The 401(k) Audit CPA Success Show: Episode 27
In today's episode, Kim Moore, Summit CPA's Director of Auditing will be our host together with Karen Hill, Summit CPA Group's 401(k) Senior Auditor to talk about a situation that we often see on the operations floor - misunderstandings and tension between the auditor and the company being audited. Knowing how you can interact and communicate better with your 401k Auditor can help avoid several unnecessary conflicts and wasted energy. We will be sharing tips and tricks of the trade that can help make the audit smoother for everybody.
Building Stronger Relationships with your 401k Auditor
Kim: Hello everyone. This is Kim Moore. I'm the audit director here at Summit CPA Group. And I have Karen Hill with me. She's the manager of the team. Uh, today's podcast for the 401k audit CPA success show is going to be about interacting with your 401k plan auditor. I thought it would be a good time of the year for us, to go through this. If this is a year that you're having an audit for the first time.
Kim: Uh, or maybe you've not had good relationships with auditors in the past. We thought this might be a good podcast for you to kind of get some ideas and some tricks of the trade that, that, that we've learned. Um, both Karen and I have audited for a long time. So, um, some things that we know that help make the audit go smoother, um, and for, for everybody.
Kim: So, so welcome. Um, and we're, um, we're just going to kind of go, go down through things. These aren't in any particular order, I kind of tried to do them in the order that I thought made sense as you're progressing through an audit, but, um, we'll kind of add-in our thoughts as we go along. Um, first thing, an audit has a lot of documents that are.
Kim: Uh, that's true of any audit, but a benefit plan audit is that's especially true because you're proving out a lot of things during an audit. Um, so if you think about the life cycle of a participant in a plan, everything from their first becoming eligible and deciding, do they want to get in the plan all the way so they're ready to retire and they take their money out of the plan as they're working through the retirement process.
Kim: All of those pieces and parts are things that your auditor is going to want to look at. So, um, any problems obtaining documentation delays in getting it, uh, misunderstandings around documentation, um, trying to tell the auditor, you don't really need that. Those, all those things are going to cause you problems in an audit.
Kim: Uh, they're going to cause delays and. And also just heart feelings with, with the auditor. If, if, if you keep questioning everything they're asking for. So, um, Karen, you want to kind of go through just a few examples, of things that, you know, we would be looking for in a 401k plan audit so people can plan ahead.
Karen: Um, well, the first thing that we need is the plan documents and these documents need, or should be signed documents now, not everything is signed. Like if you have. The, um, determination letter or the opinion letter and the actual basic plan document. Those may not be signed. Those may, those are more standardized, but the adoption agreement and any amendments that you have should be signed.
Karen: Um, some, if you don't have those, get in contact with your record keeper and they likely will have, hopefully, they'll have copies of those for you. You probably were provided them at some point. So maybe it's just a matter that they're sitting in. A file somewhere and you just have to hunt them down. Um, the other thing that we need is documentation from human resources, things like I-9s offer letters.
Karen: Um, sometimes if, if you don't have handy, uh, we can use w fours, um, medical forms, and that's just basically to help provide documentation for some of the things that we're testing during the course of the. Um, also, since we're going to be testing, what was taken out of the participants, uh, paychecks will need payroll reports.
Karen: Um, usually we'll ask for them for the entire year, but it may, we may actually ask for specific payroll reports or asks for them, um, each one at times, or if you have, if your system has a way to run the payroll reports where you can give each, each person. Payday and all of their, in their different deductions.
Karen: Sometimes those are helpful too, but in general payroll reports are something that's really important for the audit. And then, um, you also will need to have, uh, some tax information for us, the W2's that you hand out, um, those, those are needed for also different things that we test for, but also it's really helpful on the W2's.
Karen: As you can see. What is reported for tax purposes, as far as the contributions, the deferrals that the participants took out of their,
Kim: their pay. Yeah. It's a lot, it's a lot of stuff. Isn't it? A lot of documentation.
Kim: Yeah. And I think the other thing that we had, I interrupted you there, but I'm also giving a little thought as you. Going into an audit, or if you're having your first meeting with the auditor, um, playing a little bit of head and maybe talk amongst yourselves within your company. How did the last year go?
Kim: Because you're always doing an audit after the fact. So, you know, you're always auditing the prior year. Not currently, not what you're currently working on, but the prior year. Um, so have a little conversation about how did the year go, um, and, and try to think back it's hard cause it's, you're always a year behind.
Kim: And so maybe even making notes as you're going through the year will be helpful because then you can, it'll jog your memory when you're having those conversations with the auditor, but anything that was unusual that happened during the year or maybe errors, you know, that happened, even if you fix them.
