In a recent report released by the U.S. Department of Labor (DOL), a spotlight has been cast on the current state of employee benefit plan (EBP) financial statement audits. This comprehensive study concentrated on the audits from the 2020 filing year for Form 5500, Annual Return/Report of Employee Benefit Plan, and was conducted by the DOL's Employee Benefits Security Administration (EBSA).
After a thorough examination of 307 employee benefit plan audits, the findings revealed mixed results. While 70% of audits reviewed fully adhered to auditing standards or encountered only minor issues, 30% were marred by deficiencies. Though this percentage represents an improvement from a 39% deficiency rate reported in 2015, it underscores the ongoing need for continued improvement in the auditing practices of employee benefit plans.
Correlation Between Number of Audits Performed and Audit Quality
A key finding of the study was the correlation between the number of employee benefit plan audits a CPA firm performs and the quality of their audit work. Firms conducting between one and five employee benefit plan audits exhibited higher deficiency rates compared to those performing a higher volume of audits. This trend underscores the importance of experience and specialization in ensuring audit quality. Firms that conduct a higher number of audits demonstrate a markedly higher adherence to auditing standards, suggesting that proficiency and frequent engagement in such audits are key to maintaining quality and accuracy.
The statistics highlight this difference in audit quality based on the number of audits a firm performs each year. Firms auditing only 1-2 plans per year had a high deficiency rate of 70%. This rate decreased to 51.7% for firms auditing 3-5 plans and slightly improved to 50.1% for those auditing 6-24 plans. However, firms auditing a larger volume of 100-749 plans have a lower deficiency rate of 18.6%, and it further reduces to 17% for firms auditing 750 or more plans.
The Role of AICPA’s Employee Benefit Plan Audit Quality Center
In addition, audits conducted by CPAs who are members of the AICPA’s Employee Benefit Plan Audit Quality Center displayed significantly lower rates of deficiencies. This emphasizes the value of specialized training and resources provided by professional bodies in enhancing audit quality.
The Changing Landscape of CPA Firms
There has been a notable shift in the landscape of CPA firms involved in these audits. In 2011, 81,162 plan audits were performed by 7,330 CPA firms. By 2020, the number of audits increased modestly to 86,863 but was conducted by only 4,300 firms, indicating a 40% decrease in the number of CPA firms involved. This trend suggests a move toward greater specialization and possibly reflects the complexity and regulatory challenges in this audit field.
Continuous Oversight by the DOL
While the DOL conducts comprehensive statistical audit quality studies at intervals of several years, it is crucial to recognize their ongoing efforts to maintain high-quality employee benefit plan audits. Throughout the year, the DOL actively engages in various initiatives, including targeted inspections, to identify and address deficient audits.
This continuous oversight extends beyond periodic extensive studies involving routine check-ups and reviews. Such measures ensure that companies consistently adhere to the required standards, particularly in their Form 5500 filings.
Enhancing Audit Quality
Organizations can take proactive steps to enhance the quality of their EBP audits before the auditing process even begins. A critical measure is ensuring that plan administrators file Form 5500 on time, even if some information is yet to be completed. This approach is vital to avoid penalties, particularly in light of the DOL’s stringent stance on late filings. The introduction of new methodologies in the 2023 Form 5500 for counting participants and reporting administrative expenses further emphasizes the importance of accuracy and compliance. These changes require meticulous preparation and reporting to meet the evolving standards set forth by regulatory bodies.
It is also important to note that the careful selection of an auditor is a key factor in the overall quality of an EBP audit. The recent report highlights a significant trend: auditors who manage a larger volume of EBP plans annually tend to have lower rates of deficiencies, indicating that experience and breadth of practice are crucial. In addition, audits conducted by CPAs affiliated with the AICPA’s Employee Benefit Plan Audit Quality Center consistently show fewer deficiencies. This correlation suggests that choosing an experienced auditor, especially those associated with recognized professional groups like the AICPA, can greatly mitigate the risk of audit deficiencies, thereby enhancing the reliability and integrity of the audit process.
For More Information
If you're concerned about the quality of your EBP audit, please connect with our professionals today. Our team of auditors, equipped with thorough expertise and comprehensive knowledge, will ensure your audit adheres to all necessary standards, effectively simplifying EBP audit complexities and ensuring smooth compliance with IRS and DOL regulations.
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