The 401(k) Audit CPA Success Show: Episode 20
Knowing the right questions to ask can make all the difference when looking for a 401(k) audit service provider. In this episode, Jamie Nau sits down with Summit CPA Group's Director of Auditing, Kim Moore, and 401(k) Auditor, Karen Hill to discuss what you should consider in selecting a 401(k) provider.
Jamie Nau: Hello and welcome to today's podcast today. I'm really excited because we are joined by our audit manager, Karen Hill, in addition to our normal podcast host, Kim Moore. So, we are really going to have a three way conversation here, and I'm excited for the topic as well. So, we are going to talk about what you need to think about when you're selecting your 401(k) audit provider. But first, I wanted to welcome you to the show Karen, how you doing?
Karen Hill: I'm doing well. This is my favorite topic. Excited to dive into this.
Jamie Nau: Yes. Let's go ahead and dive in. All right, Kim, I'm going to throw it over to you first. So, let's just do a real quick intro. I know there's a lot that goes into it, but first things first, what do you need to think about as you're going down this path?
Kim Moore: Yeah. The first thing we like to point out to everybody, and this is based on our experience talking to several folks online on the phone, et cetera, about they need an audit, and they're usually shocked. And they first find out that that's even a potential that they might have to have an audit. So, once they get over that, then they're really looking for somebody. And then they very quickly go to and how much is it going to cost? Because to them, we're all the same, as long as you can get me something called a 401(k) audit, whatever that is, I'm good. And I don't want to pay any more for it than I have to, because I don't want to say it's of no value to them, but they're only doing it because it's a regulatory requirement. And they don't know that usually first time through, they don't know that much about it. They've never had one before. So as long as you say you can do it and you can do it within the time frame needed, that's all that they really are concerned about. And so really it just comes down to price and whoever’s cheapest that's who they're going to go with. We are going to talk a little bit about price at the end today. But really, one of the very first things we want to stress with everybody is that although price is important, of course, it should not be your only consideration. And it should not be your primary consideration, not only just because it is going to be a financial site for your plan. And obviously, you should want to get a quality provider. But also, because as a fiduciary, and we've talked in prior podcast, the fiduciaries, anyone with primary responsibility to the plan, so that would be the trustee or the plan administrator. Really, anybody that deals with the plan on a regular basis can usually be deemed a fiduciary. So anyways, those fiduciaries have a responsibility to the plan and the plan participants. And from a legal standpoint, if you don't get an auditor that knows what they're doing, and so they give you something that's called an audit that really is deficient in a lot of ways, you may feel like, well, it's the auditor’s responsibility, and it is. But from a legal and regulatory standpoint as your responsibility as a fiduciary to make sure that that audit is of good quality and covers all the areas that you need. So, getting the cheapest person out there or firm out there is probably not the best route, just because maybe cheap now. But in the long run, if that audit gets flagged by regulatory authority, then you're going to have to pay another auditor to come into it. You can have penalties and fines from those regulatory agencies. It's a lot of work at a time when you weren't planning on it, so it can be a real problem for you down the road.We always like to start there. We want to make sure that you understand that right out of the gate.
Jamie Nau: I think that makes a lot of sense. I did audits. It’s been 10 or 15 years now, and I think hiring someone like me probably isn't the best path to go, or calling up some friend that used to be an accounting and saying, hey, do you mind doing my audit for me? That probably isn't the best path. So, Karen, I'm going to throw this question over to you. So, when you're talking to an accounting firm, when you're talking to a CPA firm, what kind of questions did you ask to understand their experience.
Karen Hill: How many 401(k) audits do you do every year? How long have you been doing these audits? Make sure they don't just do a couple of them every year. You want to make sure that whoever is doing your audit knows what they're doing because they need for 401(k) audits are different than financial statement audits. There are certain things that are just they have certain quirks to them. And your auditor needs to understand that.
Jamie Nau: I think the big thing there, too, is that they are changing, right? They're changing every year. So, you want to make sure you have someone keeping up on the guidance, keeping up on all the rules, and really understands what has changed over the last year, because if someone hasn't done audit in three years, the criteria they're applying to the audit might be dated. So, I think it's really important to ask those questions because I think there's multiple different levels of what firms do when it comes to 401(k) audits. Some firms, like you said, that's all they do. That's their bread and butter. That's all they do. Then there's firms that do that as well as maybe some small, other compliance type audits. Then there's some, big firms, like Grant Thorton, when I worked there, went back and forth every year on how they were going to do 401(k) audits. Sometimes it was just the same auditor that was on the main account, and some years we shipped all those out to Dallas or whatever. So, I think just really understanding who's going to do the audit. What kind of experience they have is really important.
