Auditing the auditors: The DOL urges scrutinizing retirement plan auditors

As retirement plan sponsors know, one of their yearly obligations is the preparation and filing of the plan’s Annual Report (also called a Form 5500). For retirement plans with 100 or more participants, the Annual Report must include an audit of the plan’s financial statement prepared by an independent auditor.

In reviewing the Form 5500s filed over the years, the Department of Labor (DOL) found nearly 40 percent of the audits accompanying the Form 5500s had serious problems. As a consequence, the DOL has been engaged in an initiative to improve the quality of the audits by improving the quality of the auditors engaged to do plan audit work.

Recently, the DOL sent letters to plan sponsors who would need to have audits done for their Form 5500 reporting. The letters are designed to highlight the need and importance to select a Certified Public Accountant (CPA) firm with the appropriate credentials and expertise to perform the required plan audit.

The DOL urged plan sponsors to review the qualifications of the CPA firm they choose for plan audit work. Specifically, the DOL instructed plan sponsors to consider the following:

• The number of plan audits the CPA firm conducts each year (including the type of plan audits);
• The extent of specific annual training the CPA firm received in auditing plans;
• The status of the CPA’s license with the state accounting board;
• Whether the CPA firm has been the subject of any prior DOL findings or referrals, or has been referred to a state accounting board or the American Institute of CPAs for investigation; or
• Whether the CPA firm’s plan audit work has recently been subject to a peer review by another CPA firm and whether such review had negative findings.

The DOL correctly points out that choosing the “wrong” CPA firm to perform the required audit can have serious and costly consequences for a plan sponsor. If the audit is deemed inadequate by the DOL, the DOL can take the position that the Form 5500 is deficient and, therefore, not timely filed. Failure to file in a timely manner subjects the employer, as the Plan Administrator, to a late penalty from the DOL of up to $1,100 per day with no maximum and a separate IRS penalty of $25 per day up to a maximum of $15,000.

Perhaps more importantly, a CPA firm with significant plan audit expertise can assist an employer in identifying administrative errors and investment issues. Once identified, correcting such errors and issues can be invaluable to the plan. Correction protects both the employer and the employee.