conducting the audit.

  • Be sure to review the letter closely. Within it, you will find vital and specific information related to how we will perform the audit, its timing, and our fees.

  • We welcome any questions that you may have once the letter has been reviewed, and at any time you need clarification in these and other areas.

  • We also encourage any plan administration to enlist the expertise of their other advisors or relevant in-house staff as needed; for instance, a staff attorney may need to discuss conditions and procedures associated with assets held by banks, other financial institutions and insurance companies.

  • As noted within the engagement documents, we will be requesting information to ensure records are complete, accurate, and maintained properly. These financial, accounting and ancillary records must be reviewed by our auditors. Additionally, we can work with any providers who may be tasked with keeping these records on your behalf, too. We’ll discuss arrangements from the get-go. So, everyone is clear and aware of the process and what to expect.

  • Once the audit is done, you will be provided with information such as our opinion on financial statements and schedules (as needed) that are required to properly complete the 5500 filing.

  • If we find substantial deficiencies, such as significant or material weaknesses in controls, those will be reported. Furthermore, we can advise on methods to promptly and proactively repair those deficiencies and improve controls.

  • As always, it is essential to ask any questions as they come up. We welcome any follow-ups regarding our findings and recommendations; for example, we want to provide peace of mind on how assets and obligations are stated, described and “fairly reported.” More information on questions to ask, as well as other pointers, can be found at the DOL guide here.

Let’s get to work! We always urge our clients and readers to contact us sooner rather than later. You do not want to leave this all-important requirement for benefit plans to the last minute. Our skilled and experienced assurance team is here to help now.

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