Introduction
Employee benefit plan audits, or EBP audit support, are among the key compliance requirements to notice by U.S. businesses that provide employees with retirement plan opportunities. As retirement laws continue to evolve, with the DOL focusing more on transparency and participant protection, companies sponsoring employee benefit plans are coming under heavy pressure to maintain accurate records, establish solid internal controls, and report on-time.
For CPA firms, EBP audits are no longer simply another compliance engagement. These processes have become a specialized service area with distinct requirements for technical competence, operational efficiency, and the use of technology, in addition to the need for a skilled team to manage them.
Some firms effectively face staffing shortages, increasing workloads, and tight deadlines. These issues compound during peak audit time frames, particularly for those firms juggling several employee benefit plan engagements simultaneously.
In this blog, we'll go over what is an EBP audit, why it matters, common challenges for employers and CPA firms, the latest in regulatory updates, and what firms are doing to enhance efficiency while maintaining audit quality.
What exactly is an EBP Audit?
An Employee Benefit Plan (EBP) audit refers to an independent review of a company’s retirement benefit plan financial statements and related records. Generally speaking, such audits are mandated by the Employee Retirement Income Security Act of 1974 (ERISA).
Typically; any organization that sponsors an Employee Benefit Plan with 100 or more eligible participants will be required to have an independent audit of their plan performed each year by a qualified public accountant.
Some of the more prevalent types of employee benefit plans which require annual audits include the following:
- 401(k) Plans
- 403(b) Plans
- Employee Stock Ownership Plans (ESOPs)
- Defined Benefit Plans (DB's)
- Health and Welfare Benefit Plans
The EBP audit will provide assurance to the sponsoring organization that all financial statements of the plan have been presented fairly and in accordance with relevant laws and regulations.
What are the Importance of EBP Audits?
EBP auditing is not merely regulatory. In addition to ensuring the integrity of retirement plans, it serves to safeguard Employees.
Ownership of Employee Assets
Employees have a reasonable expectation that their contributions to retirement will be properly administered and accurately recorded. An EBP audit helps to ensure that employer contributions, investment balances and records of participants' accounts are proper.
Compliance with Government Regulations
The Internal Revenue Service and the Department of Labor heavily regulate employee benefit plans and violations resulting from plan administration will result in penalties, litigation and possible disqualification of the plan.
Credibility with Employers
Well-managed retirement plans demonstrate corporate responsibility which creates trust and confidence amongst employees.
Mitigating Fraud/Errors
Audits expose operating deficiencies, discrepancies in reporting and other potential deficiencies which may lead to larger problems.
There are many important components to performing audits of employee benefit plans; the purpose of an employee benefit plan audit is to confirm the validity of the operational practices of the plan as well as the related financial reporting.
Verification of Participant Eligibility
The purpose of verifying participant eligibility is to determine that all eligible employees have been included in the plan in accordance with the plan documents.
Testing Contributions
Contribution testing includes examination of employee deferrals, employer matching contributions, and the timing of the contributions.
Investment Valuation
Auditors confirm that the valuations of the investments of the employee benefit plan are accounted for correctly and properly disclosed to participants in the plan.
Testing of Distributions and Loans
Testing of distributions and loans will confirm that account holders receive distributions in accordance with the rules and regulations that govern the plan.
ERISA Compliance
Determining that the plan is in compliance with respect to the operation of the plan will be substantiated by the audit of the plan for compliance with the ERISA regulations and the plan document that was approved by the Department of Labor.
Review of Employee Benefits Plan Audit Requirements
A financial statement audit includes an examination of the financial statements and accompanying notes, disclosures and supporting documentation.
Employee Benefits Plan Audit Types
Employee Benefits Plan audits typically come in two types.
Section 103 (a)(3)(C) Audit
Formerly referred to as Limited Scope Audits, this type of audit excludes from examination certain investments for which the investment information has been certified to be true and accurate by a relevant financial institution (i.e., bank or trust company).
Auditors still perform numerous tests of compliance and validation.
Non-Section 103(a)(3)(C) Audit
Previously, known as Full Scope Audits where auditors examine and verify all aspects of the plan, including investments.
Auditors performing Non-Section 103(a)(3)(C) Audits must perform more detailed testing and maintain more detailed documentation.
Listing of Common Challenges for Employer Benefit Plan Audits
Employer Benefit Plan Audits are specialized audits. Both the CPA firm that conducts them and the employers that provide employee benefit plans are confronted by numerous common audit challenges.
Lack of Complete Documentation
The most significant issue when auditing Employee Benefit Plans is obtaining complete and reasonable documentation. Examples include:
- Missing Payroll Records
- Incomplete Census Data
- Untimely or No Trustee Reports
- Incorrect Participant Data
- Missing Plan Amendments
These factors can lead to a delay in completing an Employee Benefit Plan Audit and increase the overall expense of the audit.
Constantly Changing Regulations
The Employee Retirement Income Security Act (ERISA) has numerous regulations that continue to change. Employers and CPA professionals must remain current on all new compliance and disclosure standards and audit guidelines.
Time Constraints
Audit teams often face pressure to complete their tasks on or before a deadline due to strict timeliness requirements for filing, and third-party administrator and custodian entities being frequently late in providing data can exacerbate the time constraints for an audit team.
