The Employee Benefit Plan Audit Quality Center has recently released a Plan Advisory (the Advisory) on the importance of hiring a quality auditor in respect to your employee benefit plan; this advisory covers the financial statement audit's significance to users, and the risk a plan sponsor will face if a quality audit is not performed. The Advisory also provides guidance in evaluating auditor qualifications, and includes a complete overview of the proposal process.
Financial statement importance
The Advisory discusses the significance of the financial statement as an important accountability mechanism providing independent, reliable reporting to participants, plan management, and the regulators. This reporting also helps to protect the financial integrity of the plan, allowing users to determine the plan's viability to meet its promised obligations.
Hiring a quality auditor is considered a fiduciary function of the plan; therefore, this process should be similar to hiring any other service provider of the plan. When analyzing an auditor's fee, the Employee Retirement Income Security Act of 1974 (ERISA) requires plan fiduciaries to provide assurance reasonable compensation is paid for services, in comparison to the quality of the required services provided.
The Advisory states, "Hiring a firm that lacks knowledge of the specialized nature of the industry and skills necessary to perform plan audits conflicts with the stated goal of ERISA to protect plan participants."
An appropriate process in the selection of an auditor would begin with the evaluation of their technical qualifications before reviewing their pricing structure.
DOL auditor quality findings
The Advisory discusses the Department of Labor's (DOL) comment on auditor firms’ quality based on its various reviews as follows: the DOL has found that firms with limited employee benefit plan audit practices have a higher rate of deficient professional work. The DOL has identified certain factors it believes to contribute to complying with professional standards, such as:
- the adequacy of internal technical training and knowledge of the auditor,
- the establishment of internal firm quality review specific to the employee benefit plan practice, and
- the amount of employee benefit plan work performed by the firm, just to name a few.
The Advisory is a valuable tool for plan sponsors to mitigate risk when complying with their fiduciary responsibility in selecting a qualified auditor for their employee benefit plan. The Advisory's guidance expands to assisting in the proposal process and defining the significant components of a request for proposal.
For more information on this topic, or to learn how Baker Tilly employee benefit plan audit specialists can help, contact our team.