Kim Moore: There is more to just the years of experience. So how many audits do they do? What's their background in doing these? As you mentioned, I'm here to service my clients, and I'm only doing the 401(k) audit. If a current existing client needs one versus here at Summit, this is what we do. It's just for one audit. We're not doing a lot of other work for the client. We're specializing in just their 401(k) audits. That really helps you to nail down the type of firm are you working with. Knowing their background and experience. I would ask not just at a firm level but ask who's going to be working on my audit. Now, if someone were to call me today, I couldn't tell them exactly the so and so person that's going to work on it, but I can give them a general idea. This is the kind of staff that we have. Is it going to be a group of people? Is it one person? Is it two or three people? A lot of them are done in the summer so some firms might get an intern or somebody right out of school and say hey, let's go give them that. They may not be very experienced. So, they're going to be asking you a lot of questions where you're sitting there thinking, why am I paying these people to tell me I did everything right when I'm describing how I do the work myself, how qualified are these people? That's a common thing that we've all seen. If you've been in auditing for a while, that's not all that unusual. And that's not really how it should work. But it does happen. So, I would really dig into it a little bit more on how many audits does that firm do? What kind of staff do they have? How many years’ experience do those folks have? We mentioned that this is an ever-changing space. So how do they keep up on all those changes? It's a very technical area, and it's not easy to keep up with the latest and greatest on what's going on. So, I would really dig in and get the as much detail as you can.
Jamie Nau: I think that's important. You want to make sure you're asking the right questions and listening to the answers. That you're not just checking off a box when you ask those questions. You do want to make sure that the person that comes in is bringing the right experience, because that's going to make the audit a lot more comfortable, a lot easier. It's going to make it a lot less frustrating. Maybe it's also going to give you the right result you want, which is ultimately the reason you're doing this. A lot of our listeners might not know this, but as an auditor, you get audited as well. And again, we don't really call it an audit.
Kim Moore: Yeah. I think the vast majority of folks don't know that. But because we do audits and some other types of work, there are certain requirements that are driven at a state and national level around auditing and around accounting work in general. Certain things require what's called a peer review audit being one of the main things that require this review. And it is exactly that. It is a review by a PR firm. So, it has to be another firm that has nothing to do with your firm. It can't be somebody internal or a friend that you know or something. It has to be another licensed CPA not affiliated with your firm. And in our case, it has to be someone that has years of experience in the benefit plan auditing world. It can't just be another auditor, another CPA that's out there. It has to be a very specific kind of person. And now peer review rules are getting a lot stricter. They're changing every year as well. And so now these folks that are doing the peer review they're also audited. So, their peer review work of us will get audited by even another group of people. They have to complete several hours of training, specifically on peer review. So, they're going to get training on auditing. They're going to get training in our case on benefit plan auditing. But then they also have to get training on the peer review requirements as well. So, these folks come in. We're required every three years to have a peer review. They're going to come in, review some selections of our audits. They're going to select them. That's not our choice. They will select them randomly; we don't know ahead of time. So, then they're going to take a look at all the work we did and offer us feedback. And at the end of the process, they give us a report with a pass or fail. Basically, there's a couple of different designations, but it's mainly pass or fail. We just had our last year review. Last year, in 2020, we received a pass rating, which is the highest that we can get. We can provide it to anybody if they ask for it. But because we're a member of the AICPA Benefit Plan Auto Quality Center, it has to be public. So, if you go on to the AICPA site and just look for peer review results, you'll be able to see the latest peer review, the actual report that was done for our firm. So that's something I would definitely ask, if they have had a peer review? If so, when was the last one. What was the rating? What was their experience in the preview? And I'd ask for a copy. There should be no problem with the firm giving you a copy. And like I said, in a lot of cases, they're publicly available. So that's one thing. I would also ask, though, a couple of other things. Have they had