Lack of Staff at CPA Firms
The accounting profession is facing unprecedented staffing shortages, in particular, the employee benefit plan audit dates fall during very busy seasons for the CPA profession, putting an additional burden on CPA firms that are already short-staffed.
Data Inaccuracy Issues
Audit teams building their audit files may run into huge problems with participant data; payroll records; and/or contribution calculations.
Importance of Specialized Expertise for EBP Audits
EBP audits are not conducted in a traditional manner, so in order to effectively conduct an EBP audit an auditor needs to have a working knowledge of:
- Compliance with ERISA
- Department of Labor requirements
- Compliance with Internal Revenue Code
- How retirement plans operate
- Certain audit procedures used to audit EBP
Without specialized EBP expertise, CPA firms may face difficulties regarding:
- Quality Control
- Increased Risk
- Not using efficient audit processes
- Regulatory Deficiencies
The Department of Labor has published its findings over the years regarding high levels of deficiencies in EBP audits conducted by CPA firms that do not have specialized audit experience.
Because of the findings published by the Department of Labor in the past, many CPA firms are now making a significant investment into proper training, quality review processes, and having the right number of specially trained professionals on their audit teams.
Changes to Regulation Affecting EBP Audits
There has been a significant shift in the audit environment for EBP audits.
New Audit Reporting Standards for EBP Audits
New auditor reporting requirements for employee benefit plans were established by the AICPA. These standards increased auditor responsibility regarding risk assessment; the presentation of the report; representations made by management; the communication with plan management; and increased oversight by the DOL.
The DOL is placing a greater emphasis on the quality of audits.
When there are poor quality audits, it can lead to:
• Regulatory investigations
• Form 5500 filings being rejected
• Penalties for plan sponsors
• Damage to the CPA firms’ reputation
• Cybersecurity Risks
The increasing digitalization of retirement plans has created an expanded focus on the risks associated with cyber security.
Auditors are increasingly focused on:
• Access management
• Data protection controls
• Security with third party service providers
• Protection of participant information
Technology and EBP audit
The way EBP audits are conducted is being transformed through the use of technology.
Modern audit firms are leveraging automation tools to increase the efficiency, accuracy and collaboration of their audits.
Data Analytics
Hire Audit teams are now using advanced analytics to identify trends, anomalies or unusual transactions.
Workflow Automation
Through the use of automated workflow processes, firms are able to manage documentation requests, review processes, and track deadlines more efficiently.
Secure Client Portals
Digital client portals are facilitating better communication and easier sharing of documents between audit firms and clients.
Cloud Based Audit Systems
Cloud computing allows for centralized audit management and remote collaboration.
Technology not only helps firms operate more efficiently, but also helps practitioners to perform higher quality audits.
Expansion of CPA Firms into Employee Benefit Plan (EBP) Audits
Growth Opportunity: EBP Audits for CPA Firms
Stable, Recurring Revenue. Because most EBP audit engagements are on an annual basis, CPA firms have a reliable, stream of income from this service line.
Long-term Relationship with Your Business Clients. EBP audits can provide a means for building longstanding relationships with your business clients that can develop into additional cross-selling opportunities.
Increased Demand for EBP Audits from Clients. With more businesses surpassing the 100-participant-threshold, there is an increase in demand from your clients for qualified EBP auditors.
Value-Added Advisory Services. Many CPA firms are expanding their EBP audit practice beyond compliance services toward providing value-added advisory services (governance, operational improvements, and fiduciary responsibilities).
Difficulty in Staffing the EBP Audit Practice
Increased demand for EBP audits has created a challenge for CPA firms to staff the EBP audit practice due to the availability of talent.
Professionals who have the following skills are needed to perform EBP audits effectively:
- Audit Procedures
- Retirement Plan Operations
- Employee Retirement Income Security Act (ERISA) Compliance
- Financial Statement Preparation
- Documentation Standards
The challenge for CPA firms is that training internal staff to perform EBP audits takes a considerable amount of time and money.
Additionally, many of the experienced employees in CPA firms have left the profession because of burnout, workload stress, and a desire to find a new profession.
As a result, firms are looking for alternative ways to staff the EBP audit practice.
Many CPA firms are increasingly using offshore accounting professionals to assist with EBP audit engagements.
- Using offshore suppliers for audit work can help firms:
- Efficiently manage seasonal workload fluctuations
- Reduce operational stress on audit teams
- Shorten time to complete audit work
- Increase firm profitability
- Maintain consistent staff levels
Common offshore supplier functions for audit engagements include:
- Preparing audit workpapers
- Organizing and collating data
- Copying to and from prior year workpapers
- Assisting with contribution testing
- Formatting pension fund financial statements
- Maintaining all documentation in accordance with AICPA and IRS regulations
- Conducting analytical procedures
When managed properly, working collaboratively with an offshore supplier can result in significant improvements in efficiency while at the same time allowing onshore teams to concentrate on reviewing the audit work products, communicating with the client and making high level decisions.
As EBP audit requirements continue to evolve, contact us today to learn how our specialized audit support solutions can help your CPA firm maintain quality, improve efficiency, and scale with confidence.
