Plan Financial Audits May Uncover 'Red Flags'

When performing annual retirement plan financial audits, plan sponsors and their auditors should look for potential “red flags” for regulators.

James E. Merklin, partner in charge of Assurance Services for the CPA firm of Bober Markey Fedorovich in Aktron-Ohio, explains, “Every year since ERISA was passed in 1974, employer-sponsored benefit plans, including retirement plans, with 100 or more participants have been required to undergo an annual audit of the plan’s financial statements by an independent auditor. The results of this audit are then included with the submission of that company’s Form 5500 paperwork to the federal government.” ERISA is the Employee Retirement Income Security Act.

Merklin tells PLANADVISER, “The auditors are looking to see if the statements are in line with generally accepted accounting principles, or GAAP. The auditors are looking to see how many types of transactions are present in the statements and how many they have to sample to reach a reasonable conclusion about the plan’s GAAP compliance. In this respect, the audit focuses on numbers and on making sure that disclosures are made properly.”

Merklin says auditors are also looking to see whether or not the plan still qualifies for tax-exempt status. “One purpose of the audit is to make it less likely that the Department of Labor or the Internal Revenue Service will come along and say that your plan or company owes taxes,” he says.

But GAAP compliance and maintaining tax-exempt status are not the only things auditors should be looking for, added Merklin. “There may be some things that the plan is doing wrong, and that can eventually become a problem for both the plan sponsor and the plan. Plan sponsors shouldn’t be afraid to have auditors, as well as legal counsel, take a deep dive into the plan documents and examine whether areas such as contributions are being carried out properly. Plan sponsors want to be the first ones to be aware of any issues, before the DOL or IRS spot them.”

Merklin offers a list of additional tasks for plan sponsors and auditors:

  • Making sure the plan documents contain the correct definition of compensation, and that the definition is being applied correctly;
  • Looking for any instances of late remittances of participant contributions and loan repayments;
  • Looking for any instances of failure to comply with participant elections;
  • Looking for instances of improper application of eligibility provisions of the plan;
  • Making sure there have not been any instances of calculations of improper vesting and employee distributions;
  • Checking to see if there has been turnover of employees who have responsibilities relating to the plan, and whether current employees with such responsibilities are adequately trained;
  • Making certain the plan is being operated in accordance with the plan documents;
  • Asking who is responsible for making certain the plan documents are amended and restated in a timely manner;
  • Asking what oversight the plan sponsor performs with regard to third-party administration of the plan; and
  • Asking what the plan’s stated investment strategy is and how it is reflected in the investments offered to participants.

Merklin concludes, “Overall, plan sponsors have to ask ‘Am I doing things the right way?,’ whether it’s a large company that has the capability to do an internal audit or whether it’s a smaller company using an outside auditor. As the saying goes, an ounce of prevention is worth a pound of cure. Audits can potentially help plans to avoid a DOL investigation. Such investigations can continue on for months or even years, putting a drain on a company’s resources. Auditing plan documents before that happens can save companies a lot of time, money and aggravation.”