If you are the Plan Sponsor of a 401(k) that requires an annual audit, you may have asked yourself "why does my audit take so long". We often hear that audits are completed at or very near the 401(k) audit deadline. However, they may have actually started much earlier. That begs the question – why did it take so long? Let’s explore some of the reasons.
Documentation that is needed for the audit is not received.An audit is all about documentation. There are several steps that are required to be completed in an audit. These are dictated by audit standards, accounting rules and the types of transactions that occurred for your Plan for the audit year. The auditors will request specific documentation to satisfy each test step. If the documentation is not provided or does not provide all the information needed by the auditor, it will delay the progress on the audit. Note that documentation usually needs to come from the client/Plan Sponsor but also from their providers such as the recordkeeper, TPA and/or custodian. If your auditor asks for a specific item and you cannot provide that item, ask the auditor what you can provide instead to help them satisfy the test step they are working on.
- Issues are noted during the audit.
Another key component of an audit is verifying that specific compliance requirements are met. In most cases, the auditor will have an expectation for each test step and they are reviewing to ensure your Plan met those expectations. For example, if you withheld $100 from a participant pay check for one pay period, the auditor expects to see a deposit of $100 into that participant account in the Plan. If the deposit is for a different amount or not made at all, that will trigger additional questions. The more documentation that you maintain for your Plan, the easier it will be to answer these types of questions.
- The audit is started too close to the 401(k) audit deadline.
We are often asked how long a 401(k) audit should take? Our experience shows that an audit when it is conducted to the audit requirements should take between 4 – 6 weeks if the audit is well planned, well executed, the documentation needed is received timely and no significant issues are encountered during the audit. The audit can, of course, be completed in less time if it is a very small audit with few transactions and take longer if it is a complicated audit and the documentation is not readily available. Plan Sponsors should plan ahead for their audits and ensure they leave enough time to ensure the audit can be completed timely and allow for time to file the audit the Form 5500 by the 401(k) plan audit deadline.
- The auditor or audit firm chosen is not experienced in conducting ERISA Plan audits.
The 401(k) plan audit is a financial statement audit. However, there are requirements unique to them audits. In addition, requirements for 401(k) plans and the related audits are ever changing as the regulations for the Plans are modified constantly. Annual updates are needed to ensure the audit staff is up to date on all the audit requirements and how to handle them. Also, firms that conduct many of these compliance-type audits will have specific tools that help them work most efficiently on the audits and ensure that each step is completed accurately the first time to ensure rework is not needed. Plan Sponsors should ask potential audit firms how many ERISA audits they conduct each year. The more audits of this type conducted, the better. Also, ask what type of training is required for the auditors that would most likely conduct your audit. You should not be expected to “train” the new staff at the firm on the terms used in a 401(k) Plan Document, how to audit deferrals, etc. The firm should be providing that training to their staff. This is a common frustration we hear when talking to potential new clients.
401(k) audits have specific requirements that are unique to the audit profession. They are technical, complex and highly regulated. For this reason, you need to make sure you hire a firm trained specifically to address your 401(k) Plan audit requirement.
At Summit CPA we specialize in retirement plan audits. If you would like to discuss our audit process in more detail or need an audit contact our office at (866) 497-9761 to schedule an appointment. We can help you navigate the world of the 401(k) audit as proficiently as possible. We also offer off-site assistance and flat-fee pricing so there are no surprises when the job is complete.