Looking closer: CPAs under the microscope regarding audit quality.

• Author: Minnihan, Bertha
• Position: Auditing issues

The Department of Labor last year reported that the quality of employee benefit plan audits is poor and stated that nearly four in 10 audits failed to meet professional standards. The DOL conducted a review of 400 statistically identified employee benefit plan audits and was the fourth such assessment since 1988. The deficiency rate noted by the DOL, averaged nearly 39 percent. With nearly 300 of the 400-plan sample consisting of firms auditing less than 25 plans, the failure rate was approximately 70 percent nationally.

How did California-based firms do? Unfortunately, not well. California is the largest stale society of CPAs in the country and California employee benefit plan (EBP) audits cover more than $2 trillion in retirement monies. The DOL's review of some California firm audits revealed a deficiency rate as high as a 75 percent for firms auditing less than 100 plans.

Would you believe that 80 percent of firms in California audit less than 10 plans? It's true. This can imply that firms aren't really specialized in this area and possibly provide this service to their clients as an add-on, to as not to jeopardize the client relationship. Perhaps these audits are used to keep staff chargeable in the slower summer months. Whatever the reasoning, what these firms don't understand is that they are running the risk or being labeled a "dabbler" as DOL Chief Accountant Ian Dingwall put it.

Moreover, these audits are unique for a variety of reasons. To start, they are mandated by law and heavily regulated. Additionally, the client is effectively the plan participants and beneficiaries, while plan activity is heavily outsourced. To further complicate matters, there is often an organizational disconnect between finance and human recourse functions overseeing the plan. Lastly, there is a sanctioned scope limitation relating to plan investments and investment earnings.

It's safe to conclude that the EBP audit world is complex...