Auditing 401(k) Plans

Form 5500 Rejection

Form 5500 Rejection

Based on the results of reviewed firm’s ERISA audits, the EBSA Office of the Chief Accountant (OCA) can reject the Form 5500 filing where it determines that an audit failure has occurred. As well, the OCA has the option to refer the substandard work to the AICPA’s Professional Ethics Division or the appropriate State Board(s) of Accountancy.

 

 

 

 

 

 

 

 

 

 

 

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EBSA Inspection Program

EBSA Inspection Program

Since the DOL Office of Inspector General (OIG) first conducted its study of ERISA audit quality in the late 1980s, it has been documented that ERISA audit deficiencies occur at an unacceptably high rate. Subsequent studies performed by the EBSA have shown no improvement, despite both public and private sector efforts to affect change. Because no measurable improvement has been noted as a result of its enforcement strategy, EBSA changed its ERISA audit inspection program in 2008 to its current format.

 

 

 

 

 

 

 

 

 

 

 

 

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Augmented Workpaper Review Program

Augmented Workpaper Review Program

The OCA  “Augmented Workpaper Review Program” is the monitoring program utilized for firms that perform fewer than 100 annual ERISA audits.  For this program, the OCA selects applicable CPA firms from its Form 5500 database, then it randomly selects one plan audit from each selected firm for review.  The review will be an in-house review conducted similar to the Mini-Inspection Program.

 

 

 

 

 

 

 

 

 

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  • You should know…

    Common audit deficiency - inadequate or missing disclosures.
    Common audit deficiency - inappropriate reliance on SOC 1 reports.
    A “large” plan will file a Form 5500 with a Schedule H and a “small” plan will file a Form 5500 with a Schedule I.
    Common audit deficiency - failure to test employee deferrals.
    Administrators of a 401(k) plan subject to ERISA must file an annual report (Form 5500).
    Common audit deficiency - failure to properly report on and/or include the required supplemental schedules relating to ERISA and DOL.
    Common audit deficiency - improper use of limited scope exemption because financial institution did not qualify for such an exemption.
    The “80-120 rule” will allow the plan to continue to file as a “small” plan (and avoid the audit requirement) indefinitely until the plan exceeds 120 participants at the beginning of a plan year.
    Common audit deficiency - testing of payroll data is insufficient.
    It is important for the auditor of a 401(k) plan to have the knowledge, proficiency and competency to perform an efficient and effective audit which will stand up to the scrutiny of the DOL.
    ”Large” 401(k) plans, generally meaning those plans with 100 or more participants, must file an audit with the annual Form 5500.
    Common audit deficiency - no testing of investment income allocation to participants.
    Common audit deficiency - failure to test eligibility to receive benefit payments.
    Common audit deficiency - no audit work performed for benefit payments.
    The DOL and the AICPA indicate that 401(k) audits have an unnacceptably high rate of deficiencies and the DOL can reject any Form 5500 with a deficient audit.
    Common audit deficiency - failure to obtain proper certification for a limited scope audit.
    Under the “80-120 rule”, if a plan has between 80 and 120 participants as of the beginning of the plan year, it may elect to file the same category (Schedule H or Schedule I) of form 5500 it filed the year before.
    Common audit deficiency - no audit work performed for contributions.
    Common audit deficiency - failure to understand testing requirements on a limited-scope engagement.
    Common audit deficiency - no audit work performed for related parties.
    The auditor of a 401(k) plan must be familiar with ERISA, tax, and DOL laws and regulations and they must be familiar with special requirements of 401(k) plans.
    Generally, a plan is considered a “large” plan if it had 100 participants at the beginning of the plan year and a “small” plan if it had fewer than 100 participants at the beginning of the plan year.
    Common audit deficiency - no testing of participant eligibility or forfeitures.
    Common audit deficiency - failure to test timeliness of participant contributions
    Common audit deficiency - no audit documentation for testing participant data.
    “Large” plans that have a short plan year of seven months or less may elect to defer (but not eliminate) the audit requirement.
    Quality audits for 401(k) plans are imperative, not only because they help ensure plan compliance for the benefit of the participants, but quality audits are important because the DOL can reject the annual Form 5500 filing when the DOL determines an audit failure has occurred.
    Plans whose sole assets are insurance contracts that fully guarantee benefit payments are not required to be audited.

DOL Oversight

Monitoring ERISA Audits

Since the Department of Labor (DOL) Office of Inspector General first conducted its study of ERISA audit quality in the late 1980s, it has been determined that ERISA audit deficiencies occur at an unacceptably high rate. Subsequent studies performed by the DOL Employee Benefits Security Administration (EBSA) have shown no improvement, despite both public and private sector efforts to affect change. Because no measurable improvement has been noted as a result of its prior enforcement strategy, EBSA Office of the Chief Accountant (OCA) began administering an enforcement program in 2005 to raise the quality of ERISA audits.  Based on the results of reviewed firm’s ERISA audits, the OCA can reject the Form 5500 filing where it determines that an audit failure has occurred. As well, the OCA has the option to refer the substandard work to the AICPA’s Professional Ethics Division or the appropriate State Board(s) of Accountancy.

OCA administers three different enforcement programs to assess the audit quality of audit firms.  OCA conducts and onsite “Firm Inspection Program” to inspect firms with over 200 annual ERISA audit engagements.  OCA typically reviews 4 or 5 firms each year under this program and they will inspect multiple ERISA engagements at each firm.

OCA has a “Mini-Inspection Program” for firms with between 100 and 200 ERISA engagements. This program is similar to the onsite firm inspection program, except that the reviews are performed at the reviewers “desk” meaning the firm will send the required documentation to the reviewer who will examine the documentation and communicate via telephone and email.

The last OCA progam is the “Augmented Workpaper Review Program”.  This program is utilized for firms that perform fewer than 100 annual ERISA audits.  For this program, the OCA selects applicable CPA firms from its Form 5500 database, then it randomly selects one plan audit from each selected firm for review.  The review will be an in-house review conducted similar to the Mini-Inspection Program.

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