Plan Audits - uncooperative CPA firms

[Guest J. David Wright]

As a TPA, our firm has prepared numerous valuation reports and 5500's over the years subject to independent audit. These audits have been completed by CPA firms ranging from large national firms to small local firms. Since our firm is acting as the plan contract administrator and we prepared the valuation report and the annual return plan auditors generally have direct contact with us during the audit if they have questions and before the audit is released, they send us a draft to review.

I have one plan we have completed since 1997 the audit has been completed every year by the same auditing firm. Every year, they want additional information which we promptly provide. Every year they seem to find some nit picking item they want changed on the return plan financial section. This year it was a $ 21 matching contribution. Every year the firm fails to send us a draft of the audit to review and they don't even send us a copy of the final audit. It is like they are keeping a big secret. As it were, the $ 21 they wanted changed this year was correct in the first place, although their suggested change changed six or eight other numbers in the Schedule H. When it was pointed out they were in error, their response was it was "imnaterial" to the audit. If it was immaterial, why did they want it changed in the first place? The next item was that they couldn't resolve to the matching contribution. I suggested they review the plan document which addressed the matching level. Upon further review, it was discovered they had been using the wrong document as a basis for their audit for some period of time. Then an issue came up about the audit scope. Since 1997, we had reported the audit to be a full scope audit with an unqualified opinion. Until this year, they never made a comment to the contrary. This year they said it was a limited scope audit.

It seems to me that the TPA who is the contract administrator of the plan should not only be in the loop with the auditors, but should review the audit draft before it is finalized. Auditors make mistakes. Post Enron, auditors need all the help they can get. TPA's have knowledge from day to day activities of the plan auditors may not have nor does the plan sponsor. In this case, the auditors of this plan have filed several audits with errors as the result of using the wrong plan document. There may be inconsistnecies between the audit and the scope and opinion reported on the Annual Return as well. Since I have never seen a copy of any of these audits, I have no idea what other inconsistencies or errors may be in the audit.

We also have a plan we have served in the same capacity from start up in 1993 that has grown in assets and participants to the point of needing an audit for 2001. The plan sponsor retained a local auditor to complete this audit. We try to provide auditors with as much information as possible to make their job as simple as possible. First year audits are generally trying. As near as I can tell, these people spent four months working on this audit. In the four months, they never contacted us one time with one question. Finally, the plan sponsor forwarded a draft of the audit for us to review. The draft had no identifying marks of any type. No name of the auditing firm, the auditor who worked on the audit, phone number, address. Nothing. Nothing other than a $4,667 error in the beginning balance for the year. We were almost certain the transaction in question would confuse the auditors and had included specific documentation to substantiate this item and either they didn't understand the transaction or they ignored the information we provided. After notifying the plan sponsor of this error and advising them to have the auditors call us to discuss correcting this error, in two weeks, I have not heard a word from the auditors.

Both of these diverse auditing firms, one a fairly large regional firm and the other a fairly large local firm in a city of 500K. Both seem not to want to divulge anything about the scope or content of their audit to the TPA, even though it is likely that if items between the return and the audit could result in the rejection of the audit or an inquiry or possible audit by the PWBA, these firms seem to believe their only responsiiblity is to the plan sponsor.

Since these are the only two incidences of this type I have experienced with auditing firms, does anyone know why these firms are taking such a hard line position? Regardless of the elevated opinion of their qualifications, auditors do make mistakes. All you have to do is look to Arthur Anderson if you disagree. They seem to want to draw a line in the sand. I am of the mind set that maybe it is time that we the TPA should draw a line in the sand as well. If we aren't provided with a draft of the audit and unless we agree with the draft before it is finalized, maybe we shouldn't change the return or schedules?

Any ideas or suggestions?

[E as in ERISA]

If you intentionally prevent the CPA from completing the audit, you will get yourself in trouble.

When a CPA requests changes to the 5500 that does not mean that they are saying there is an error in the TPA records.

First note that the CPA doesn't create the financial statements -- it only reviews them. So those are not the CPAs numbers. They are getting them from the client and the trust records. The CPAs scope/materiality requirements sometimes actually prevent them from changing small differences. E.g., if they correct the audit numbers to match your $21 difference, then that might lower their scope/materiality for other purposes. In effect, they are sometimes prevented from changing their numbers because of materiality -- so you may have to change yours even if the audit is wrong.

Another reason for changes to the 5500 is that the audit and 5500 are on the accrual method and TPA records are generally on the cash method. So there need to be adjustments for accruals.

The CPA is required by auditing standards to review the Form 5500 and make sure the numbers match before it can issue the audit (and if there are any discrepancies, then either the Form 5500 must be changed or the client has to get the client to change its footnotes to describe the differences).

If the CPA can't issue its audit, the client is at risk for $50,000 for failure to attach an audit to its 5500. If the CPA issues an audit without performing the necessary steps of reviewing the 5500 and reconciling it, then the CPA is subject to sanction by the DOL and state boards.

If you prevent the CPA from performing necessary steps in the process then the finger will be pointed at you. They will be able to prove to the client that there are rules that require them to review your 5500. But you will not be able to point to any rules that require you to review their audit.

It sounds like you are working with very uncooperative CPAs who reflect poorly on the profession. They often have problems getting info from TPAs -- it sounds like they should be happy to work with you!

