Depending on the size of your company’s employee benefit plan, you may be required to have an audit of your financial statements performed each year. The goal of this audit is to obtain reasonable, but not absolute, assurance from an independent third party that the plan’s financial statements are presented accurately.
An audit helps protect the financial integrity of an employee benefit plan, which in turn helps participants determine whether funds will be available to pay retirement, health, and other promised benefits. It can also help management improve and streamline plan operations by evaluating the strength of internal controls and identifying any control weaknesses or operational errors.
Auditor Independence is Crucial
Employee benefit plan audits must be conducted by an independent CPA, preferably one with experience auditing ERISA retirement plans. Plans with more than 100 participants are required to complete and submit an audit using Schedule H along with their annual Form 5500 filing. (See sidebar on page 3 for an explanation of a key exception.)
The deadline for audit completion is the same as the Form 5500 filing deadline, which is due seven months after the last day of the plan year (or July 31 for calendar year-end plans). The deadline may be extended for another 2½ months (or until October 15 for calendar-year plans).
A plan’s financial statements are intended to provide information to help assess the plan’s present and future ability to pay benefits to participants. The financial reporting and audit environment for employee benefit plans is unique in many ways, adding complexity to a plan audit.
Following are some of the unique aspects of the employee benefit plan reporting and audit environment:
- Numerous federal laws, including ERISA, along with additional DOL and IRS regulations
- Special reporting and audit requirements
- SOC 1 internal control reports
- DOL-required supplemental schedules
- Fair value reporting
- Prohibited transactions
- Parties in interest
The Auditor’s Objective
The main objective of the independent plan auditor is to obtain reasonable assurance that the plan’s financial statements as a whole are free from material misstatement, whether due to fraud or operational error. The auditor will then issue a formal report on the statements in accordance with his or her findings and the scope of the audit (full or limited scope).
Additionally, the auditor will report on whether the form and content of supplemental schedules required by the DOL and attached to Form 5500 are presented in compliance with the DOL’s rules and regulations for reporting and disclosure under ERISA.
To do so, he or she will assess the reliability, fairness, and appropriateness of the financial information reported by plan management by:
- Testing evidence supporting the amounts and disclosures in the financial statements and supplemental schedules
- Assessing the accounting principles used and significant accounting estimates made by management
- Evaluating the overall financial statement presentation to form an opinion as to whether the statements are free of material misstatement
Using his or her knowledge of the plan’s nature and control environment, the auditor will examine a number of aspects of the plan, including the following:
- Participant data and allocations
- Employee and employer contributions
- Plan distributions and participant loans
- Plan expenses, investments, and income
- Plan asset valuations
- The timeliness of plan contributions
- Liabilities and plan obligations
- Administrative expenses
Ensuring Audit Efficiency
One of the best ways to ensure audit efficiency is to review your plan’s financial statements for accuracy before the auditor starts work.
Ideally, a high-level finance department employee should perform this review instead of the HR or payroll manager—especially if this manager isn’t familiar with or doesn’t understand GAAP. In particular, the employee should reconcile contributions reported by the plan to the payroll records to ensure the auditor receives a complete and accurate listing of contributions.
Here are a few more tips that will ensure a smooth and efficient audit process:
1. Assign responsibility for financial statement preparation to a single employee. This is usually an employee in the financial reporting department. A single employee (not necessarily the same one) should also be responsible for coordinating the audit and obtaining necessary input from all parties involved (e.g., accounting and human resources, third-party administrator, actuary, legal counsel, and investment trustee or custodian).
2. Make sure all plan records are complete, current, and easily accessible. The same goes for the plan document and IRS opinion or determination letters. Incomplete and outdated records will complicate and delay the audit process.
3. Collect documentation and prepare requested schedules ahead of time. By providing schedules of underlying activity and items supporting account balances (such as investments and plan expenses) in advance, you can limit the duration of the audit.
4. Read your outside service providers’ SOC 1 reports. Look closely at the user controls contained in the reports. Document which controls the plan is responsible for, and carefully monitor compliance with these controls.
5. Carefully review all outside reports. These include investment reports and certifications as well as SOC 1 reports. Make sure these reports are consistent, complete, and reasonable. Don’t hesitate to ask about anything you don’t understand.
Bringing It All Together
Remember that the ultimate responsibility for timely and accurate financial reporting lies with the plan sponsor and plan management, not with the independent auditor. Therefore, it’s critical for management to be actively involved in the financial reporting and auditing process.
We can perform a financial statement audit for your employee benefit plan. Please get in touch to discuss an engagement.
Source: Allinial Global