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Getting Prepared for Your Employee Benefit Plan Audit

Lawrence J. Hoffman, CPA/CFF, CVA, CFE Senior Partner, AICPA EBPAQC Designated Partner

March 27, 2013

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AGENDA

• Seminar objectives

• Unique aspects of the EBP reporting and audit environment

• Who are the players?

• Employee benefit plan audit requirements

• The importance of a quality plan audit

• Understanding your auditor’s responsibilities

• Understanding your responsibilities

• Working with your auditor

• Common audit findings

• Suggested resources

• Q&A

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SEMINAR OBJECTIVES

• Help you to better prepare for your EBP audit

• Better understand what your responsibilities are as plan management and in the audit process

• Better understand what your auditors’ responsibilities are and what they do in an audit

• Anticipate areas of concern for auditors

• Make your audit more efficient and timely

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UNIQUE ASPECTS OF THE EBP REPORTING AND AUDIT ENVIRONMENT

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WHO ARE THE PLAYERS?

• Sponsor – generally the employer.

– Human Resources. – Finance & Accounting – Audit / Finance Committee – Compensation / Benefits Committee

• Participant – employee, former employee, beneficiaries, members.

• Plan administrator / record keeper – day-to-day administration of the plan. Could be the sponsor; a trustee (bank trust dept); insurance company; investment advisor; or a person designated by the trustee, if an unrelated third party – “third party administrator” (TPA)

• Trustee (fiduciary) – responsible for the operation and administration of the plan assets.

• Custodian – charged with the safekeeping of the plan assets.

• Service providers – benefits consultant, investment manager, accountants, lawyers (ERISA counsel), actuary (defined benefit).

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WHO ARE THE PLAYERS?

THIRD-PARTY ADMINISTRATORS

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WHO ARE THE PLAYERS?

PLAN CUSTODIANS / TRUSTEES

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EMPLOYEE BENEFIT PLAN AUDIT REQUIREMENTS

• TYPES OF PLANS REQUIRING AN AUDIT: • Defined Contribution Plans • Defined Benefit Plans • Health and Welfare Plans

• TYPES OF PLANS THAT DO NOT REQUIRE AN AUDIT:

• Governmental plans (ERISA section 3(32)) • Church plans (ERISA section 3(33)) • “Safe Harbor” Plans (DOL regulation 29 C.F.R. § 2510.3-

2(f))

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EMPLOYEE BENEFIT PLAN AUDIT REQUIREMENTS

AUDIT REQUIREMENT

• Generally when a plan has 100 or more participants at the beginning of the plan year.

• A participant is defined as those who are eligible to participate in the plan (that is, contribute to the plan), as well as those who are participating.

• Must count those obtaining or maintaining benefits – those who are no longer employed yet have vested balances or benefits to be paid.

• 80/120 rule.

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EMPLOYEE BENEFIT PLAN AUDIT REQUIREMENTS

• IF LAST YEAR YOU FILED FORM 5500-SF AND THIS YEAR YOU HAVE:

PARTICIPANTS TAX FILINGS AUDIT REQUIRED? <100 FILE FORM 5500-SF NO

100-120 CAN ELECT 5500-SF NO

>120 MUST FILE FORM 5500 YES

• IF LAST YEAR YOU FILED A FORM 5500 AND THIS YEAR YOU HAVE:

<100 FILE FORM 5500-SF NO

>100 MUST FILE FORM 5500 YES

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EMPLOYEE BENEFIT PLAN AUDIT REQUIREMENTS

AUDIT SCOPE

• FULL SCOPE AUDIT.

• LIMITED SCOPE AUDIT:

• C.F.R. 2520-103.8. • Proper certification from a qualifying institution-bank, trust

company or insurance company • Only applies to investment and investment-related

information at the plan level. • Must include the words “complete and accurate.” • Authorized signature on certification.

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EMPLOYEE BENEFIT PLAN AUDIT REQUIREMENTS

FILING REQUIREMENTS

• Form 5500 (with audited financial statements for large plans).

• Due 7 months after year end (e.g., 12/31 year end = 7/30 due date).

• Automatic 2½ month extension if form 5558 is filed with IRS.

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THE IMPORTANCE OF A QUALITY PLAN AUDIT

• An important accountability mechanism.

• Plan administrator’s duty to hire an independent auditor and ensure the plan has obtained a quality audit in accordance with ERISA and DOL requirements.

• ERISA holds plan administrators responsible for ensuring that plan’s financial statements are properly audited in accordance with generally accepted auditing standards (GAAS).

• Penalties for audit failures can be substantial! ($1,100 a day capped at $50,000 per annual report filing where the required auditor’s report is missing or deficient.)

• Your audit firm should be a member of the AICPA employee benefit plan audit quality center.

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UNDERSTANDING YOUR AUDITOR’S RESPONSIBILITIES

AUDIT OBJECTIVES • The audit is conducted in accordance with auditing standards

generally accepted in the United States (GAAS). • Auditor is responsible to plan and perform the audit to obtain

reasonable assurance that material misstatements, whether caused by error or fraud, are detected.