P.S. AndersEn is spelled with an "E."

[E as in ERISA]

P.S. If you are having real problems: (1) Request that the client be included in any discussions about changes to the 5500 (so that the client can update its records as necessary to reflect the changes, too); or (2) Send a note to the client stating what changes you made to the 5500 at the CPAs request. (If the CPA is finding real discrepancies between what the client is reporting and what you are reporting, the CPA would probably be doing the same.).

[Guest J. David Wright]

Thanks for the reply, Katherine. I take it you are a CPA from the points raised and your siding with the auditors. First, there is nothing we did intentionally or otherwise except to help the auditor by providing everything they could possibly need to complete the audit. I have been working with qualified plans for quite some time now and I know exactly what the auditors need and we provide a full accrual valuation report, census, schedule of benefits and adjustments, loan valuation report, and testing, accounting information, schedules of disbursements including 1099's, a preliminary draft of the 5500 and all schedules that balances to the valuation report in binders, written explanations of any strange looking transaction with substantiation, schedule of receivables alongn with dates actually deposited, indexed with all substantiating data from the plan record side. The only thing the auditors need to do is check employer payroll records and data. The audits have been completed but not finalized or maybe they have. Either way I have not seen a copy of the final audit report on either plan.

Secondly, the records they are auditing in both instances are for the most part, plan records we maintain, our financial statements provided to them and employer payroll records. The $ 21 item on our statement was correct and was substantiable. You can't argue with a check and a confirmation of a deposit. The auditor asked us to change the numbers to coincide with their audited numbers which were wrong. When we pointed out the error, then they said the item was immaterial. Are you saying that if an auditor makes an error in an audit before it is released they can't change it?

Thirdly, the 5500 and financial statement provided was accrual based, so there were no adjustments for them to make.

The point of the issue in both cases is the auditors involved both made errors in the audit. So if the financial statement provided is correct, the 5500 is correct, and the audit has errors, how do you suppose this can be as you say "....perform the necessary steps of reviwing the 5500 and reconciling it..." if the auditor doesn't provide the TPA who prepared the return with a copy of the audit? Your assumption is the CPA is always right because he is a CPA. That is an incorrect assumption on your part. Although maybe not legally but certainly logically, reviews should go both directions. Auditors are not perfect and just because they are CPA's doesn't mean they fully understand every transaction they audit and they don't make mistakes. If an auditor doesn't understand a transaction it seems reasonable to ask someone who does understand the transaction to explain it before they proceed to complete their audit.

Other than informing me of the TPA circumstance if we prevented the CPA from performing necessary steps in the process, what is the CPA's circumstance if the audits they prepared and provided opinions on are in error? Does anyone care if a plan audit is incorrect or has errors such as the State Society of CPA's, the AICPA, or the DOL? Where do you find guidance informing TPA's what the people who regulate CPA's considers "material"?

If the TPA prepared the 5500 and the auditors complete the audit and don't ask the TPA anything or provide the TPA with a copy of the audit or any information relating to the audit, how are these items supposed to be reconciled? How is the TPA supposed to know how to respond to Schedule H question 3 (a) and © if the auditor doesn't provide a copy of the audit or doesn't tell the TPA the scope of the audit or the type of opinion? Are we simply supposed to take our best guess? Oh! It's not clear. The light in my crystal ball just went out! What would the implications be if the auditor in the one case has completed at least five years of audits based upon the wrong plan document? Do you believe the PWBA would believe something like this is immaterial?

If there was only one question in this thread it would be, is there anything in the Auditing Standards or whatever other regulations you people use that prevents an auditor from providing a draft or final copy of his audit to the Plan Contract Administrator?

P. S. Thank you for correcting my spelling error. Actually, it was my typing rather than my spelling. I hate typing on these BBS.

[Guest b2kates]

As someone who used to teach the AICPA program on how to audit benefit plans, I question the competence of any auditing firm that does not have direct and ongoing contact with the keeper of the records.

How do they test your policies and procedures? Do they inquire if you have a FAS 70 report. do they even test your software if you use Voice command systems?

Do they issue a full audit or a limited scope?

[Guest J. David Wright]

b2kates, these are the points I am questioning. If a TPA is functioning as the plan contract administrator and plan record keeper and has a written contract to do so with the Plan Sponsor, I don't see how an auditor can complete an audit without ever asking the recordkeeper anything, no matter how complete the data provided was. They should at an absolute minimum ask the TPA if there was anything they were aware of that was not in compliance with the law or the Plan Document. I don't know how they test our policies, procedures, software, or anything else.

Are they issuing a full audit or limited scope? The light is out in my crystal ball. They never said nor provided the TPA with anything indicating either the scope of the audit or the type of opinion being issued. They did not provide a draft of the audit and never provided a copy of prior years audit reports despite numerous requests. There are and were errors in their audit reports.

[E as in ERISA]

I am not an auditor. No one would accuse me of siding with auditors!!! But I do understand their limitations. They shouldn't change the $21 themselves. The client is the source for the numbers on the audited financials. If the auditor wants to get that number changed, he has to record a proposed adjusting journal entry in the workpapers and take it to the client for approval and get the client to change the financial statements. The client have to record an entry in the plan's financial statements to make the change. They normally would pass on an entry that is $21. It is much, much easier to change the 5500, even if that makes it wrong!