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Operational errors found during initial audit


JJRetirement

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I'm not sure whether this issue is better placed in EPCRS 403(b) or Form 5500 because it applies to all.  

A client has a 403(b) plan that is now a large plan requiring an audit.  The auditor uncovered several operational errors and a lack of adequate procedures to make sure the plan is compliant.  The client has investigated the 3 prior plan years and has found similar errors.  These are pretty typical errors: the employees may not have been made aware that they were eligible to defer upon hire, some employer contributions didn't start as soon as the participant became eligible for them, some late deferral deposits, contributions weren't always calculated using the correct compensation definition, some investment directions were not followed and contributions were invested in a default fund.  The client will be correcting operational failures under EPCRS with a VCP application, with assistance of counsel.   They expect to correct the late deposit of deferrals by calculating interest and depositing in participant accounts, without a VFCP application. 

But here's the more immediate issue.  The 5500 is now overdue because the auditor will not issue a report.   So a new late filing error has occurred and the penalty amount will continue to increase.  The auditor wants all of the failures quantified, and won't proceed until the entire 30 year history of the plan has been investigated to uncover all errors.   

This appears to be unique to the first audit year because opening balances have to be verified.  But when corrections are made, aren't they deposited and credited to the account in the current year?  I have submitted many VCP applications that correct for multiple years (for large plans) and have never heard that the 5500 should be redone for prior years because the errors mean that the opening balances aren't correct.  

Is an auditor able to issue a qualified opinion in these circumstances - stating the types of errors that were found and indicating that the sponsor is working with counsel to make appropriate corrections?  May be a separate question whether the DOL/IRS would accept this.  

There has to be  a way to move forward and get the 5500 in (even if it needs to be corrected later) before the investigation is completed for prior years, the VCP application filed and a compliance statement received. 

 

 

 

 

 

 

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I've been in this business since 1999 and two years ago was the first time I'd ever heard of an auditor refusing to provide a report until an error was corrected. I"m wondering if others know if it is because of increasing scrutiny of audits, or just a random bad auditor?

We ended up filing with an attachment indicating that the auditor had not yet completed their work. We got the audit and amended the filing with no penalties.

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23 minutes ago, K2retire said:

I've been in this business since 1999 and two years ago was the first time I'd ever heard of an auditor refusing to provide a report until an error was corrected. I"m wondering if others know if it is because of increasing scrutiny of audits, or just a random bad auditor?

We ended up filing with an attachment indicating that the auditor had not yet completed their work. We got the audit and amended the filing with no penalties.

It sounds more like the auditor won't issue the audit because the amount of errors/issues found in the past three years has left them unable to take the basic step of verifying beginning balances.  From the OP, it doesn't sound like they have even started digging into the prior years beyond the last three years.  With the scrutiny on auditors nowadays, I'm not surprised that they wont issue an audit without first identifying all the issues.

What was the timeline between filing with a "audit not yet available" to amending with the audit?

From what I understand, this will only work during the short period between submitting the 5500 and when the DOL folks (or algorithm) verify that the attachments do not contain personal information such as SSNs.  If they discover your "audit not yet available" note during review, the 5500 is rejected as incomplete and delinquent if past the due date.

 

 

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In our case it was not a first audit. The same firm had done the prior year audits.The client had changed payroll companies during the year and had a number of errors associated with that.

The form was due 10/15/2015 and was finally filed with the audit 1/6/2016.

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To the OP:  is it worth it to try to find a new auditor who would file a "provisional" audit and amend once everything is corrected?  The current auditor is holding the plan hostage, causing (potentially) thousands of dollars in fines.  Don't the auditors know that a VCP filing takes a long time to complete?

QKA, QPA, CPC, ERPA

Two wrongs don't make a right, but three rights make a left.

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I agree with RatherbeGolfing.  The OP says the auditor can't issue until the errors have been quantified.  That is frequently true.  Where there is a risk that any receivable required to correct these errors would be material, the auditor cannot conclude that the financial statements present fairly the financial position of the plan.  The failure to measure the receivable to enable the auditor to audit it would trigger a qualification of the auditor's report.  The DOL typically looks at all filings that include a modification of the auditor's report, other than the normal limited scope.  Will it be rejected?  That depends.  The DOL has the right to reject such a report but will work with the client when they are diligently working to quantify the correction so that a clean report can be issued. 