Kim: And so they're all fine. By the time the auditor comes in, the air has been corrected. A lot of times, those things will still come up and the auditor doesn't know. That there was an error. They don't know that you fixed it. They're just going to see a discrepancy. Um, but if you can give them that information upfront, it can save you a lot of time.
Kim: So instead of the. Finding it not knowing what it is. They already have kind of a heads up. Oh, I should probably be looking to see if I see this, and then as they're going through it they're oh, yep. There it is. And they already know that whatever actions you took, they already know that. So they don't have to come back and then you've got to go research.
Kim: So anything you can do, to gather that stuff up ahead of time, or even just think it through in your mind so that you're ready to answer those questions. Um, you'll find that will be very helpful. Um, it'll make your auditors happy cause they don't have. You know, come back to you. They already know the answer and those kinds of things do tend to come up.
Kim: So, uh, don't think that, well, if I don't say anything, they probably won't even know. Usually, we actually find that a lot of averages usually comes up.
Karen: If you have one person. There is a decent chance that the auditor will pick that person. It's just the way that it works. And even if you're, if you just have email chains, if you talking back and forth with the TPA, that can be helpful to the auditor during the audit.
Kim: Yeah, absolutely. And I mean, that's a good thing. One of the reasons I wanted to go over this with everybody is, you know, what can I do now to prepare for an audit that I may have in the future or next year's audit? Um, I mean, a good thing is just keeping up a little cheat sheet over to the side. You know, you can have a piece of paper or you can do it on, on a word document or something and just keep it to the side.
Kim: And then that way, when you get to the conversation with the auditor next year, you've already made notes of things that happened throughout the year. And you don't have to rely on your memory, which I know for myself would, would be tough to try to remember all that stuff. So, um, so that's the first, first thing we had, um, uh, on our lists.
Kim: Anything you can do, to make sure you've got that documentation would be a good thing. Um, second thing. When you're starting the audit, almost all auditors will have something called an opening meeting, um, or a pre-audit meeting or they'll call it various things. But your first meeting with the auditor to kind of get things going and to review items that are needed for the audit.
Kim: And there are various things that different audit firms will go through in that meeting. A lot of times people look at that as kind of that, well, they have to do that and I know it's native, but really there's no point to it. Um, you know, they're, they're going to dig into the media audit, and then that's what really matters.
Kim: But that opening meeting is really important and can set the tone for how things are going to go. So make sure that number one, you're having that meeting with your auditor, make sure you get the right people there that can actually. Contribute to all of the discussion items. Um, the auditor should give you an agenda of what they're going to talk about ahead of time, so you can make sure you've got the right people there to talk to the points that are on that agenda.
Kim: It's a little bit of planning for that. I know it's, you know, it seems like a lot of, a lot of work for just one meeting, but that can really help make sure that the audit gets off on the right foot. I listed a couple of things here in my notes, the things that if they're not included in that agenda, that I think would be a good thing, um, to make sure that you cover, um, during that opening, the first thing is expectations.
Kim: What, what is the auditor feel, um, is going to be needed for the audit? And, that includes things like time. How long is the audit going to take? When are they going to start it? When do they anticipate wrapping up? How much of your time do they need? When do they need that? What do they need you to do during those times?
Kim: They should be able to answer all of that, um, for you. And then that will help you to plan out the last thing you want is for them to say, well, my intention as the auditor was to, to do this work during, you know, the second and third weeks of May, and you're going to be on vacation then, or you've got something project that's going to interfere with that.
Kim: Um, you don't want to wait till then to have that discussion. You want to have that discussion upfront so that everybody's on the same page. They're ready to do the. And they know what that work is and they know when they need to do it. And so everybody can stay on track. Um, no one's delaying the other party.
Kim: Um, so just having those discussions, um, is really important upfront. Um, you can also talk about who's going to be doing the audit. So what staff is going to be working on it? Are they coming to your location? Are they doing it remotely? Like we do here at the summit. But if you have questions about things, who should you contact, um, do they want it all funneled through one person?
Kim: Or should you talk to you? There might be two or three people working on the audit. Should you talk to those three people? Um, those are all things that can be very upsetting to the audit firm. If. Not following their protocol. So just have discussions about that. I mean, just be upfront with it, um, and ask them, um, about that timeline is very important.
Kim: You wanna make sure you're following the timeline, um, that, that you're agreeing on, and it should be a discussion between the two parties, the client and the audit firm, you know, the audit firms got other audits to do. They can't just jump on something because now you're ready. I mean, they're, they've got to schedule out their work, but you're busy too.
