Last week, the U.S. Department of Labor (the “DOL”) issued a damning report on its latest study of the quality of required audits of employee benefit plans.  The report, titled “Assessing the Quality of Employee Benefit Plan Audits” can be accessed at the Department’s website, at www.dol.gov/ebsa/pdf/2014AuditReport.pdf.  The DOL reviewed 400 audits out of the over 81,000 performed by over 7,300 audit firms for the 2011 plan year.  They chose a stratified sample based on buckets determined by how many employee benefit plan audits the firms performed.  They found that overall, 39% of those audits had major deficiencies.  This is a decline in overall audit quality from a 33% deficiency rate in 2004, and is a cause for concern across the industry.

The DOL has indicated that audit quality is directly linked to the experience level of the firm, saying “the results of the audit study clearly indicate a link between the number of employee benefit plan audits performed by a CPA and the quality of the work performed”, and “Once again, the smaller the firm’s employee benefit plan audit practice, the greater the incidence of audit deficiencies”.    They also looked at the percentage of revenue that the employee benefit audit practice represented to the firm (is there specialization?), Employee Benefit Plan Audit Quality Center membership, the amount of continuing professional education obtained by auditors and other factors that might improve audit quality.

Firms performing one or two audits had deficiency ratings of almost 76%.  Those performing under 25 audits had deficiency ratings of 67%, and those performing under 100 still had deficiency ratings of 41.5%.  Collectively, these firms performed over 58% of audits in that year!  Firms performing over 100 audits had deficiency ratings of 12% (still unacceptable, in my mind!).

As a Plan sponsor, you have a fiduciary responsibility to engage an Independent Qualified Public Accountant (“IQPA”).  Based on the results of this study, many are failing at this task.  Both the DOL and AICPA have resources available to provide guidance in hiring a plan auditor.  We think this is a good time to provide those links again.  The AICPA booklet can be found at http://www.aicpa.org/interestareas/employeebenefitplanauditquality/resources/planadvisories/downloadabledocuments/ebpaqc-importance-of-hiring-plan-advisory.pdf and the DOL booklet at http://www.dol.gov/ebsa/pdf/selectinganauditor.pdf

As a result of this study, the DOL is proposing several steps, including legislative changes and education of plan sponsors.  This is an important read for all plan sponsors, and I would encourage you to take the time to review the report.