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Best Practices in EBP Audits

EXECUTIVE SUMMARY
 The Department of Labor requires employee benefit plan (EBP) audits for employers with more than 100 eligible plan participants and some smaller plans. EBPs include defined-benefit, defined-contribution, 401(k) and ESOP, health and welfare, and vacation and severance plans sponsored by a single company or several employers under common ownership. Multiemployer plans often include their attorneys and actuaries at trustee meetings to help them make decisions.

 A well-developed pension practice can convert what’s often seen as a so-so CPA service line into a very good business. Another plus is that an EBP audit niche can provide a firm with steady work from as early as March to October. Once launched, EBP practices remain relatively intact because companies don’t like to disrupt those areas. The DOL will continue to monitor these audits, so the niche is here to stay.

 The keys to developing a successful EBP audit practice are to name a niche champion, train staff thoroughly and stay current on regulatory developments. Set up lines of communication to exchange timely information with the client. Nothing derails a schedule more than finding out late in the engagement that a third party failed to provide required documentation.

 There’s risk: If auditor error or deficiency occurs, the DOL can levy significant fines and/or report firms to state boards of accountancy and the AICPA professional ethics division. Possible disciplinary actions against responsible parties include sanctions or loss of license.

 Largely paperless audits are a fact of life. Meetings with administrators and boards of trustees used to be opportunities to build client relations, but the Internet and other technologies are reshaping the profession by reducing face-to-face contact with clients.

Michael Hayes is a senior editor on the JofA . Ms. Hayes is an employee of the AICPA and her views, as expressed in this article, do not necessarily reflect the views of the Institute. Official positions are determined through certain specific committee procedures, due process and deliberation.

Benefits auditing is something of a sleeping giant,” says Thomas M. Clifford, CPA, a Parente Randolph LLC partner in Philadelphia. “There’s great potential for a firm with a well-developed pension practice to convert what’s often seen as a so-so service line into a multi-million-dollar business that supports several partners full-time.”

Clifford isn’t alone in seeing the opportunity. In this article principals from large and small CPA firms with strong employee benefit plan (EBP) audit practices share niche-building tips.

IT’S A GROWTH AREA
The Department of Labor (DOL) requires all employers with more than 100 eligible benefit plan participants and certain smaller plans to conduct EBP audits. More than 75,000 EBP audits are conducted each year, and the market is good and growing. “National firms preoccupied with Sarbanes-Oxley are shedding lower-margin engagements such as pension plans, or they are pricing jobs so clients go elsewhere,” Clifford says. And because benefit plans are separate entities from the companies offering them, CPAs can audit just the plan even if they don’t audit the company’s financial statements.

EBPs for large and small public and private companies and not-for-profits include defined-benefit, defined-contribution, 401(k) and ESOP, health and welfare, vacation and severance plans (see “ An EBP Glossary ”). They can be sponsored by a single company or several employers under common ownership (multiemployer), and many companies have more than just one plan type.

Multiemployer plans make good clients because they generally have large assets and are responsive to auditor suggestions, says CPA David Evangelista, a partner of Goldstein Lieberman & Company LLC in Englewood Cliffs, N.J. He considers EBP audit work genuinely enjoyable. “We attend board meetings and see how labor and management boards of trustees interact while representing different sides, which is exciting,” he says. “It’s very satisfying when they implement our recommendations.”

IMPORTANT INSTRUMENTS
Only 10% of defined-benefit plans are multiemployer plans, but they cover 25% of all participants in defined-benefit plans.

RISK AND RESPONSIBILITY
The downside of an EBP audit practice is that Department of Labor regulations create risk. If a firm without sufficient knowledge fails to properly perform the audit, the DOL can assess fines on the plan administrator or sponsor. One plan sponsor recently was fined $800,000. The DOL also has the power to report firms to state boards of accountancy and the AICPA professional ethics division for investigation. Either could result in disciplinary actions against the responsible parties that include sanctions or loss of license.

Another problem is that clients don’t always see EBP audits as important and tend to put them off. Some companies simply want an audit report for the cheapest price and balk at paying more for quality. “Clients who refuse to recognize their responsibilities toward their EBPs are a problem—as are practitioners who ‘lowball’ by charging inadequate fees that foster rushing the job,” says CPA Robert L. Prator of Tarpley & Underwood in Atlanta. “A good audit takes time.”

But performing the audit needs to be cost-effective for the firm, too. Some firms bid and set fees for each engagement year, sometimes for several years, and have to be extra careful about managing the time for the job.

Staffing is an issue, too. “It’s been hard to attract and retain professionals to develop the well-oiled-team approach that is such a competitive strength in this niche,” says Bertha Minnihan, CPA and audit partner at Mohler, Nixon & Williams in Campbell, Calif.

All the firms interviewed here say the keys to developing a successful EBP audit practice are to name a niche champion, to obtain—and impart to staff—very thorough training and to stay current on regulatory developments. For help, the AICPA Employee Benefit Plan Audit Quality Center offers a centralized place to find resources to enhance firms’ audit performance. Its online forum is a place to share EBP best practices and locate the latest information on audit developments (see “ AICPA Resources ”).