• Expression of an opinion on the financial statements. • Whether the DOL-required supplemental schedules attached to

the Form 5500 are presented fairly in all material respects, in relation to the financial statements as a whole.

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UNDERSTANDING YOUR AUDITOR’S RESPONSIBILITIES

THE AUDIT PROCESS

• Generally accepted auditing standards require, among other things:

− Proper planning and risk assessment. − Understanding the design and implementation of

internal controls. − Gathering of sufficient evidence. − Documentation of findings.

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UNDERSTANDING YOUR AUDITOR’S RESPONSIBILITIES

RISK ASSESSMENT • Plan management – tone? • Control environment. • Financial condition of plan sponsor and industry. • Plan administration and personnel. • Accounting and personnel records. • Fraud risk factors. • Change in trustees, custodians or other advisors. • Significant accounting or auditing issues – MAPS, e.g.,

hard-to-value investments, fair value disclosures.

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UNDERSTANDING YOUR AUDITOR’S RESPONSIBILITIES

FRAUD RISKS • Trustee of small plan created a fictitious employee in the census

data, made employer contributions, and then took out loans against the balance.

• HR manager requested distributions for persons who left company 2+ years ago. He had been successful 3 times for over $10,000. Discovered when bank refused to direct the deposit, since deposit name differed from account holder’s name.

• Plan investments managed in-house. Company controller is also plan administrator. Controller borrowed funds from the plan to cover cash flow needs of the Company.

• An HR employee, who also assisted with payroll, diverted both payroll taxes and plan contributions into his personal account for six months, then left the country. This employee also had responsibility for reconciling payroll bank accounts.

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UNDERSTANDING YOUR AUDITOR’S RESPONSIBILITIES

FRAUD RISKS (cont.) • A person was offered a job but never actually started the job.

The plan sponsor entered the person as an employee into the HR system, enrolled the person in the plan, and then started issuing paychecks with deductions for contributions to the plan. This went on for three years, until the employee running the scam requested a distribution, at which time the fraud was discovered.

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UNDERSTANDING YOUR AUDITOR’S RESPONSIBILITIES

• AUDIT AREAS 1. Contributions and receivables.

– Employee – Employer – Rollover

2. Investments and investment income. 3. Benefits and benefit payments. 4. Liabilities and plan obligations. 5. Participant data and allocations. 6. Loans to participants 7. Administrative expenses 8. Parties in interest and prohibited transactions 9. Plan tax status

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UNDERSTANDING YOUR AUDITOR’S RESPONSIBILITIES

AUDITOR COMMUNICATIONS • Required to make certain communications to “those charged

with governance” throughout the audit. – Planning stage. – During field work. – Conclusion of the audit (SAS 114 letter). – TCWG defined as the person(s) with responsibility for

overseeing the strategic direction of the plan and obligations related to the accountability of the plan.

• Engagement letter.

• Management representation letter.

• Communicating internal control related matters identified in an audit (SAS115 letter):

– Material Weaknesses. – Significant Deficiencies.

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UNDERSTANDING YOUR RESPONSIBILITIES

• The financial statements are those of plan management – only the opinion is the auditor’s!

• The selection and application of accounting policies.

• Establishing and maintaining effective internal controls over financial reporting.

• Designing and implementing programs and controls to prevent and detect fraud.

• Identifying and ensuring that the plan complies with the laws and regulations applicable to the plan.

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UNDERSTANDING YOUR RESPONSIBILITIES

• Know your plan and plan requirements.

• Know your service providers and their responsibilities.

• Make sure participant accounts and information is reconciled to the service organization records on a timely basis (contribution records and census data agree with payroll information).

• System of internal controls (who has access to the data provided to the service organization and can override controls?)

• Controls of a benefit plan are composed of controls at both the plan sponsor, as well as at the service organization (SSAE 16 report). Review these reports.

• The DOL holds plan management responsible for the proper reporting of plan investments. Watch for proper fair value reporting and disclosures.

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WORKING WITH YOUR AUDITOR

• Have a point person.

• The “PBC” list.

• Timely turnaround of requested documents and schedules (but review them first!).

• Contact your service providers early to assure they will have the necessary information on a timely basis, e.g., “Audit package.”

• Obtaining service organizations’ SSAE 16 control reports (now SOC1, 2 and 3 reports).

• Scheduling audit field work – be ready!

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COMMON AUDIT FINDINGS

• Late deposit of participant deferrals and loan repayments.

• Failure to properly apply plan’s definition of compensation.

• Failure to follow plan’s eligibility provisions.

• Failure to update plan documents.

• Incorrect employer contributions (including match).

• Failure to properly apply plan’s vesting provisions.

• Improper use of plan forfeitures.

• Not covering the proper employees, or excluding eligible employees.

• Failing to identify defaulted loans.

• Not limiting employee deferrals and employee contributions to the maximum limits between all available plans.

• Failure to satisfy hardship distribution requirements.

