Employee Benefit Plan Audit Quality: What Plan Sponsors Should Watch For

Why Audit Quality Matters for Plan Sponsors

 

A completed employee benefit plan audit does not necessarily mean the audit meets professional standards. In its November 2023 Audit Quality Study, the U.S. Department of Labor’s Employee Benefits Security Administration (EBSA) reported that 30% of the audits reviewed contained major deficiencies. The study examined audits for the 2020 filing year and offers important lessons for plan sponsors preparing for their next audit.  EBSA’s study focused on whether plan audits were performed in accordance with applicable professional standards and whether the audit work supported the auditor’s report. 

 

Employee benefit plan audits are more than a filing requirement. For plan sponsors, a quality audit helps confirm that plan assets are properly reported, participant information is reliable, and the Form 5500 filing is supported by appropriate audit work. A plan audit is intended to give users of the plan’s financial statements confidence that the information is fairly presented. When audit work is incomplete or poorly documented, the audit may not provide the level of assurance that participants, regulators, and fiduciaries expect.

Audit Quality Risks and Practical Lessons for Plan Sponsors

 

1. Insufficient Audit Work to Support the Opinion

One of the most important themes in the EBSA study is that some audits did not include enough work to support the auditor’s conclusions. In practical terms, this means the auditor may have issued an opinion without obtaining sufficient evidence in key areas of the plan’s financial statements. 

What to watch for:

• Audit questions should be specific to the plan, not generic or copied from prior years.
• The auditor should follow up on inconsistencies, missing information, or unusual activity.

 

2. Weak or Missing Documentation

EBSA’s findings also highlight the importance of audit documentation. Even if an auditor performed certain procedures, the audit file must show what was done, what evidence was reviewed, and how conclusions were reached. If the audit file does not clearly support the auditor’s conclusions, EBSA may question whether the audit was properly performed.

Plan Sponsors can help by keeping complete records for:

• Plan amendments and restatements
• Adoption agreements and board or committee approvals
• Payroll and contribution data
• Participant eligibility support
• Distribution and loan documentation
• Service-provider reports and certifications

• Form 5500 support and supplemental schedules

   

3. Problems Auditing Contributions

Contributions are a central part of many employee benefit plan audits. The auditor generally needs to understand whether employee deferrals, employer matching contributions, nonelective contributions, and other contribution amounts are accurately recorded and properly remitted.

The EBSA study identifies audit-quality issues involving important plan areas, including areas that commonly require testing of plan transactions and balances. For plan sponsors, contributions deserve special attention because they connect payroll, HR records, plan provisions, and the recordkeeper’s data.

Common contribution-related pitfalls include:

• Payroll data that does not reconcile to plan records
• Not using the proper definition of eligible compensation in contribution calculations
• Incomplete support for employee deferral elections
• Employer match calculations inconsistent with plan provisions
• Delays in remitting contributions to the plan
• Missing explanations for contribution adjustments or corrections

 

4. Inadequate Testing of Participant Data

Participant data drives many important plan activities, including eligibility, contributions, vesting, benefit payments, forfeitures, and required disclosures. If participant data is incomplete or inaccurate, the financial statements and related audit work may be affected.

EBSA’s study emphasizes the need for audit work that is responsive to the plan’s risks. Participant data is one area where plan sponsors and auditors should not assume that information is correct simply because it appears in a system report.

Plan sponsors should be prepared to support:

• Dates of birth, hire, and termination
• Compensation used for plan purposes
• Eligibility dates
• Hours of service, if relevant
• Deferral election history
• Vesting service
• Beneficiary or distribution-related records, when applicable

 

5. Insufficient Work Performed on Benefit Payments and Distributions

Benefit payments and distributions are another common area where audit quality can suffer if procedures are too limited. Auditors generally need to consider whether payments are properly authorized, accurately calculated, and recorded in the correct period.  The EBSA study’s broader findings on audit deficiencies are a reminder that auditors should obtain appropriate evidence over significant plan transactions and not merely rely on summary-level information.

