The dreaded "A" Word: All You Need To Know About ERISA Audits

Basic audit requirements

Plan administrators of certain employee benefit plans that file Form 5500 are required to attach an independent qualified public accountant's opinion. The independent qualified public accountant must examine the plan's financial statements and other records to determine whether the financial statements and schedules are presented fairly and in conformity with generally accepted accounting principles. Benefit plan service providers often refer to the accountant's report and financial statements collectively as "the audit report."

Here are the basic rules that apply to the audit:

>> Generally, federal law requires that an employee benefit plan with 100 or more participants have an audit report. The auditor engaged for the employee benefit plan audit must be licensed or certified as a public accountant by a state regulatory agency and should not have any financial interests in the plan or the plan sponsor.

>> The audit report will include an opinion on the following Form 5500 items:

>> In some cases, it will not be necessary for the auditor to review financial statements and schedules provided by a regulated bank or insurance carrier if the investment information is prepared and certified by a trustee or custodian of the bank or insurance carrier. This is part of a limited-scope audit, as discussed below.

This alternative is only available if the certification includes a statement that the information is complete and accurate. This does not relieve the accountant of the auditing procedures that apply to investments held by a broker-dealer or an investment company. It applies only to investment information, does not apply to benefit payments and does not relieve the plan of the requirement to have an audit.

What type of audit or opinion will the auditor issue?

There are four types of opinions the plan auditor can issue:

1. Unqualified.

Generally, an unqualified statement means that the accountant agrees that the plan's financial statements fairly present the financial status of the plan at the end of the audit period and any changes in the plan's financial status conform with generally accepted accounting principles (GAAP).

2. Qualified.

The qualified opinion means that the accountant agrees that the plan's financial statements fairly present the financial status of the plan at the end of the audit period, and that any changes in the plan's financial status are in conformity with GAAP, except for the specified effects of one or more matters.

3. Disclaimer.

If the accountant does not perform an audit sufficient in scope to enable him or her to form an opinion on the financial statements, the accountant will issue a disclaimer of opinion on the plan's financial statements.

4. Adverse.

If the accountant finds that the financial statements do not present fairly the financial position of the plan and the results of its operations in conformity with GAAP, an adverse opinion will be issued.

The accountant may choose not to examine and express an opinion regarding certain information that is prepared and certified by a bank or similar institution, or by an insurance carrier that is regulated and supervised and subject to periodic examination by a state or federal agency, or certain investment entities under the law. This is called a limited-scope audit, and the accountant's opinion is unqualified only with respect to the financial information actually examined. Federal law provides for a limited-scope audit, meaning that certified financial statements of banks and insurance carriers need not be examined.

Potentially serious problems revealed in the accountant's opinion generally must be reported on Form 5500. And, as you would expect, the Department of Labor pays close attention to these matters.

Dos and don'ts for hiring an auditor

The starting point should be a contract, referred to as an "engagement letter," describing the audit work to be performed, the timing of the audit and the fees. This letter should also describe the responsibilities of the auditor and the plan administrator.

But to get to that point, consider that selecting a plan auditor is a fiduciary function. So here are a few don'ts to remember when selecting an auditor:

•  Don't forego the competitive bidding process. Rather than automatically going with your corporate auditor, it's important to remember that employee benefit plan auditing is a specialized field, and many otherwise capable accountants don't have the necessary experience.

•  Don't always select the candidate with the lowest price.

•  Don't forget to ask what training your auditors receive and what continuing education they get. Also, find out if they are involved with the Employee Benefit Plan Audit Quality Center at the American Institute of Certified Public Accountants.

•  Don't ignore continuity among your audit team. Accounting firms, like all firms, have employee turnover. You don't want to be charged for training a new plan auditor every year.