12 Questions to Ask Your Current or Prospective Auditor to Ensure You're Exercising Proper Due Diligence
Plan fiduciaries for Employee Benefit Plans are held to the highest legal standard and are required to act solely in the interest of the plan and its participants. Plan fiduciaries can be held personally liable if their fiduciary duties are breached. Most fiduciaries are aware of their duties surrounding the selection of investment options, acting in the plan's best interest, and assessing the reasonableness of plan fees. However, most plan fiduciaries may not be aware that exercising the proper due diligence when selecting a plan auditor is also considered an important fiduciary responsibility.
In May of 2015, the DOL released a report titled “Assessing the Quality of Employee Benefit Plan Audits” that found there was nearly a 40% deficiency rate in their review of employee benefit plan audits. The report makes a number of recommendations, including increasing DOL outreach and enforcement related to audit quality.
Further, in November 2015, plan sponsors who either have or were close to having 100 or more participants in their employee benefit plans received a notice from the DOL emphasizing that the selection of a plan auditor is a fiduciary function and that deficient audits can cause plans to fall out of legal compliance and result in significant civil penalties being imposed on the plan administrator. The DOL intends to target 5500’s filed by plan sponsors whose auditor firms perform fewer than 100 audits per year.
What Should Plan Sponsors and Plan Fiduciaries Do?
What can Plan Sponsors do to ensure that they exercise the proper due diligence when selecting or retaining a plan auditor? In the November 2015 notice sent to plan sponsors, the DOL provided a list of questions to ask your current or prospective auditor:
- How many employee benefit plans does the CPA audit each year, and what plan types?
- What annual training has the CPA received in auditing plans? Be specific.
- What is the status of the CPA’s license with the applicable state board of accountancy?
- Has the CPA been the subject of any prior DOL findings or referrals, or has it been referred to the state board of accountancy or American Institute of CPAs for investigation?
- Has the CPA’s employee benefit plan audit work recently been reviewed by another CPA (this is called a ‘Peer Review’), and if so, did such review result in negative findings?
You can also follow DOL’s guidance in its “Selecting an Auditor for Your Employee Benefit Plan” booklet by asking your auditor specific questions about whether certain tests were performed during your last audit. The DOL specifically suggests you ask them to confirm the following:
- Whether plan assets have been fairly valued?
- Whether plan obligations are properly stated and described?
- Whether contributions are transmitted in a timely manner?
- Whether benefit payments are being made in accordance with the plan’s documents and terms?
- Whether participant balances/benefits, as applicable, are correctly stated?
- Whether there are any potential disqualification issues?
- Whether “prohibited transactions” have been identified?
Fiduciaries should consider documenting the questions asked along with their responses in their meeting minutes to provide adequate documentation that the governing body took the appropriate steps to both select and monitor the activities of their plan auditors.
Your CPA should act as a trusted advisor and be able to guide you through the appropriate steps and documentation to ensure you have fulfilled your fiduciary responsibilities.