Employee Benefits:

Improved Plan Reporting and CPA Audits Can Increase Protection Under ERISA

AFMD-92-14: Published: Apr 9, 1992. Publicly Released: Apr 9, 1992.

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Pursuant to a congressional request, GAO provided information on independent public accountants' audits of employee benefit plans, focusing on: (1) a November 1989 Department of Labor study that criticized such audits; (2) requirements for employee benefit plan audits; (3) scope limitations in such audits; and (4) ways to enhance plan reporting and audits.

GAO reported that: (1) the Employee Retirement Income Security Act of 1974 (ERISA) requires annual audits of employee benefit plans with over 100 participants; (2) the Labor study concluded that 64 of 279 randomly selected plan audits violated at least one generally accepted auditing standard; (3) Labor referred 14 audits to the American Institute of Certified Public Accountants (AICPA) for what it believed was egregious disregard of professional standards; (4) 9 of the 25 plan audits that GAO reviewed had severe violations of auditing standards that seriously diminished the audit reports' reliability and usefulness; (5) insufficient planning and supervision, inadequate evidence of testing, inadequate reporting, and auditors' lack of knowledge about specialized procedures for auditing employee benefit plans contributed to plan audit problems; and (6) AICPA independently investigated and upheld most of Labor's findings, and has publicized audit problems and expanded guidance to improve the quality of such audits. GAO also reported that ERISA: (1) does not require plan administrators or auditors to report on internal controls; (2) allows plan administrators to exclude the examination of certain investments and assets from plan audits; (3) does not require auditors to promptly disclose discovery of fraud or serious fiduciary breaches to Labor or plan participants; (4) does not require auditors to participate in peer review programs; and (5) does not require that plan audit reports be addressed to plan participants.

Matters for Congressional Consideration

  1. Status: Closed - Not Implemented

    Comments: Proposed legislation to eliminate limited-scope audits has been introduced in the 106th Congress.

    Matter: Congress should amend ERISA to eliminate the provision that permits plan administrators to direct audit firms to perform limited-scope audits.

  2. Status: Closed - Not Implemented

    Comments: Proposed legislation to amend ERISA has not included provisions to implement this recommendation.

    Matter: Congress should amend ERISA to require plan administrators to report on the effectiveness of plan internal controls and auditors to report on plan administrators' assessments of those controls. Reports prepared by plan administrators should be included in plan annual reports submitted to Labor and should: (1) describe actions taken to establish and maintain an effective system of internal control; (2) contain the plan administrator's assessment of the effectiveness of the plan's internal control structure; (3) identify material control weaknesses that have not been corrected; and (4) contain the signature of the plan administrator.

  3. Status: Closed - Not Implemented

    Comments: Congress has not enacted related legislation.

    Matter: Congress should amend ERISA to require that plan auditors report fraud and serious ERISA violations to Labor promptly after discovery if plan administrators do not do so.

  4. Status: Closed - Not Implemented

    Comments: Congress has not enacted related legislation.

    Matter: Congress should amend ERISA to require that plan auditors participate in a peer review program that assesses the quality of at least one plan audit.

  5. Status: Closed - Not Implemented

    Comments: Proposed legislation to amend ERISA has not included provisions to implement this recommendation.

    Matter: Congress should amend ERISA to require that plan auditors address their reports jointly to plan administrators and participants.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Labor referred three of nine firms with severe standards violations to AICPA. One firm no longer audits plans. Five firms performed satisfactory work on subsequent audits.

    Recommendation: Because of the severity of the violations identified in nine audits, the Department of Labor should reconsider the nine audits and refer the auditors to the professional or licensing authorities, if deemed appropriate.

    Agency Affected: Department of Labor

  2. Status: Closed - Implemented

    Comments: AICPA revised its audit guide and publicized GAO results to its membership in the 1991 industry risk alert.

    Recommendation: To further strengthen audits of employee benefit plans, AICPA should change its audit guide to discuss the importance of audits in protecting plan participants.

    Agency Affected: American Institute of Certified Public Accountants

  3. Status: Closed - Implemented

    Comments: AICPA revised its audit guide and publicized GAO results to its membership in the 1991 industry risk alert.

    Recommendation: To further strengthen audits of employee benefit plans, AICPA should change its audit guide to discuss the need for auditors to have specialized industry knowledge needed to successfully perform plan audits.

    Agency Affected: American Institute of Certified Public Accountants

  4. Status: Closed - Implemented

    Comments: AICPA revised its audit guide and publicized GAO results to its membership in the 1991 industry risk alert.

    Recommendation: To further strengthen audits of employee benefit plans, AICPA should change its audit guide to identify and clearly describe requirements for specific schedules and financial statement footnotes. These requirements should include those for statements prepared under the statutory and regulatory methods, as well as generally accepted accounting principles requirements.

    Agency Affected: American Institute of Certified Public Accountants

  5. Status: Closed - Implemented

    Comments: AICPA revised its audit guide and publicized GAO results to its membership in the 1991 industry risk alert. Also, the December 1991 Journal of Accountancy provided information about the investigations of employee benefit plan audits.

    Recommendation: AICPA should communicate to its membership the results of: (1) its investigations of the 10 audits referred by Labor, with which AICPA found problems; and (2) future investigations of deficient plan audits.

    Agency Affected: American Institute of Certified Public Accountants

 

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