The U.S. Department of Labor’s (DOL) Employee Benefits Security Administration (EBSA) has published its study of the quality of benefit plan audits performed by certified public accountants (CPAs), “Assessing the Quality of Employee Benefit Plan Audits.”

The agency says the report reveals serious issues with the current system. “The existing patchwork of regulations and rules needs to be overhauled and a meaningful enforcement mechanism needs to be created,” says Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. “The department is proposing, among other measures, legislation that will fix these problems.”

More than 7,300 licensed CPAs nationwide audit more than 81,000 employee benefit plans, according to the EBSA. The agency’s review found that only 61% of audits fully complied with professional auditing standards or had only minor deficiencies under professional standards. The remaining 39% of the audits contained major deficiencies, however, which put $653 billion and 22.5 million plan participants and beneficiaries at risk. These figures reflect increases in the amount of plan assets and number of plan participants at risk compared with prior EBSA studies.

NEXT: How the AICPA is addressing poor audit quality.

The American Institute of Certified Public Accountants (AICPA) anticipated the study results. “Poor audit work is a concern to us. It is unacceptable. It is something we take very seriously,” Sue Coffey, the AICPA’s senior vice president for public practice and global alliances, previously told PLANADVISER. 

Coffey said, in 2017, the institute will be rolling out a new CPA exam with new content and a new technology platform to not only test individuals’ knowledge but their competency. She added that the institute is issuing a competency framework for employee benefit plans to help practitioners assess whether they have the competency needed for employee benefit plan financial audits and, if not, what curriculum they need to gain competency.

And, early next year, the AICPA will be launching an employee benefit plan certificate program to allow practitioners to show their competency.

In a statement in response to the release of the audit quality report, the AICPA says it is addressing quality issues through its Enhancing Audit Quality initiative, which has a special focus on employee benefit plans. “Our recently issued Six-Point Plan to Improve Audits will help our members stay focused on achieving the highest level of performance for financial statement audits. Further, our Employee Benefit Plan Audit Quality Center offers members best practice tools and resources that help improve the quality of audit engagements in this area. In addition, the AICPA is collaborating with the National Association of State Boards of Accountancy on a project to expedite ethics enforcement by allowing our Professional Ethics Division and the DOL to share their respective investigative files with state boards of accountancy.”

NEXT: EBSA recommendations for improvement.

In addition to increased outreach to CPAs and enforcement of audit standards by the EBSA, the report proposes legislative fixes. It recommends that congress amend the Employee Retirement Income Security Act (ERISA) definition of “qualified public accountant” to include additional requirements and qualifications necessary to ensure the quality of plan audits. Under the proposal, the Secretary of Labor would be authorized to issue regulations concerning the qualification requirements.

The report also urges congress to repeal the ERISA limited-scope audit exemption and give the secretary the authority to define when a limited scope audit would be an acceptable substitute for a full audit. “When auditors have to issue a formal and unqualified opinion, they have a powerful incentive to rigorously adhere to professional standards ensuring that their opinion can withstand scrutiny,” the EBSA says. “The limited scope audit exemption undermines this incentive by limiting auditors’ obligations to stand behind the plans’ financial statements.”

Finally, the report suggests ERISA be amended to give the Secretary of Labor authority to establish accounting principles and audit standards to protect the integrity of employee benefit plans and the benefit security of participants and beneficiaries.

In its statement, the AICPA agreed with the recommendation to repeal the ERISA limited-scope audit exemption, and said the EBSA also should initiate a comprehensive education program for plan sponsors to help them understand the critical importance of hiring a quality auditor.