the Department of Labor review any of their work? Because that's pretty common as well. If the firm that you're talking to does a lot of this type of work, more than likely, they've probably had a DOL review it. They only do a few. Then it's maybe less likely. But again, a good question to ask. And if they did, how did it go? What was the result? Did they have any findings? I would also ask them; and we do get requests for this from prospects every once in a while is what is the client experience like? Can you give me a client recommendation? Sometimes those will be on the website where you can actually see quotes from folks. Sometimes we have people ask that they want to do a call with a current client, and they want to talk to them directly. Sometimes just a reference will work. But again, I don't think it hurts to go down that path. If you've got the time, it does take time. You can drag things out. So, if you're going to do that, make sure that you're doing your due diligence and have plenty of time. But I would consider asking those questions. And then another thing you may not be aware of is you have to be licensed in various States to perform an audit. So, there's differing rules around this. Sometimes you have to be physically licensed. You have to go get a license in the state. Sometimes there's something called mobility, so certain States will allow if you are licensed in a state. Our home state here at Summit is Indiana. Indiana has some pretty strict requirements. So, if you are licensed in a state like that, a lot of other States will say we're just going to look at that licensing, make sure it's valid. If you don't have any current kind of things against you, and as long as your license is up to date and doesn't have any negative comments on it, they are going to allow you to do work in their state without requiring a license. So, it's a little different. Different States require different things. But I would definitely ask, are you allowed to do work in our state? Because the answer may be no. And it may be a situation where you're right across the line. Maybe you're very close to where a state line happens. And you may think, well, it's 10 miles away. What difference does it make? But actually, it can make a big difference. So again, I would double check that licensing is important.
Jamie Nau: License is important. I think you also mentioned calling previous clients. I think that if you do that right, it can be very valuable to you. I think just calling a client and being like, hey, do you like working with Summit CPA? Of course, they're going to say yes. They wouldn't give you that firm as a reference if they didn't like working with them. So, you know, that question is obviously can be asked, but I think that's an important one. I think another important one is to ask that client what the audit process is going to look like it's going to feel like. And Karen, I'd like you to go into that a little bit. Like, what type of questions would you be asking to the previous client in terms of what the audit is going to look like and what sort of things they should be looking for in terms of what an audit should look like during the process.
Karen Hill: One thing you would ask is, and this was less common before COVID. But now, especially since COVID, is it going to be an in-person audit or is it going to be a virtual audit? Because there are different expectations, or timelines can be a little bit different depending on whether somebody is going to come and sit at your office for a week or two while they conduct the audit or if everything's going to be done remotely. Another, this is even more so important if it's going to be a remote or virtual audit is how are you going to send and receive the information? A lot of the information in these 401(k) audits is privileged or confidential types of information. There's a lot of security numbers, birthdays, all sorts of things that could if somebody stole that information, could be really bad and could lead to identity theft and things like that. So, you want to make sure you understand the way things are sent and received. So, in a secure manner, to help prevent those types of things, here at Summit we use something called Smart Sheet where they can upload to Smart Sheet where we can get the information from that and vice versa. We can put our sample selections on Smart Sheet and they can download them that way. There's no sending something through email. Email is not very secure unless you have some sort of security on the email itself. So that way everything's encrypted and helps prevent that. Make sure that everything's done securely. Another thing you want to ask is how long did the audit take? Did they tell you that it was going to be done in two weeks and then it took six months? Or were they pretty reasonable in the expectations set? How many have maybe a range? And if they went over, was there a valid reason? Sometimes it does go over. Sometimes you schedule something out for six weeks. And especially last year, people got sick. All of a sudden, the client wasn't available, sometimes those types of things happen. Did they let you know when they were going to be out of the office? What else Kim?