Questions sponsors should expect auditors to ask include:

• Was the participant eligible to receive the distribution?
• Was the payment properly approved?
• Was vesting correctly applied?
• Was the amount calculated using the correct participant account or benefit information?
• Were supporting records retained?

 

6. Overreliance on Service Providers

Employee benefit plans often rely heavily on third-party administrators, custodians, trustees, recordkeepers, payroll providers, and investment platforms. These providers are essential, but their involvement does not eliminate the need for appropriate audit work.  EBSA’s study reinforces that the auditor’s work must support the audit opinion and address the plan’s relevant financial statement areas. In practice, this means auditors should not simply accept service-provider reports without considering whether those reports are relevant, complete, and properly used in the audit.

Plan sponsors should realize the service providers can supply important information, but the plan sponsor remains responsible for the plan’s reporting. Sponsors should understand who is responsible for maintaining which records and review the information provided to auditors for accuracy and completeness. They should also proactively coordinate the timing of providing auditors with the requested information to avoid timing delays and additional charges.

 

7. ERISA Section 103(a)(3)(C) Audits

Many plan audits involve investment information certified by the entity that is the custodian of the investments. EBSA’s study addresses audit quality in the context of the audit work performed and the auditor’s reporting responsibilities. For plan sponsors, the key point is that a certification does not eliminate management’s assessment or the auditor’s related responsibilities. When electing an ERISA Section 103(a)(3)(C) audit, plan management must assess whether the certifying institution is qualified and whether the certification meets applicable requirements, including coverage of the relevant investment information. The auditor also has responsibilities related to management’s assessment and the certified information.

 

8. Form 5500 and Financial Statement Inconsistencies

The audited financial statements and the Form 5500 filing should tell a consistent story. Differences may be explainable, but they should be identified, understood, and supported.  Because EBSA’s study was based on audits connected to Form 5500 filings, it underscores the importance of consistency between audit work, financial reporting, and annual plan filing information. The information presented in the Form 5500 filing should agree or be appropriately reconciled to the information presented in the audited financial statements. 

 

What Plan Sponsors Can Do Before the Audit Starts

 

A stronger audit process often begins before the auditor arrives. Based on the issues highlighted in EBSA’s study, plan sponsors can reduce delays and follow-up requests by improving audit readiness and focusing on preparation, coordination, and documentation.

Before fieldwork begins, consider taking the following steps:

• Confirm plan documents are current - Gather the plan document, amendments, adoption agreement, summary plan description, and committee approvals.
• Reconcile payroll to recordkeeper reports - Identify and resolve differences in employee deferrals, employer contributions, and compensation data.
• Review participant census data - Confirm that hire dates, termination dates, compensation, eligibility, and vesting information are accurate.
• Gather service-provider reports early - Request trustee, custodian, recordkeeper, and third-party administrator reports well before the audit deadline.
• Review distributions and loans - Make sure approvals, calculations, and participant-level support are complete.
• Ask the auditor about the audit plan - Understand which areas will be tested, what information will be needed, and how the auditor will address significant plan activities.

How to Evaluate Whether Your Auditor Is Focused on Quality

 

EBSA’s study is also a reminder that not all audits are equal. Plan sponsors should look for auditors who understand employee benefit plans and who perform procedures tailored to the plan’s operations.

When evaluating an auditor, consider asking:

• How do you evaluate service-provider reports and certifications?
• What are the most common issues you see in plans like ours?
• How do you communicate audit findings and recommended improvements?
• What information do you need from us before fieldwork begins?
• What is the level of involvement of senior personnel on the engagement?

A high-quality auditor should be able to explain the audit process clearly and identify the plan areas that require the most attention. An employee benefit plan audit may identify operational errors or instances of noncompliance, but it is not a comprehensive compliance examination. Management remains responsible for administering the plan in accordance with its provisions and applicable requirements.

Key Takeaways

 

Audit quality depends on more than meeting a filing deadline. Clear responsibilities, complete records, and an audit approach tailored to the plan help support a more effective process. Contact our employee benefit plan team to discuss your plan’s audit needs and preparation priorities.