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SUGGESTED RESOURCES

• Selecting an auditor for your employee benefit plan, DOL Employee Benefits Security Administration: http://www.dol.gov/ebsa/publications/selectinganauditor.html

• AICPA Employee Benefit Plan Audit Quality Center: http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQuality/Pages/EBPAQhomepage.aspx

• Raffa, P.C. website – Employee Benefit Plan Services Resource Center: http://www.raffa.com/ProfessionalServices/EBP/Pages/default.aspx

QUESTIONS AND ANSWERS

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BIOGRAPHY

• 35 years of consulting, audit, accounting and tax experience in the public and private sectors.

• Started career with a Big-Four international accounting firm in Washington, DC. • Founded a regional certified public accounting and consulting firm in 1982 and grew it to

on of the Washington, DC’s largest firms in seven years. Merged his practice with Raffa P.C. in 2008.

• Managed and conducted audit and accounting engagements ranging from small privately held to large publicly held businesses in various industries, including multi-national businesses, nonprofit organizations, and governmental entities and agencies.

• Performed economic and financial analysis, including projections and forecasts, in support of litigation and claims for lost earnings and profits, business interruption, shareholder disputes, patent and trademark infringements, bankruptcy and restructuring, and structural settlements; assistance with interrogatories, document requests and depositions; and serving as an expert and consulting witness.

• Performed and supervised business valuations for both public and closely held companies in a variety of industries, individuals and estates, family limited partnerships and limited liability companies, including valuations for business combinations (SFAS 141R), mergers, acquisitions, and divestitures, estate and gift taxes, marital dissolution proceedings, buy-sell agreements, intangible assets and intellectual property, purchase price allocations, goodwill (SFAS 142) and long-lived asset (SFAS 144) impairment, fair value accounting (SFAS 157), cheap stock (IRC 409A), stock-based compensation (SFAS 123R), phantom stock and employee stock ownership plans.

• Conducted and led teams of forensic accountants on fraud audits and investigations, including fraudulent financial statements, misappropriations of assets and embezzlements; money laundering, kickbacks, bribery and conflicts of interest; insurance claims; bankruptcy; financial institutions and loan fraud. Also has conducted fraud risk assessments, anti-fraud programs, and fraud training and education.

Lawrence J. Hoffman, CPA/CFF, CVA, CFE

Senior Partner Raffa, P.C. 1899 L Street, NW Washington, DC 20036 Tel. 202-822-5408 Fax 202-822-0669 lhoffman@raffa.com

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BIOGRAPHY

• Assisted companies and nonprofits with restructuring and turnaround situations, including recapitalizations, reorganizations and liquidations. Advised entities on Chapters 11 and 7, bankruptcy filings and proceedings and non-judicial workouts. Developed and administered crisis management plans, cash flows, liquidation and turnaround analysis, debt restructuring and creditor negotiations, and turnaround plans.

• Formulated strategic short- and long-term business and financial planning for various business organizations and served as interim “C” level positions, including for a major North American sports league, European and U.S. aircraft manufacturer, aviation charter airline and travel company, and a multi-chain quick service food chain.

• Formulated syndication strategies and prepared business plans and private placement offerings, including financial forecasts, market research and analysis, due diligence, securities pricing and structuring for various public and private securities offerings, including SEC filing.

• Founded and developed a regional NASD licensed broker dealer investment banking firm. Placed over $150 million in debt and equity and represented over $200 million in merger and acquisition transactions.

• Founded and developed two private equity funds in excess of $10 million, including investments in early stage and mature emerging companies in the form of debt and equity. Portfolio investments included aviation, food and hospitality, software and technology, telecommunications, sports and entertainment, banking and financial institutions, healthcare, and wholesale and retail.

• Co-founded and managed various real estate acquisition, ownership, and operating entities, including commercial office buildings, shopping centers, flex warehouses, residential housing and developed land.

• Performed tax and financial consulting services for individuals and closely held businesses.

• Instructor in audit, accounting, finance, and forensic accounting.

Lawrence J. Hoffman, CPA/CFF, CVA, CFE

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BIOGRAPHY

EDUCATION & CERTIFICATIONS • Bachelor of Science, Accounting – Mount St. Mary’s University • Certified Public Accountant (CPA) • Certified Fraud Examiner (CFE) • Certified in Financial Forensics (CFF) • Certified Valuation Analyst (CVA) • Private Investigator (PI), Virginia • Series 7 General Securities Representative (not active) • Series 24 General Securities Principal (not active) • Series 63 Uniform Securities Agent (not active)

PROFESSIONAL ASSOCIATIONS & AFFILIATIONS • American Institute of Certified Public Accountants, Member • Virginia Society of Certified Public Accountants • Association of Certified Fraud Examiners • National Association of Certified Valuation Analysts • Institute of Business Appraisers

PERSONAL INTERESTS • Private pilot with instrument, multi-engine, high performance complex and aircraft ratings • Gold and fishing • Reading and politics

Lawrence J. Hoffman, CPA/CFF, CVA, CFE

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