At last count, there were approximately 121 million households in the United States and, of those households, approximately two-thirds had assets in a retirement plan. According to the Internal Revenue Service, retirement plan assets were approximately $23 trillion in 2013, which included assets held by pension plans, 401(k) plans, 403(B) plans and a variety of individual retirement plans. Of approximately $23 trillion, approximately $6 trillion are subject to audits by independent auditors. The remaining $17 trillion are not required to be audited as those assets are likely in individual accounts (such as IRAs) or in plans with less than 100 participants, which generally do not require audits.
In terms of audits, the $6 trillion of assets are spread over approximately 83,000 plans and audited by approximately 7,400 certified public accounting (CPA) firms. The Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) is responsible for monitoring the quality of these audits, and it has determined that the audits have an unacceptably large deficiency rate of 32%. After performing additional analysis of the results, DOL believes there is a correlation between the quality of the audits and size of the CPA firm’s employee benefit plan practice. CPA firms with a large employee benefit plan practice tend to have fewer deficiencies. From a statistical analysis, 50% of the 7,400 CPA firms audit one or two plans, representing approximately 6% of the total plans audited. Conversely, approximately 1% of the CPA firms audit 100 or more plans, representing approximately 42% of the plans audited. DOL has referred more than 900 firms to either the American Institute of Certified Public Accountants’ Ethics Division or respective State Boards of Accountancy for appropriate action. DOL is currently conducting a statistically based analysis of audit quality on a stratified sample of 400 plan audits to determine, among other things, whether the CPA firm is complying with both peer review and state licensure requirements.
In September 2013, the Office of the Inspector General (OIG) issued a report on an audit they conducted to determine whether DOL was providing adequate oversight of plans that hold alternative and hard-to-value investments. DOL estimates that there are from $1 trillion to $3 trillion in alternative and hard-to-value investments in benefit plans. The OIG determined many of these investments are valued based on self-reported investment values provided by the investment manager. The OIG recommended independent valuations be obtained for these types of investments, and the lack of objective determinations of values may result in concluding an audit was substandard.
For plan sponsors, this means a determination by DOL that an audit was substandard or deficient may result in DOL concluding a Form 5500 filing was not timely filed in that it did not include audited financial statements. The deficiency may subject the plan sponsor to late filing penalties and additional costs associated with the elimination of the audit deficiency or, in some cases, retaining a different CPA firm to re-audit the Plan. DOL views the plan sponsor as being responsible for establishing an internal control environment with procedures to monitor and prevent the occurrence of these and other types of deficiencies. While relief provisions may be available to the plan sponsor, DOL expects due diligence be performed by the plan sponsor, such as obtaining a copy of the CPA firm’s peer review report. Establishing a good control environment before the determination of a deficiency may be useful in resolving these issues.
Carl Kampel, a certified public accountant, is the director in charge of professional standards at Ellin & Tucker, an accounting and business consulting firm with offices in Baltimore, Frederick and Belcamp, Maryland and Washington, D.C. He is a member of the FASB Emerging Issues Task Force and past vice chair of the AICPA Financial Reporting Executive Committee. He is also a member of the Board of Directors of the Baltimore Chapter of Financial Executives International and Maryland Association of CPAs.