Kim Moore: It's really going to go by what is important to you. What is most important to you as a client? Do you care about the interaction? So maybe you're more interested in how responsive they are. What kind of status did they give? I think a good question to ask is about their process and their deliverable dates or their kind of benchmark dates. Are they just saying, hey, we'll come in and we'll do your audit, and when it's done, it's done? And we think we can get it done by such as such date, or do they provide major milestones that they are going to track throughout the audit. You know, here's how long we estimate it takes from the beginning of the audit to the first one, and then from the first one is the second one. And then when you add it all up, here's how long the audit would take. We certainly have that here. So, we can explain to someone how the audit is going to proceed from the beginning to the first milestone. What kinds of things are going to happen in that time period? How long is it going to take? How much involvement do you have in that particular piece versus there are parts of the audit where it's more the auditor is off doing their work and they're not going to bother you. Or there are time periods where it's really documentation heavy. We need a lot from the client. Maybe we're going to need a lot from your provider. So, your record keeper, your custodian, you're a payroll system, so it may be easy to get. Those may be difficult. You should probably know that already. So, it's going to depend a little bit, I think, on what's important to you. With some folks we hear timing is important. I'm going to be gone or I've got a big project coming up, so I got to get this audit done. Extended calendar year plans are due end of July, but then you can get an extension into October 15. But we hear some folks come and say, hey, I got something going on. I can't be doing this in August. It's got to be done by July. Other folks, maybe they're going to be gone in the summer, or maybe they've got to leave so can your auditor work around that? Some may say I'm going to plan it when I can plan it, and you're going to have to accommodate my schedule. So, timing can be a big deal. I would ask about that. I would also ask about what kind of experience do you want? We talked a little bit about lesser experienced staff and that you might get the newbie that doesn't really understand auditing. And so that can have a lot of implications. You could be spending a lot of time with that person that you weren't planning on. You might have to give them a lot of information that you didn't really need because they didn't know what they were looking for. We all know it's a lot easier when it is one person you're dealing with versus a whole team of evil. So those are the kinds of questions I would ask when it comes to this stuff.
Jamie Nau: Should you ask questions about the type of training they're getting and what conferences they attend and stuff like that? Is that something you should be asking about as well?
Kim Moore: Yeah, absolutely. We skipped over that on our list of things we wanted to talk about. But this goes back to our comment about the complexity that we're dealing with here, the tactile nature of it and the ever-changing nature of the work that we're doing. It doesn't do you any good to have done a course. 20 years ago, or even 5 years ago, to be quite honest. And even a year ago, things are changing quickly. Yeah. I would ask again, who's going to be working on your audit? What's their background experience? How do they get training? How can you assure me that this person is up to speed on the latest requirements? And there are requirements in a variety of areas. So, it isn't just they went and did an accounting update and you think, well, okay, that sounds good. People who do not specialize they will not have that latest and greatest in all of those areas. I would also ask, and this would be true, regardless of what they're going to tell you in terms of the staffing. Is it a team or is it one person? The person who's overall responsible for that audit in that firm, in our case that's myself, with Karen as the backup here at Summit, what experience do they have? Because they're the ones that are going to double check everything. And sure, the staff may have missed something a long way. That's not unusual. We're all human beings and we miss things. But you always want to make sure that there's somebody that's going to review that work, that they do have that most current level of information. So, what kinds of training does that person go through? How many hours of training do they go through? I hinted at this, but we didn't talk a lot about it. There is something that the AICPA, which is the governing body for all accountants in the United States. They have something called the Belong Title Employee Benefit Plan, Auto Quality Center. It's a voluntary group. So, you can do these audits and you do not have to belong to this, it's voluntary. You have to pay some fees to belong to it. You have to do some additional training to belong to it. But they offer a lot of training. They offer additional tools. They're always sending information out that is coming down the pike. They also sponsor a conference. They actually do two a year. But they have one big conference that's in May each year. It's a comprehensive conference. That's about half a week. It talks about everything from beginning to end in these audits and especially focuses on things that have recently changed or will be changing coming up again. Not everybody goes to that. Usually, firms will send one person. We send our entire audit team to it. So that's something we do. You're not going to see that everywhere. I'm not saying you can't do a good audit if you don't send your whole team. But those are the kinds of things that I think you need to be asking. And it just shows the level of commitment that that firm has to this particular kind of audit, to the quality of that audit versus just someone who's just doing it because it's out there. It's another fee, another service I can provide. Those are kind of all the things I would take a look at.
Jamie Nau: I think the training is important. I know we've hit on that a couple of times in this podcast, but this is an industry that just changes all the time. All CPAs are required to do some amount of training. You want to make sure you understand current trends and are not falling behind. So, a couple of minutes left here and we haven't got to the part that everybody's waiting for after you've qualified these people, after you feel like you've found the right firm, how does the pricing conversation go? What should that sound like? What types of things you need to look for?