Kim: And we, you know, we as auditors understand that. It's very important that everybody's coordinating their schedules and then they stick to those schedules. The last thing I had on here was due dates. It a very important to keep in mind that these audits are due. If your calendar, your plan, they're due by the end of July to file with the form 5,500, or if you get an extension, which you'll work with your service provider to obtain, and you've got till October 15th, but you don't have an unlimited amount of time to get these audits done.
Kim: They do take time to finish them. So don't, don't figure, oh, it's due at the end of July so I can go find it. 1st of July and get started around July 20th. And I'll be good to go. No, you, you're not going to be filing on time if you do that. So, so make sure you, you keep that ma those due dates in mind, kind of as you're working through things because, um, you know, they, they're really important and there, it's hard to get back time once it's gone.
Kim: So, you know, it doesn't do any good to say, boy, I wish I would've started this earlier, cause that's not gonna really help you. So I don't know Karen anything. You can think about those points.
Karen: Um, uh, just, just to kind of reiterate, if you can't provide the documentation that's been requested, you can't stick to the timeline.
Karen: That definitely is going to affect how quickly your audit gets done. And it might cause them if your auditor has a full schedule and you're not ready when they're ready and you gave them no. There's a chance that your audit it'll be put on the back burner and back of the line, and you might miss the deadlines now.
Karen: I mean, we know that things happen. Um, but as soon as you know that you're not going to be able to make a deadline, you need to let the auditor know there we're much more willing to work, work things out and try to find time if you give us notice. Instead of we look as like, oh, there was, this was supposed to be here and it's not.
Karen: And then you w you know, we ask where it is and say, Hey, what happened? And no response, or just keep pushing, pushing it down the road. Just let us know if there's an issue, let us know up front, and we can work. We can probably work things out and try to juggle things
Kim: around for you. Yeah. I, um, I always describe the audit kind of timeline as, uh, an airplane on a runway.
Kim: You know, it takes so much runway to get the airplane. You know, off the ground and into the air. Depending on the size of the airplane and how much cargo is carried and everything else. And, you know, you only got so much runway and as you get to the end, um, you know, the airplane is probably gonna either not take off or crash if you, if you leave it too long.
Kim: Um, and, and in this scenario with the, with the audit, um, you'll put the audit firm in a bind that they've got a lot of other audits to get done. Things do tend to get pushed. And so there's a lot to do very close to those deadlines. And so you want to avoid that at all costs because some audits at that point will not get done and you don't want yours to be one of those.
Kim: Um, and it'll be out of the control of everyone. And you think of that error, the airplane once, once, you know, if it needs a certain amount of space on the, on the runway to be able to take off and you didn't have that much left it's, it's not gonna end well. So that's the best analogy I can use to try to describe that.
Kim: Um, the other thing I always liked to mention is everybody thinks, well, I have. You know, the end of July or that October 15th. Um, and as long as I filed by that date, I'm good. And that's true, but you also need to remember that there's a whole lot of. Even once the audit is done and I can give you the completed audit.
Kim: You're not done. You've got to take that audit. It's got to get filed with the form 5,500. It's an electronic filing. You have to have IDs and passwords and things to get into the system, which is what you use to file it. You can't file it any other way. There, there is no other option. The DOL does not allow you other options.
Kim: And that system is very old. It gets bogged down when you get close to those deadlines. So you may be all ready to go. And it's still the day of the deadline and you may not be able to get it successfully filed. It's just a technical issue. So we always stop people if at all, possible, try to get your filing plan for your filing to be done at a minimum a week before the deadline.
Kim: Because once you get into that last week, everybody's trying to file and, it just gets very, very difficult. Have a successful filing on time. So just keep that in mind as well. Um, the next thing I had on the list was to check in periodically. Another thing for you to talk about in that opening meeting, um, you know, your own schedule, you know, how busy you are, you know, do you prefer conversations with folks, um, like this in a video setting?
Kim: Do you prefer a phone call? Do you prefer just an email? Um, but you don't want to assume that the. Is moving along, they're sticking to their timeline. They've got everything they need. They're not having any issues. You don't want to make those assumptions. You want to make sure that the audit is staying on track because ultimately it's your responsibility that the audit is completed, not the auditors.
Kim: You know, obviously the auditor has a responsibility too, but the ultimate responsibility lies with the client and the sponsor of the plan. So. You know,, we encourage people to have an honest discussion with our auditor, um, upfront and then hold them to it, to the dates that the auditor has agreed to. Um, but that also needs constant communication to make sure that everybody's upholding both ends, that you're getting them what they need.
