401(k) Audits Get Tougher

Regulators are looking at 401(k) plans with 100 or more participants under a more powerful microscope than in past years and CFOs who are plan fiduciaries are paying closer attention than ever to the annual mandatory plan audit. The July 31 deadline for submitting audited plan financial statements to the federal government is fast approaching and this year those audits face stricter standards, according to Buchbinder Tunick & Co, a CPA firm.

In the past, auditors focused exclusively on a plan's books to verify that transactions were conducted properly -- that payments were made and transferred correctly and that GAAP was followed. Now auditors are required to look beyond the plan's financials and do some sleuthing, in an effort to uncover any financial mismanagement or weakness in internal controls at the company that could indicate danger to the plan. For example, as Joseph Musher, CPA, a senior partner at Buchbinder Tunick states, it's a lesson from Enron: although the books were balanced, if you had looked at the company itself you would have seen the risk and planned the audit accordingly.

The American Institute of Certified Public Accountants (AICPA) spelled out the procedures that pension plan auditors must follow to meet the new standards (SAS 104-111). The stepped-up process requires extensive documentation. Plan sponsors can face financial penalties if documentation is incomplete.

To meet the new requirement, auditors will ask plan sponsors for more information than they've gathered in the past, which will lead to a longer audit process, more of management's time than the audit previously required -- and, of course, audit costs will rise.

Musher recommends that plan sponsors familiarize themselves with the new requirements before starting the audit and verify that their audit firm is trained in the new standards. According to the Department of Labor, the number one reason that audits fail to meet standards is auditor inexperience.