Overzealous 5500 auditor?

[Guest Mike Spickard]

We have a client with 3 large pension plans. The 5500 auditor is KPMG. As part of their routine data gathering, they are requesting some odd things. Here is a sample:

1) pension calculations for retirees who commenced 30 years ago

2) employment applications to verify hire dates for persons who retired in the 1980's (some of whom hired back in the 30's and 40's)

3) copies of payroll reports from 7 years ago to verify compensation used in the FAE definition

Obviously, some of the information does not exist but the auditor does not seem to know how to react to unavailable information. Exacerbating the situation is that the client was spun off 2 years ago, and many of the personnel records stayed with the prior owner.

In virtually all other data requests I have handled, the information request was largely limited to things that happened during the year audited. Did the audit standards or rules recently change, causing auditors to have to "re-audit" old information that was possibly audited in some prior year?

[MGB]

These audit requests are virtually always handled by people with under one year of experience under the direction of an auditor higher up, often with two-year people in between as managers. They do not like to go to the higher ups to find out if they can disregard issues when told to disregard them by others such as actuaries. This eventually will probably require a communication to the partner in charge at the audit firm to get them to back off on such ridiculous questions.

I had some auditors like this once that would find errors in the data used in the actuarial valuation such as a birth date or a hire date off by a few days or even a year. They would then ask how much that changed the benefits being valued and the contribution requirements for the year. They (the newbies and their managers) absolutely refused to accept a general statement that it was inconsequential or negligible (the errors were typically with an employee in their 20s and a plan with many thousands of participants). After fighting them on this over and over, I finally had to have the CFO of the company (a Fortune 100 firm) tell the audit partner to tell these people to back off. So, for a $1 difference in valuation results, it ended up costing the client thousands of dollars in fees (between the audit firm and the actuarial firm) by the time it was resolved.

[Mike Preston]

Surely it wasn't a full dollar.

[mbozek]

The tenacity of IRS auditors in this matter reminds me of a Ronald Regan quote to constitutants regarding the cost of maintaining govt agencies "Be glad you dont get all the govt you pay for" .

[Mike Preston]

Uh, this discussion wasn't discussing government auditors. But I agree with the quote, anyway. ;-)

[Guest galdridge]

Is this an initial audit of this plan? For initial audits, auditors are required to perform auditing procedures with respect to individual participant account balances accumulated from inception of the plan up to the beginning of the plan year under audit to ensure that participant accounts are properly stated and that prior plan distributions were appropriate. This means that an auditor should make a selection of participants that have either been in the plan since inception or for a substantial amount of time, obtain a roll-forward of their account activity and test that information back to payroll information and to the various plan documents that were in place during the periods of participation. Similar procedures would apply to plans that are merged into the plan under audit. This can result in a substantial amount of work for plans that have been around for a long time or that cannot locate the requested information. In that case, the auditors' could include a scope limitation in their audit report noting that these procedures could not be performed. This type of scope limitation would generally remain in the audit report until the auditors are able to get comfort that the plan is operating properly (i.e., most of the participants that were in the plan during the unaudited periods are gone and no longer entitled to benefits).

Has the Plan been previously audited? If previously audited, is this a new request or something that has been looked at in prior years? Is the auditor attempting to test compliance with a sample of participants or with an entire group of participants? Generally, auditors will only perform procedures on a test basis, whereas your comments appear to indicate that the request is for a much larger, all-inclusive group. Auditors are now faced with a new accounting standard (SAS 99) that requires the auditors to incorporate unpredictable procedures in their engagements primarily directed at uncovering material fraud. These could be procedures designed to accomplish those objectives.

Materiality is generally not the issue when errors are noted for two reasons: first, audit procedures are generally done on a test basis and the identified errors could result in a potentially significant problem when projected over the entire population and second, the issue is whether the plan is in compliance.

Also, what you or I would consider as "material" is much different than what the DOL would consider "material". In fact, the DOL has stated that even a small error within a participant's account should be considered "material" because "if a participant knew they would consider it material" especially when you consider lost earnings through the point of retirement.

Bottom line is that whatever the reasons are, you should have been provided with an adequate explanation. If the auditor cannot adequately state the need for the information, then I would appeal to the audit manager or partner.

Glenn Aldridge, CPA

Audit Manager

Bennett Thrasher PC

Atlanta, GA

[Guest Mike Spickard]

Glenn,

This is not the first audit, but it is the first year for the auditor and the first year that the Plan sponsor has been out from under their prior parent company.

The information you have given helps me understand some of the auditor's rationale, and I really appreciate the valuable insight. Thank you.

Mike