The Department of Labor Office of Inspector General (DOL OIG) issued in September 2012 a report on changes needed in the audit process to increase protection for plan participants. The report focused on (a) the use of the limited scope exemption under ERISA that allows qualifying plans to instruct auditors to exclude testing of plan asset information certified as accurate and complete by certain regulated financial institutions and (b) the effectiveness of the Employee Benefits Security Administration (EBSA) in its efforts to improve audit quality.
The use of the limited scope exemption has increased dramatically in recent years. According to the report, approximately 46% of plans were using the limited scope exemption in 1987. In 2010, approximately 70% of plans were using the limited scope exemption. The DOL OIG concluded that the increased use of the limited scope exemption and the significant dollar value of assets not subject to audit procedures due to the limited scope exemption represents a risk to plan participants and to the financial reporting process. The report recommends the Employee Benefits Security Administration (EBSA) continue to seek repeal of the limited scope exemption.
On a separate but related note, the report recommends the EBSA perform a reassessment of audit quality to see if there has been improvement since the EBSA’s most recent review in 2004.
The Skinny: Audit quality and the integrity of benefit plan financial reporting continue to be high priorities for the Department of Labor. To protect your plan, consider the following actions:
• Do your due diligence on your plan auditor. Audit fees should not be the sole criteria for auditor selection. The Department of Labor provides a guide for selecting a plan auditor with tips and points to consider during the process
In addition, the AICPA Employee Benefit Plan Audit Quality Center also provides an informational brochure on selecting a plan auditor (http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/Resources/PlanSponsorResourceCenter/DownloadableDocuments/Plan_Sponsor_Guidelines_preparing_RFP.pdf).
• Make sure you know how your plan assets are being valued. It is the responsibility of the plan sponsor to ensure that assets reported in the financial statements are valued properly for reporting purposes. If you have been utilizing the limited scope exemption, consider electing a full scope audit. The auditor would then perform audit procedures to test asset valuation, as well as other asset characteristics, such as existence, completeness, and cut-off. Another option might be to engage your external auditor to do valuation testing as a separate agreed-upon procedure engagement if you want to continue using the limited scope exemption for audit purposes.