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Enhancing the effectiveness and quality of employee benefit plan audits, including 401(k) and 403(b) plans, has been a top priority for the AICPA and government regulators. To evaluate audit quality, the Department of Labor (DOL) Office of the Chief Accountant (OCA) has conducted several studies of submitted Form 5500s to better understand issues and trends. Past reports include those issued in 1997, 2004, and 2015, and have uncovered information about audit deficiencies, audit quality by CPA firm size, and other important details. These findings have been valuable when seeking to identify issues, challenges, and quality improvement opportunities.
In late November, the OCA issued an Audit Quality Study – November 2023 to determine if there have been changes to audit quality over the last report published 8 years ago. The study used Form 5500s filed for plan years beginning in 2020. One objective was to determine if there is a correlation between audit quality and type of plan engagement. The overall results were positive, with 70% of audits fully compliant with auditing standards. However, it shows additional changes are needed. To help clients, prospects, and others, JLK Rosenberger has summarized the key details below.
About the Study
The DOL reviewed Form 5500s, related audit reports, and work papers for 2020 filings. That year was chosen because it was before SAS 136 was implemented, allowing for a more accurate comparison with the past. Plans were categorized as simple (i.e., 401k), complex (i.e., ESOPs), or health and welfare plans. In total, 307 randomly selected audit reports and work papers were evaluated against the AICPA’s Audit & Accounting Guide: Audits of Benefit Plans.
- Firms Auditing Benefit Plans – The study wanted to understand if there were any changes in the firms auditing these plans. It appears there was a sharp reduction in the number of firms conducting plan audits from 7,330 firms (2011) to 4,300 firms (2020). The number of plans audited slightly increased from 81,162 in 2011 to 86,863 in 2020. This means there has been a 7% increase in the number of plans audited, while there was a 40% decrease in the number of auditors.
- Simple v. Complex Engagements – The study also evaluated the audit population based on the complexity of types of plans. It was determined that 75,677 plans (87 percent) were simple engagements, while 11,186 plans (13 percent) were considered complex. Interestingly, the number of firms conducting simple engagements vastly outweighed those conducting complex engagements, regardless of annual plan audits conducted.
- Audit Issues Persist – Unfortunately, audit issues persist, with 30% of audits reviewed containing unacceptable – major deficiency issues (the most serious category). According to the study, 6 billion dollars and 11.7 million participants and beneficiaries have unnecessarily been placed at risk. These numbers reflect the lack of oversight over benefit plan assets by the CPA firms hired to conduct the audit.
- Size of Plan Audit Practice – There is a correlation between the size of a firm’s benefit plan audit practice and plan audit quality. A significant divide continues to exist between those performing the fewest and most plan audits. It was reported that CPAs who performed between 1 and 5 plan audits experienced sharply higher deficiency rates than firms performing a higher number of plan audits.
- Peer Review Reports – The study also found that firms may receive a “clean” peer review report even though deficiencies exist in their benefit plan audits. Based on these findings, you can expect more oversight and additional steps to promote transparency of findings so prospective clients have the best information available when selecting their auditors.
Selecting Your Next Plan Auditor
These findings are important for plan sponsors to consider when selecting a plan auditor. Firms with fewer annual plan audits are more prone to make serious errors than those who audit a greater number. Concurrently, peer review reports do not correlate to audit quality. Many firms committing serious errors often receive a passing rating. The result is that sponsors need to carefully evaluate auditors to identify which can provide the best experience possible.
The report offers valuable insights into the quality of plan audits and where problems occur. If you have any questions about the details provided above or require help with your next plan audit, JLK Rosenberger can assist. JLK Rosenberger audits over 50 benefit plans annually, paying close attention to compliance with audit standards and guidelines.