The following article was sourced from Journal of Accountancy.

A U.S. Department of Labor (DOL) report released earlier this month showed a need for improvement in audits of employee benefit plan financial statements.

The report is the result of a study that examined audits of employee benefit plan financial statements for the 2020 filing year for Form 5500, Annual Return/Report of Employee Benefit Plan.

The DOL’s Employee Benefits Security Administration (EBSA) found that 70% of audits fully complied with auditing standards or had minor deficiencies. One or more major deficiencies were found in 30% of the 307 employee benefit plan (EBP) audits examined in the report, a decline from 39% in the previous report in 2015.

Firms that are members of the AICPA Employee Benefit Plan Audit Quality Center (EBPAQC) performed higher-quality work than nonmember firms, the recent DOL report states. In addition, the overall deficiency rate for all plan audits is lower than in the last DOL study, and the percentage of plan audits with multiple deficiencies also declined.

The AICPA issued a response to the report. “The latest U.S. Department of Labor report confirms what we’ve seen in the past: Firms that perform the fewest number of EBP audits — less than six a year — have the highest deficiency rates,” the statement read, in part. “Significantly, the report also documents a considerable reduction in the number of firms in that ‘less than six audits a year’ category, driven in part by the AICPA through our Enhancing Audit Quality (EAQ) initiative and AICPA Peer Review Program. From 2015 to 2020, the number of firms that perform a low volume of EBP audits shrank from 5,203 to 2,589, a 50% drop. …

“It’s important to note the quality issues identified by the DOL do not pose a risk to the viability of any EBP plan. That said, audit deficiencies are never acceptable, and we plan to analyze the DOL’s findings and recommendations and incorporate them into our learning products and resources as part of our continuous, data-driven improvements through the EAQ initiative.”

EBP audits are part of an ongoing initiative by the AICPA aimed at strengthening audit quality. The AICPA launched the EAQ initiative in May 2014, which resulted in a six-point plan launched by the AICPA the following year. The plan created a road map to improved audit quality starting with prelicensure activities and the new CPA Exam, which begins in January 2024. The road map also focuses on ongoing learning and support, peer review, practice monitoring, ethics enforcement, and collaboration with state accountancy boards and their organizing body, the National Association of State Boards of Accountancy. Finally, the road map addresses standards and AICPA Code of Professional Conduct updates.

And in 2019, the AICPA issued SAS No. 136, Forming an Opinion and Reporting on Financial Statements of Employee Benefit Plans Subject to ERISA, the only industry-specific auditing standard. As noted in the DOL report, while SAS No. 136 was not particularly relevant to this study because it was not yet effective, the DOL believes it is a pivotal change in auditing standards.

An update on the Enhancing Audit Quality initiative is available here.

DOL findings

In the DOL study, deficiencies were more likely among firms that performed smaller numbers of EBP audits. Deficiencies were found in 70% of plan audits performed by firms that audit just one or two plans annually.

As a result of the study, DOL has referred seven deficient engagements to the AICPA Professional Ethics Division for review and possible disciplinary action. Sue Coffey, CPA, CGMA, the AICPA’s CEO—Public Accounting, said the AICPA Professional Ethics Division and Peer Review Program are investigating, on an expedited basis, all audits from the study that were referred to the AICPA, and any disciplinary action by the AICPA will be shared promptly with the appropriate state boards of accountancy, which could have an impact on licensure.

The report concluded that, overall, firms that “perform more benefit plan audits tend to perform higher quality work.” Also, the leading areas of audit deficiencies, the report said, were areas unique to EBP auditing, such as participant data, contributions received and receivable, and benefit payments.

In the study, the EBSA made recommendations in the areas of enforcement, regulations, and outreach. Among the recommendations were that the EBSA should “work with state licensing boards to enhance the investigation and sanctioning process for CPAs who perform significantly deficient audit work” and “encourage state boards of accountancy to accept the results of investigations performed by the AICPA’s Professional Ethics Division.”

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