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Tips on Selecting a Plan Auditor

Generally, federal law requires employee benefit plans with 100 or more participants to have an audit as part of their obligation to file a Form 5500. Note that some pension plans with fewer than 100 participants also may be required to have an audit if they fail to meet certain conditions relating to their plan investments, bonding, and disclosure requirements.

An audit will help protect the assets and the financial integrity of an employee benefit plan and ensure that the necessary funds will be available to pay retirement, health and other promised benefits. An audit also will help in carrying out the legal responsibility to file a complete and accurate annual return/report. Since an incomplete, inadequate or untimely audit report may result in penalties being assessed against the plan's administrator — who is the plan sponsor unless another individual or entity is specifically designated to assume this responsibility — selection of an experienced and reliable auditor is very important.

If the employee benefit plan is required to have an audit, one of the most important duties of the plan administrator is to hire an independent qualified public accountant. Following are some tips on selecting an auditor and reviewing the audit and report.

  • Federal law requires that an auditor engaged for an employee benefit plan audit be licensed or certified as a public accountant by a state regulatory authority.
  • Auditors of employee benefit plans should not have any financial interests in the plan or the plan sponsor that would affect their ability to render an objective, unbiased opinion about the financial condition of the plan.
  • One of the most common reasons for deficient accountants' reports is the failure of the auditor to perform tests in areas unique to employee benefit plan audits. The more training and experience that an auditor has with employee benefit plan audits, the more familiar the auditor will be with benefit plan practices and operations, as well as the special auditing standards and rules that apply to such plans.
  • In some instances, a less experienced auditor may be assigned to perform routine audit procedures in order to reduce audit costs. When this happens, the plan sponsor should confirm that an experienced employee benefit plan auditor will review his or her work, as well as perform the more complicated audit procedures.
  • When engaging an auditor, the plan sponsor may wish to obtain references and discuss the auditor's work for other employee benefit plan clients. If the plan sponsor have additional questions, the plan sponsor may also wish to verify with the appropriate state regulatory authority that the provider holds a valid, up-to-date license or certificate to perform auditing services.
  • In preparation for the audit, the auditor will prepare a contract, referred to as an “engagement letter,” describing the audit work to be performed, the timing of the audit, and fees. This letter also should describe the responsibilities of the auditor and the plan administrator. The plan sponsor should review this letter carefully and resolve any questions with the auditor before the process begins.
  • Federal law permits the administrator of an employee benefit plan to limit an audit when plan assets are held by banks or insurance companies and written certifications are provided by the institutions holding those assets. It may be appropriate for a plan administrator to consult with an accountant, attorney or plan advisor to determine whether limiting the scope of an audit may appropriate.
  • It is generally the responsibility of the administrator to maintain plan financial and other records. Many of these records will need to be made available to the auditor for review in the course of the plan audit. If a third-party service provider maintains plan records, the plan sponsor will need to arrange for auditor access to these records.
  • At the conclusion of the audit, the auditor will issue a report and state an opinion on the plan's financial statements as well as any schedules required to be included as a part of the plan's annual report filing. Auditors will also report on significant problems, if any were found. The auditor may also suggest ways to improve internal controls and plan operations. This is a good time to ask questions about the auditor’s work.

Frequently audits are found to be deficient because of the failure of the auditor to conduct tests in areas unique to employee benefit plans. Accordingly, an a plan sponsor should make sure that the auditor considered the following areas:

  • whether plan assets covered by the audit have been fairly valued;
  • whether plan obligations are properly stated and described;
  • whether contributions to the plan were timely received;
  • whether benefit payments were made in accordance with plan terms;
  • if applicable, whether participant accounts are fairly stated;
  • whether issues were identified that may impact the plan's tax status; and
  • whether any transactions prohibited under ERISA were properly identified.

John Iekel is Senior Writer and Editor for the ASPPA Net and NTSA Net portals.