Few things strike fear in the mind of employers like the word “audit” especially when used in connection with the modifiers “IRS”, “Department of Labor”, and/ or “SEC”.
But the reality is that all Employee Benefit Plans (EBPs) required to file 5500 are also required by law to have an annual audit by an Independent Qualified Certified Public Accounting Firm which has specialized training in performing such audits. This became even more crucial in 2019 with the Issuance of AICPA (American Institute of Certified Public Accountants) Statement on Auditing Standards (SAS) No. 136: Forming an Opinion and Reporting on Statements of Employee Benefit Plans Subject to ERISA which imposes new requirements in all phases of an audit of ERISA plan financial statements including engagement acceptance, risk assessment and response communication with those charged with governance, performance procedures and reporting.
The types of Plans covered by these requirements include:
Employee Stock Ownership Plans (ESOPs)
Defined benefit pension plans
Health and welfare benefit plans
Master trust arrangements;
In addition to the Annual audits required by these types of Plans, CPA firms engage in a wide array of services for these Plans including: Full-scope audits, Limited-scope audits, Reviewing complex and alternative investments, Auditing plan mergers, Acquisitions, and Spin-offs, Aiding with full or partial plan terminations, Performing initial audits and Stub period audits, Helping with DOL and IRS investigation assistance as well as ERISA compliance matters, and finally preparing Form 5500 and Form 990 or 990T Filings. If the review is not completed the employer risks large penalties, civil sanctions, and even a criminal record.
The CPA firm is an advocate for the employer advising on the “best practices” and often acting as a problem solver by fixing issues where “best practices” are not being met. More than anything else, the employer should see the auditors as an investment against fraud and abuse. With the new auditing standard issued and made effective as of 2019 and as noted above, the employer should expect a CPA firm to be diligent in rooting out problems if they exist.
Once engaged in the audit, the CPA firm will attempt to verify the following:
That eligible plan participants are given the opportunity to participate;
That plan assets are fairly valued;
That contributions are made by employer and employee alike in a timely manner;
That the accounts of the plan participants are fairly stated;
That plan benefit payments are correctly made;
That any issues related to tax status are considered and;
That there are no prohibited transactions.
Each of these seven areas could be the subject of a dissertation as to the rules and regulations applicable to them. Suffice it to say that a CPA firm is experienced in auditing plans and will engage in detailed reviews of each area with the cooperation from the employer and meeting the regulations of law.
At the end of the audit, the employer can expect that everything that they do right will be noted and anything that may have been done less than perfectly will be fixed if the employer follows the CPA firm’s recommendations.
Dan Dudley at OFWF is a trained professional in the area of employee benefit audits. If you have any questions or would like to learn of the intricacies involved please reach out to Dan at firstname.lastname@example.org.