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First, hire a good ERISA attorney that can complete the VCP & the VFCP.  Second file the Form 5500 without the Auditor's opinion but include a statement describing the holdup.  Three, make a rough estimate of the receivable that is due to the plan and give a copy to the auditors.  Four, ask the auditors to issue a disclaimer opinion because they are unable to audit the beginning balances.  Five, consider firing and or suing the auditors (how many plans do they audit each year).  Six, complete all the work deemed necessary by the ERISA attorney to correct the operational errors.  Seven, good luck.

On 403(b) plans the DOL has ruled that they would accept this wording for 403(b) plans.

Auditor suggested wording

In addition, the Plan has not maintained sufficient accounting records and supporting documents relating to annuity and custodial accounts issued to current and former employees prior to January 1, 2009.  Accordingly, we were unable to apply auditing procedures sufficiently to determine the extent to which the financial statements may have been affected by these conditions. 

Because we were not able to apply auditing procedures to satisfy ourselves as to the appropriateness and completeness of the Plan’s net assets available for benefits as of December 31, 2009 and 2008, and the changes in net assets available for benefits for the year ended December 31, 2009, as described in the third paragraph above, and because of the significance of the information in the financial statements related to the Plan’s investments that we did not audit as described in the second paragraph above, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on the accompanying financial statements and supplemental schedules taken as a whole. 

 

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Thank you everyone who commented.  It's very helpful to get some other perspectives.  

They have hired an ERISA attorney (me - with plenty of VCP and VFCP experience) to file the corrections when the investigation is complete.  The correction methods for the kinds of errors discovered are pretty clear cut, but the digging has just begun, so we won't be in a position for quite some time to conclude we have identified all of the errors, calculated the required corrective allocations and distributions, located former participants, etc. The 5500 was due on 4/15/17, and the sponsor has been working diligently to review all records since then.  

They also have changed administrative procedure in the last year or so to prevent the kind of errors that have occurred.  Many changes were implemented prior to the audit, and more have been changed since the auditor identified additional issues.  

Could RatherBeGolfing please comment further on verification of opening balances?  What is the requirement and how would this ever be done with certainty for the first year with a required audit for a plan that may be decades old?  

Thanks WillSanDiego for the suggested wording relating to pre-2009 records.  We have asked the auditor if it could issue a qualified opinion or a disclaimer opinion now and revise the audit after the corrections are determined.  No luck so far on that.  I did have an informal conversation with a DOL investigator I was working with on another client's matter to see if he had any ideas on how to 'stop the bleeding' of the late filing while we figure out the errors and corrections.  He suggested getting a qualified opinion, but didn't have any other ideas on how to proceed. 

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31 minutes ago, JJRetirement said:

Could RatherBeGolfing please comment further on verification of opening balances?  What is the requirement and how would this ever be done with certainty for the first year with a required audit for a plan that may be decades old?  

This has to do with the required procedures for the auditor rather than the plan requirements that we work with.  I am not intimately familiar with the ever changing requirements of the auditing process, but I do work with many different auditing firms so my "knowledge" here comes from what they have explained to me.  As I understand it, the auditor must take steps to be reasonably certain that the numbers they use are accurate.

 For example,  I just had a plan that is 15 years old go through a first audit last year.  They went back three years to establish the beginning balances.  The most I had ever seen before that was two years.  I asked around and the answer I was given by this firm (and other firms) was that three years was good sample for this plan and barring any issues, they can use those three years to establish the beginning balances.  They found no issues in the past three years and were fine with relying on my numbers to establish the beginning balances.  It seems reasonable that they cannot use those numbers if they have reason to believe that the numbers are inaccurate.

In your case, they have found a lot of issues in the current year and the past three years.  The auditor therefore cannot rely on those numbers without going further back.  What sticks to me here is that from your original post, it does not sound like the auditor is requiring the correction process to play out before issuing the audit, rather they insist on the errors/failures being quantified.

Quote

The auditor wants all of the failures quantified, and won't proceed until the entire 30 year history of the plan has been investigated to uncover all errors.

To me this is a big difference. 

 

 

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Thanks again.  From our perspective, the only thing keeping us from filing the corrections very quickly is the same thing that is keeping the auditor from issuing its report - quantifying all of these errors for some as yet unknown number of years.  So even though quantification, filing and correction are different items, once we have the information for one, we have the information necessary to complete for the other.  

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For whatever it's worth, in the DOL iFile User's Guide dated March 13, 2017 for EFAST2, they list the Attachment Types.  Two of these attachments are "Reasonable Cause for late filing", and "Reasonable Cause for late or missing IQPA Report".  I would assume that these attachments would be some kind of statement or letter.  I'm not sure I've seen one, or even an example,   Maybe you can file the Form 5500 with such an attachment(s).

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