Kim Moore: Yeah. Pricing is going to differ for every firm. The one thing I'd say here is make sure you're comparing apples to apples. Just don't just take a price and compare it to another dollar amount. Make sure that you understand what is included in that price and what is not. Here at Summit, we use fixed pricing. So, we're going to tell you what the price of the audit is based on some questions that we're going to ask upfront, and we might need to verify some things, but we're going to ultimately get those questions answered, and that's going to drive a price, and that's the price that you're going to pay for the audit. We're not going to get to the audit and say, hey, it really took us a lot more time to do this than what we were thinking. So, we're going to have to charge you an extra so many thousand dollars or whatever. We're not going to charge you based on so much per hour. So those are the things that you've got to be careful about, even if they're giving you estimates. Just remember don't compare an estimate to something like a fee because they are different. And the estimate is probably not the final fee that you're going to pay. So, I would be careful and ask are there any hidden fees? If they're telling you an estimate, ask them what kinds of things could make it be different than the estimate? Is it based on how long it takes you? Is it based on the time of year that you do the audit? Some folks charge based on how big or how complex it is. So, those are the kinds of questions that I would be asking. The other thing we like to point out is that and I think it's probably true for every firm, there are different things that can happen in a plan that will change the price. A good example would be you change your record keeper custodian. So, you're moving from Provider A, who's actually going to give us all of our information. You change over to Provider B and you do that in the middle of the year. So instead of us going and getting all of our information from Provider A that covers the entire year, now we've got to get it from A and B cases. We got to add it together. We got to test the transfer from A to B. So, it creates more work. It can be the same year, same time period, the same plan. You didn't really change anything. All you did was go from A to B, and yet it's more work for us. So, I always like to point that out just because right now you may have an auditor and you may have worked with them and everything's great, and all of a sudden, they're giving you a pricing for the upcoming year, and it's more and you're like, why would it be more? There's nothing different here. Part of the reason, maybe because you've made a change like that, or maybe you're thinking of making the change down the road, maybe next year, the year after. And you're thinking, why would I tell my auditor? What difference is it going to make to them? They're just going to audit whatever it at is the end of the year. Well, it can make a big difference. So, I would always encourage you, even if you already have an auditor. If you're thinking of making a change, give them a call, even though it's not time to do the audit yet. Just give them a call and say, hey, I'm thinking of changing this procedure, or I'm thinking of changing from A to B or I'm thinking of changing my payroll provider that can impact that as well. So, anything that you are thinking of changing that may impact the space, I would suggest you call the auditor because maybe you're going to change for a very small fee differential between provider A and B, and it's $500 or something, and then you find out it's going to be $2,000 more the audit. So maybe it's really not worth it. Or maybe the auditor can have some good information, you know, that, hey, we think that provider you change it to is great. We've had some clients with problems in that area, so I would suggest you let them know. But pricing just make sure you're comparing comparable prices. Ask what could change that price? And don't just take the first one you get.
Jamie Nau: Yeah, for sure. I'm going to ask Karen this question just because I know you're doing a lot of audits and you're in the weeds there. But I think talking about the fixed price first hourly, like you do a lot of audits each year, like how much variation goes into each audit in terms of how many hours you put in on the audits?
Karen Hill: Well, it varies greatly, and some of that's related to the size of the plan. There's one plan that we have here that is extreme, that's fairly large, and takes a lot more time even though they're with a provider that is pretty easy to work with. And that's the other thing. Sometimes the providers can make a difference, but in this case, it's so large. We just have to do a lot of work because we have a lot of testing. They just have a lot of transactions. And the more transactions there are, the more that you test. And then you can have a smaller one. And usually that takes less time. But then again, it depends on the provider. The time it takes can vary sometimes with a fixed fee.
Jamie Nau: I'd say to me as a consumer sometimes it's nice to know what the price is going to be. The price is going to be going into it because when it comes to these audits, there's so many things that are unpredictable that are very hard to predict in the sales process. Well great tips today. I think this was very informative for our listeners. I appreciate Karen and Kim joining the show. I know it was your first podcast Karen, I appreciate you coming on. We'll bring you on for more. You did a great job, and thanks to all our listeners. As always, feel free to reach out to us at: firstname.lastname@example.org. Thanks everyone.
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