Kim: And then that they're looking at it timely and, and passing back the questions that they have or, um, additional information that they need. And so we recommend that you set up. A regular feedback loop on that. Now that might be once a week, might be every couple of weeks. It might be daily. I mean, it depends on, what timeline you've set for the audit.
Kim: And again, that could just be a quick email. Um, I'm on track, you know, don't need anything right now I'm working to our timeline, no issues, um, or, you know, it could be a, uh, a, um, we've got a guest, um, or it can be a. You know, a more formal process, if you prefer, you know, video chats with your auditors, um, you know, or if they're going to be onsite, you know, make sure that you're having communications while they're on-site and then communications after they leave.
Kim: Because more than likely they're not going to be totally complete when they would leave your office. So. So all of those things are important and we encourage you to set up regular communications. Don't wait to find out something's behind it. You want to know that ahead so you can, you know, you can stay on track with it.
Kim: Um, another thing I made a note on here. Some of the information that the auditor is going to get is going to come from the service provider. So that's your TPA, your record keeper, potentially your custodian. They might need things from your payroll company. If you use an outside payroll provider, um, some firms now are using outside HR firms.
Kim: And be another provider. You might need things from, and sometimes even from an investment advisor as an example. So those are all the providers that you use for your 401k plan. Your auditor is probably going to either need information from or to talk to for various inquiries that we need to do. You're going to have to grant them access for that.
Kim: You're also going to have to help the auditor if the provider is not providing information or they're not being timely about it, um, you know, you're, you're going to need to work through that because the auditor can't do that without your help. Um, so, you know, make sure that that you're following up on, on those kinds of things as well.
Kim: 'cause the, uh, that could be a sticking point for the audit. And sometimes the auditor will need that information to progress the audit. So there is a sequence of events that have to happen, and if they can't get that information from the service provider is going to prevent that section of the audit from progressing.
Kim: So it's very important that you ask, not only am I giving you everything you need but just in more general terms, are you getting everything that you need for the audit? Um, so, so again, um, check-in. Um, frequently. Um, because you know, that's, that's gonna be important to keeping your audit on track. Um, the next thing I had down was documentation required, we've, we've talked a little bit about the documentation that you need, and we're not going to list it in this podcast.
Kim: Every single thing you'd need. Cause we'd be here for a lot longer than we're scheduled for the podcast. Um, and it's, it really is gonna come down to what the auditor needs. So they're going to give you a list or a portal to use to put that documentation. And there are various ways that. Asked for the documentation.
Kim: Um, but you need to make sure that you're getting a list or that you have a list or some, um, way to know what you're supposed to provide when you need to provide it. And, and then a way to keep track of on that list of maybe 50 items that I need to provide for you. Which ones are still open, um, and also communication back and forth.
Kim: You may feel that you provided everything for the item, number five on the list, but the auditor may look at those items that she provided and it's the wrong things, or it's not all of them. Or they need additional items, to complete whatever the testing is required for that particular area. So, um, we here at summit use a tool called smart sheet.
Kim: Um, and I'm not trying to endorse a tool here, but it's a way that we use to get information back and forth between the client and, and whoever's working on the audit. Uh, and it looks a lot. If you think of an Excel spreadsheet, it looks a lot like that. So it's got columns and lines and then each line is something.
Kim: That you need for the audit and whoever's providing information can attach the documents directly on that line. So we, as auditors, don't have to figure out, um, you gave me some information, but I don't, what am I supposed to do with this? What was that supposed to be relating to off of my request listing?
Kim: We don't have to figure that out because it's attached right. To each particular line. So we can really quickly scan it and say, you know, I asked for 20 W2's and you gave me 20 w for. So it's still tax form kind of close, but not exactly what I need, um, or, uh, you know, I'm asking for and I can quickly scan and see, I asked for 25, he only gave me 20, so I'm still missing some, um, so how this stuff is organized, um, can be very helpful.
Kim: Now your auditor may use something else and it may work just as well. Um, but you want to make sure that again, you're discussing with the auditor upfront and then as you go along. Are you providing all the information that they need? Another thing that I put in this area is to make sure that, um, you're clarifying with them.
Kim: If there are things you can't find or, or, or you just, you don't know what it is. Um, you know, don't, don't make the assumption that they asked for 2,500 nines. And I could only find 20 of those 25, um, that they're just going to say, well, okay, forget it. I don't need those. No, they're going to need something.
