AUDITING

THE QUALITY OF ERISA AUDITS

By John F. Burke, CPA, The CPA
Journal

Last year, the Office of the Chief Accountant, Pension, and Welfare Benefits Administration (PWBA), U.S. Department of Labor (DOL), issued its report, Assessment of the Quality of Employee Benefit Plan Audits. This report was a follow-up to one prepared by the Office of Inspector General in 1989 that concluded that 23% of audits of employee benefit plans failed to comply with GAAS and 65% of such audits did not meet the reporting and disclosure requirements of ERISA and its regulations. The current report, which covers the 1992 filing year, concluded that 19% of such audits failed to comply with GAAS and 33% did not meet ERISA reporting requirements. The report concluded that, from a statistical standpoint, there was no improvement in audit work, and while there was improvement in reporting, the error rate remains unacceptably high.

GAAS Failures

The PWBA reported its audit findings by each of the generally accepted auditing standards. Fifty out of 262 were deemed deficient in one or more areas. This doesn't include five audits where the auditor audited the wrong entity, e.g., the trust fund rather than the plan. Examples of deficiencies include failure to have a specific audit program tailored to the audit, little or no work in connection with the plan's internal control, and deficiencies related to obtaining sufficient competent evidential matter. Work on participant data, plan obligations, benefit payments, and prohibited transactions resulted in the most number of deficient audits. Surprisingly, 11 audits involved practitioners who failed to obtain representation letters. One practitioner stopped doing any audit work after he reached the $150 fee. Another thought a limited scope audit exception meant he only had to obtain a certification from the bank.

ERISA Reporting Failures

The PWBA identified 88 out of 267 audits as deficient in ERISA's reporting and disclosure requirements. The total includes the five that did not report on the plan. More than half the deficiencies involved the required supplemental schedules. Forty-nine failed to report on such schedules and 19 involved instances where the schedules failed to include the required information.

PWBA Conclusions

The PWBA identified the following factors it believes contributes to the failure to comply with professional standards:

* Size of the firm. Smaller firms had a higher failure rate.

* Adequacy of technical training and knowledge.

* Auditor awareness of the uniqueness of employee benefit plan audits.

* Establishment of established quality review and internal process controls.

* Perception of plan administrators and auditors of such audit's importance.

* Amount of audit work in the firm's overall practice.

* Failure to understand the limited scope exception.

* Period of time available to adapt to new technical guidance. The PWBA felt there may not have been enough time since the AICPA published additional guidance after the last report and the audit year in question.

Some of these factors are interrelated. For instance, the amount of audit work done in the firm's practice may relate to the size of the firm.

PWBA Recommendations

Recommendations were made in the following areas.

Legislative Initiatives. The PWBA has repeated the recommendations of the previous report that resulted in the introduction of legislation for pension audit improvement that was never enacted. The principal recommendation is the repeal of the limited scope audit exception.

Administrative Initiatives. Included in this area is a recommendation that the agency should develop material directed at plan administrators as to what they should know about hiring an auditor. Another recommendation is that the agency should work with the AICPA to develop educational material for reviewers when conducting practice reviews. In addition, the DOL should work with the accounting profession in developing additional guidance in areas where it is needed. For instance, in feedback to the PWBA, practitioners indicated that more guidance was needed for multiemployer audits.

Enforcement Activities. Recommendations in this area primarily involved the PWBA's review process. One is to change the criteria for selection of audits to include those performed by small and medium-sized firms. Another was to expand the work involved in a desk review to go beyond reporting violations and to review the quality of the underlying audit work.

AICPA Response

The AICPA has responded to both this and the previous report. The report acknowledges the following actions taken by the AICPA in response to the first report:

* Revision of the Audit and Accounting Guide, Audits of Employee Benefit Plans. The guide has been revised five times since 1991.

* Issuance of audit risk alerts.

* The conducting of six annual employee benefit plan conferences.

* Development of a self-study CPE course for employee benefit plans.

* Incorporation of employee benefit plans into the engagement selection
criteria for peer reviews.

* Issuance of various accounting and auditing pronouncements in this area.

* Development of checklists for use on such audits.

* Development of a video for use by plan auditors.

* Development of a brochure for use by plan administrators on how to select an auditor.

* Taking investigatory and disciplinary action against practitioners referred to it by PWBA.

In a letter response to the current report, the AICPA agreed to the following actions:

* Communicate to members the findings in the report and the importance of ERISA audits.

* Develop additional audit programs and practice aids.

* Strengthen technical support on the AICPA technical hotline.

* Offer additional training courses.

* Work with state societies to enhance training.

* Improve the peer review process relative to ERISA audits.

* Develop a guide for plan administrators to use in selecting independent auditors.

* Explore the possibility of instituting an ERISA specialization for independent auditors.

Some of these actions have already been implemented. Two articles appeared in the June 1997 issue of the Journal of Accountancy. Copies of the report together with a video were sent to all state societies to solicit their aid in heightening the CPA's awareness of the importance of these audits. Two other initiatives involve the peer review program and the issuance of a practice alert.

Peer Review. The recommendation on practice monitoring appears to be the result of one situation where the PWBA reviewed a set of audit workpapers that were found to be grossly deficient and were advised by the practitioner that the same papers had been subject to peer review and found acceptable. This was unfortunate because the AICPA requires that only reviewers who have experience in audits of employee benefit plans perform such reviews and a specific employee benefit plan checklist be used.

However, changes have already taken place with the introduction of new standards for peer reviews. Under the old standards, employee benefit plans were merely given greater weight in the engagement selection process. Under the new standards effective for peer review years beginning on or after January 1, 1997, audits of entities subject to ERISA are assessed at a higher level of peer review risk. If a firm performs such audits and at least one such audit is not selected for review, the review team must document its reason for not doing so.

Practice Alert. As part of the educational process, the AICPA issued Practice Alert 97-2, Audits of Employee Benefit Plans, which includes background and coverage of deficiencies in the report. It also includes the following best practices in this area.

* Assigning professionals trained in
auditing benefit plans--preferably at the manager and/or senior level--to
employee benefit plan audits.

* Performing second (concurring) reviews on higher risk engagements.

* Coordinating responsibility for employee plan benefit audits between audit and tax staff.

* Ensuring that engagement personnel have access to current guidance.

* Ensuring that engagement personnel have adequate training in employee benefit plan audits and other related matters.

* Using standardized engagement tools and documentation approaches.

* Ensuring that the firm's internal quality review program addresses employee benefit plan audit engagements and reviews are performed by qualified
personnel.

* Using technical hotlines and support services provided by the AICPA and various state societies.

* Considering engaging the services
of another firm, experienced in employee benefit plan accounting, audit, and ERISA matters, when necessary and appropriate. *

Editor:
Douglas R. Carmichael, PhD, CPA
Baruch College