What's the big deal about employee benefit plan auditing?

It’s 10% of more of the employee’s compensation and a chunk of the employer’s revenue!

Traditionally this is one of the least respected audits out there. Companies and employees invest significant percentages of their business revenues and individual earnings into these plans, but when it comes time to audit them they are viewed as a “bottom of the barrel” responsibility and are often the victim of a fee battle of the lowest bidder.

The worst part is the audit process a large number of these companies are subjected to.
For example:

1. Number one client complaint. “We get tired of seeing a new face every year that we have to train on how to do an employee benefit plan audit”.
2. Number one CPA firm secret in the EBP world. A large majority of the firms only audit 1 plan. 10,000 CPA firms audit EBP plans. 50% (5,000 CPA firms) only audit ONE plan. 85% (8,500 firms) audit five or less plans. Would you go to a doctor to get a check-up if they only did one physical per year? How can a firm provide a quality trained benefit plan audit professional if they only do one audit per year? It’s impossible because the cost of training will far exceed the revenue from the one audit. So you draw the conclusion. Either the CPA firm is a really bad business that likes to do work at a loss or the person doing the audit is not properly trained.
3. Number one reason the value of your EBP audit is viewed as a commodity. Because the people often sent to do the audit have limited to no experience in the benefit plan audit world or they people sent to do the audit are entry level professionals with lower rates that are needed to keep the job costs down. It’s hard to demonstrate and appreciate value other than fee value when there is no expectation level set. Either way the one that loses in this situation is the company having the EBP audit done.

I am not sure how the EBP audit environment evolved, but I believe it started when large firms were the predominant plan auditor. Years ago a method of keeping competitors out of a company was to “low ball” EBP audit fees, plus in the pre-Sarbanes Oxley days EBP audit work was considered summer filler work that was discounted. As the years progressed and SOX and other risk standards came into play the summers started to fill with internal control and project needs which started to make the low fee EBP audits look unattractive. So the larger firms started shedding the EBP audits and the trickle down started to occur. As a result some firms picked up a few EBP audits. Some of those firms added more clients over the years, while others only held on to one or two plan audits. Today pricing is being set by firms with minimal audit experience. Are they quality jobs?  Maybe.

Breaking down the dollars is kind of scary.

1. Employee’s perspective version 1. For argument sake’s say a worker makes $60,000 a year. They take out of their check $15,000 to put in their retirement funds. That’s 25% of their income.
2. Employee’s perspective version 2. Okay, bring the number down to 10% of their income or $6,000. Obviously that varies by employee, by company and by plan, but if you have 200 participants in a plan contributing $6,000 a year that’s $1,200,000 annually before any growth or employer matches. In five years that plan has probably at least $10,000,000 in assets. A significant amount of money. 
3. Employer’s perspective. They spend considerable dollars in plan administration, time managing the plans, and normally match contributions at some level to the plan in order to attract and retain quality employees. Their retirement plans are a costly part of their business.

How much does a 200 participant plan audit cost? Assume it has $10M in assets. The fee for this type of audit should be $8,000 to $12,000 depending on the audit firm, location of the audit, variables within the audit, etc, but to pay $10,000 should be a normal expectation. That’s 1/10th of 1% of the asset fund value. If the fund has 200 participants, and $20M in assets, that’s 1/20th of 1%. A relatively inexpensive fee to ensure such a valuable employee and employer asset.

Here’s where it gets complicated. Assume the employer is dependent on the audit firm to identify plan weaknesses, inefficiencies and possible exposure or fraud. That’s a pretty good assumption because the President or CFO or Controller, who are pretty bright and capable professionals, really do not have enough exposure to or training in benefit plan auditing. They may excellent in making plastics or whatever their company is involved in, but a once a year benefit plan audit subject to whatever regulations the DOL mandates is generally not something they keep a close eye on. They depend on their plan administration company and auditor for their expertise.

Now add into the mix a 24 year old and auditor. Or, a 45 year old professional who audits one plan a year. That young professional or seasoned veteran has to be exceptional or undergo a lot of training to keep abreast of the EBP audit regulations if they only have a few years of experience or only do one plan. And, if they only do one plan, how can it be financially possible for them to pay for EBP audit training and conduct the engagement at a low fee? Again, either they are exceptionally gifted, not making a profit on the job which normally is not what normal businesses do intentionally, skipping the training or lacking the experience.

What should a business owner look for in a benefit plan auditor?

1. Experience. You need a firm that does more than a few audits. Like anything in life you need trial and error and repetition to do things right.
2. Reasonable Fees. The lowest fee is a bargain. But, if you want to gamble with the lowest fee benefit plan costs possible for your company’s retirement plans, which is a very valuable asset, what’s the risk exposure if something is wrong or goes wrong?
3. Common Sense. A little common sense goes a long way in accomplishing the audit and moving onto bigger and better opportunities and challenges in the company. Make sure your audit firm has the experience, is providing a fair price, and has reasonable approach to the audit. Some personality doesn’t hurt either.

If you have questions about your benefit plan audit needs or any issues, please feel free to call.

Written By: Mr. Stuart Goldstein, Samuel Goldstein & Associates. 516.466-3388 www.sgcpas.com