Kim: So, um, if that's the case, let them know upfront that Hey, of these five, I couldn't, I can't find them in the company. We don't think we have them. I mean, that's an issue, but we can move beyond that and use other things. But we need to know that, um, uh, or if you're still looking, say, Hey, I'm giving you the 20 and I'm still looking for these five, but can you work with these 21?
Kim: I go locate those five. Um, whatever the situation is, you know, let them know. Um, anything else Karen, that, you know, you can think of along those lines?
Karen: Um, no, I just would like to, you know, emphasize that if you can't find something, there is for some things, especially the eye nights. Yeah. There's a reason why we asked for it, but you can get that information in other places too.
Karen: Uh, so, you know, ask the auditor, if you can't find something. Or if it's filed away and it's going to take a while to get, cause I know sometimes, you know, if we had terminated employees, sometimes that stuff's boxed up and moved off-site, you know, let us know. We might be able to use something
Kim: else. Um, or we can always there's usually always an alternate procedure or we might need to select additional people.
Kim: You know, you just absolutely cannot find documentation for that one person. Um, we might need to select additional samples, um, but knowing all of that upfront help keeps the audit on track so that you're not, you know, moving it starting to get behind the schedule. So communication here, you're going to hear, uh, you know, a common theme.
Kim: Communication is really important to keep everything on track. Um, we mentioned, that a lot of this info, there's a lot of information live documentation you'll need to provide. This real quick note here, keep in mind that most of what you're going to give us is very highly confidential information.
Kim: So, you know, social security numbers addresses could be bank account information could be medical information. In some cases, almost everything in a benefit plan audit is going to be considered confidential, private information. And so you don't want to be. You know, mailing it, email it, please. Don't email.
Kim: Um, every time we get something email, we all cringe because we know that that could be high-risk behavior. So make sure that again, in that opening meeting that we talked about if you're going to need to provide information, other than they're sitting in an office and looking at the piece of paper, but if they're going to look at something electronically, which is almost the case a hundred percent anymore, that you arrange a secure mechanism.
Kim: Um,, to arrange for that documentation to be provided. And the same thing back from the auditor to you, there may be confidential information. And did you don't want everybody to see, so, so make sure you've got, um, uh, a mechanism that's encrypted? Um, that's going to be secure for the infant that transfers.
Kim: Um, I just had a couple of closing comments, but, um, Karen Karen's guest is, is just, he's not being, he's not. He's talking in another language we can understand. So
Karen: there's, there's a dog outside that he hears and he is desperate too,
Kim: he wants, he wants to have a conversation with the other, with the other friend outside.
Kim: So one of the perils of working remotely is we all have. Commitments, uh, you know, other, other things going on that, that, that tends to intrude. It's a 60-degree day in
Karen: the middle of February. So everybody's like, yeah, the dark can stay outside
Kim: for a while. The dogs are running around. Everybody's, everybody's happy.
Kim: Except for us working in. Um, so I'm, I'm just going to wrap up our podcast today. I'm hoping that that's helpful given you some, some tricks, uh, to, to work the audit with your auditor. And, um, one of the last things I would say is, is just be patient, um, you know, work, work with your auditor. They're trying to do the best that they can to get your audit done, um, timely.
Kim: But, we all have professional standards. We have to adhere to it. So. You know, be patient with them. And if you have concerns, bring them up. Um, as I mentioned, communication is key here, so don't be afraid to ask questions. Don't be afraid to ask why you need that particular. Piece of information, you know, auditors don't mind explaining now be careful because the auditors need to apply procedures and you know, they're not going to not do something just because you ask a question, they're still gonna go down the path of needing the information.
Kim: But, um, you know, as long as you're asking in a nice way, you're explaining, you know, why you're asking and, and what your concerns are. You know, we want to hear those. We want it to be a good experience for you as well. So don't be afraid to speak up. Um, if. You know, something's not going the way that it showed or you have questions.
Kim: Um, communication is kind of the key to making this work. So, um, with that, I'm going to wrap up the podcast. I want to thank Karen for, being online with us today. And if you have any questions about this, um, or if you have ideas for future podcasts, um, I'm actually going to give you my, my direct email it's K letter K, and then it's more M O O R E.
Kim: So K more. At summit CPA, that's S U M M I T. cpa.net came firstname.lastname@example.org. So if you would like additional information about the discussion we had today, or if you have ideas for future podcasts, something that you'd like us to delve into a little bit deeper, we'd love to hear from you. So feel free to send me an email and I'll get back to you as soon as I can.
Kim: So thank you for watching and enjoy the rest of your day.
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