Labor Department Finds Problems with CPA Audits of Employee Benefit Plans

The U.S. Labor Department’s Employee Benefits Security Administration has released a study criticizing the quality of employee benefit plan audits performed by CPAs, finding that serious deficiencies in 39 percent of the audits are putting the benefit plans and 22.5 million participants and beneficiaries at risk.

The report, “Assessing the Quality of Employee Benefit Plan Audits,” reveals serious issues with the current system.

“The existing patchwork of regulations and rules needs to be overhauled and a meaningful enforcement mechanism needs to be created,” said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi in a statement. “The department is proposing, among other measures, legislation that will fix these problems.”

More than 7,300 licensed CPAs nationwide audit more than 81,000 employee benefit plans. EBSA's review found that 61 percent of audits fully complied with professional auditing standards or had only minor deficiencies under professional standards. The remaining 39 percent of the audits contained major deficiencies, however, which put $653 billion and 22.5 million plan participants and beneficiaries at risk. These figures reflect increases in the amount of plan assets and number of plan participants at risk compared with prior EBSA studies.

The American Institute of CPAs has anticipated the report’s findings and AICPA officials have said in recent months they are working on improving the quality of employee plan audits by CPAs in response to the research (see AICPA Works on Fixing Employee Benefit Plan Audit Problems Ahead of Damaging Report, AICPA Proposes Six-Point Plan to Improve Audit Performance and AICPA Pushes for Improved Audit Quality and Peer Review).

The AICPA also issued a statement in response to the report Thursday. “We take the Department of Labor’s (DOL) findings seriously and are committed to working with the DOL and other interested parties to enhance audit quality,” said the AICPA. “The audit of an employee benefit plan’s financial statements is an important financial reporting safeguard. Notably, none of the quality issues identified by the DOL pose a risk to the viability of any plan.

“The AICPA is addressing quality issues through our Enhancing Audit Quality initiative, which has a special focus on employee benefit plans. Our recently issued Six-Point Plan to Improve Audits will help our members stay focused on achieving the highest level of performance for financial statement audits,” the AICPA statement continued. “Further, our Employee Benefit Plan Audit Quality Center offers members best practice tools and resources that help improve the quality of audit engagements in this area. In addition, the AICPA is collaborating with the National Association of State Boards of Accountancy on a project to expedite ethics enforcement by allowing our Professional Ethics Division and the DOL to share their respective investigative files with state boards of accountancy.

“We also have recommendations that would further enhance audits of employee benefit plan financial statements,” the AICPA added. “The DOL should seek congressional repeal of the exemption allowing limited-scope audits, which the Department’s Office of Inspector General determined is a major obstacle in providing audit protections for plan participants. The DOL also should initiate a comprehensive education program for plan sponsors to help them understand the critical importance of hiring a quality auditor.

“The AICPA’s overarching goal has been—and continues to be—helping individuals and firms perform the highest quality employee benefit plan audits possible,” the AICPA concluded. “We will work with auditors, plan sponsors, state CPA licensing boards and the Department of Labor to accomplish that.”

In addition to increased outreach to CPAs and enforcement of audit standards by EBSA, the DOL report proposes legislative fixes. It recommends that Congress amend the Employee Retirement Income Security Act definition of "qualified public accountant" to include additional requirements and qualifications necessary to ensure the quality of plan audits. Under the proposal, the Secretary of Labor would be authorized to issue regulations concerning the qualification requirements.

The report also urges Congress to repeal the ERISA limited-scope audit exemption and give the secretary the authority to define when a limited scope audit would be an acceptable substitute for a full audit. When auditors have to issue a formal and unqualified opinion, they have a powerful incentive to rigorously adhere to professional standards ensuring that their opinion can withstand scrutiny. The limited scope audit exemption undermines this incentive by limiting auditors' obligations to stand behind the plans' financial statements.

Finally, the report suggests ERISA be amended to give the Secretary of Labor authority to establish accounting principles and audit standards to protect the integrity of employee benefit plans and the benefit security of participants and beneficiaries.

The New York State Society of CPAs also responded to the study. “A recent study conducted by the Department of Labor’s Employee Benefits Security Administration, and released yesterday, shows a high rate of audit deficiencies in employee benefit plan audits, especially for those auditors who conduct only one to five of these audits a year,” NYSSCPA president Scott M. Adair said in a statement. “The high rate of audit deficiencies documented in this study are unacceptable and do not reflect the core tenets that the CPA profession holds dear: accuracy, transparency and accountability. The New York State Society of CPAs is committed to working with the DOL, the American Institute of Certified Public Accountants (AIICPA) and the New York State Board for Public Accountancy to develop educational and practice monitoring solutions that result in significant improvement to employee benefit plan audits.”