The Department of Labor’s Office of Inspector General/Office of Audit has completed a study and issued a report on ERISA’s plan audit process. Here is a summary of what the report said:
Background. ERISA is the primary federal law governing private sector employee benefit plans. ERISA requires that most large employee benefit plans use an independent qualified public accountant to audit the plan’s financial statements in accordance with “Generally Accepted Auditing Standards”. The Department of Labor’s Employee Benefits Security Administration (the “EBSA”) has the responsibility to ensure these audits meet ERISA requirements. One problem is that ERISA allows limited scope audits, which means the auditor does not need to audit plan asset information if the assets are held and certified by certain financial institutions. Since the auditor does not test asset information certified by the financial institution, the auditor disclaims an opinion on the plan’s financial
statements, providing no assurances to participants or beneficiaries on the reliability of the plan’s financial statements.
What the Study Found. Despite EBSA’s significant efforts to improve oversight and quality of the ERISA plan audit process, protections and assurances have decreased over time for participants and beneficiaries. EBSA’s improvement efforts have included working with the AICPA to establish an audit quality center that provides guidance and education, redesigning its targeting methods to identify and correct substandard plan audits, and providing training and outreach activities
for plan auditors. However, these efforts have been offset by plan administrators’ increased use of the limited scope audits and a significant growth in asset value of
plans subjected to limited scope audits. The percentage of plans electing limited scope audits has grown from about 46 percent in 1987 to approximately 70 percent in 2010. The reported value of assets excluded from plan audits has similarly grown from about $520 billion (43percent) in 1989 to $3.3 trillion (58 percent) in 2010.
Recommendations. The Report recommends that the EBSA seek repeal of the limited scope audit exemption and obtain authority over plan auditors. It also recommends that, in the interim, the EBSA: (1) use existing authority to clarify and strengthen limited scope audit regulations and evaluate recommendations of the ERISA Council, (2) make better use of available enforcement tools over the accountants auditing the plans, (3) improve procedures in audit quality reviews, and (4) perform a reassessment of audit quality.
EBSA Response. The EBSA’s response to the report is found in the report’s Appendix D.