The term “audit” is most commonly associated with tax returns, but it has other applications as well. One type of audit that many employers must familiarize themselves with applies to the financial statements associated with the health care and retirement plans they sponsor.
Enter the Employee Retirement Income Security Act (ERISA). Under this law, the financial statements of benefit plans with 100 or more participants, and with account balances on the first day of the plan year, must be audited annually by a qualified, independent third party.
Fulfilling your obligations
Why are audits required? For starters, ERISA’s provisions legally mandate plan administrators to ensure that their benefit plans’ financial statements follow U.S. Generally Accepted Accounting Principles and are properly audited.
Also, independent audits help stakeholders assess whether financial statements provide reliable information about a plan’s ability to provide retirement, health or other promised benefits to participants. In addition, they may help management evaluate and improve internal controls regarding the plan’s financial reporting.
Administrators who fail to obtain audits, or who hire unqualified plan auditors, may face substantial penalties from the U.S. Department of Labor (DOL). In addition, plan administrators who don’t follow the basic standards of conduct under ERISA and DOL regulations may be held personally liable for restoring plan losses.
Evaluating bidders
If your organization has grown to the point where you’ll soon be required to get plan financial statements audited, you’ll need to put together a comprehensive request for proposal (RFP) to evaluate prospective auditors. (Generally, the audits are performed by CPAs.) Properly generated RFPs provide detailed explanations of the audit engagement — including its objectives, scope, special considerations and expected timeline.
The first step in the RFP process is evaluating auditor qualifications — and it’s critical. Don’t simply accept the lowest-bid contract offer. Only after a technical evaluation is complete and you’ve identified several qualified respondents should you compare the audit fees quoted.
Evaluating auditor qualifications involves various licensing and independence rules. For example, a truly independent auditor can’t have any financial interests in the plan or a plan administrator that would affect the ability to render an objective, unbiased opinion about the plan’s financial statements. Also, the DOL doesn’t consider a plan auditor independent if the audit firm or any of its employees maintain the plan’s financial records.
Interviewing finalists
After you’ve eliminated unqualified respondents to your RFP, invite the finalists to present and discuss their proposal letters. It’s important to interview prospective auditors to get a sense of how well you’ll be able to communicate and work with them.
Also consider asking prospective auditors to provide a copy of their firms’ latest peer review report. A clean peer review report can provide additional assurance that a firm is applying best practices when auditing benefit plan financial statements.
When evaluating potential auditors, obtain references and discuss the auditor’s work for other benefit plan clients. Also review the audit team’s continuing professional education records over the last three years to determine whether they’ve kept up with recent issues and the latest best practices.
Keeping up
As organizations grow, the administrative challenges associated with employee benefits tend to also increase. The need for audits of plan financial statements is just one example.
And if you’ve been required to do audits for a while now, it’s important not to lose sight of your obligations. Contact us for more information on this topic, as well as for help analyzing the costs and tax impact of your employer-sponsored benefits.
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