September 18, 2014
By Salvatore J. Armao, CPA/PFS, CFP, CFE, CGMA
As a Fiduciary, would you feel comfortable if your benefit plan’s independent auditor did not apply any auditing procedures to your plan’s investments? Do you think the plan’s participants would be happy to know that the plan’s investments were not being audited by the plan’s independent auditor?
When a plan administrator instructs the independent auditor not to perform any auditing procedures with respect to investment information as is allowed under ERISA section 103(a)(3)(c) the independent auditor performs what is called a “Limited Scope Audit”.
The fact is that approximately 70% of the audit reports submitted to the Department of Labor (DOL) with annual 5500 filings are limited scope. This is allowed under section 29 CFR 2520.103-8 of the DOL’s Rules and Regulations.
In order to qualify to use a limited scope audit instead of a full scope audit the plan’s investments must be held by a qualified trustee or custodian such as a bank or insurance company but not a broker/dealer or an investment company. Additionally, the plan must obtain a certification from the qualified trustee that certifies that the value of the investments is complete and accurate.
Phyllis Borzi, Assistant Secretary of Labor of the Employee Benefits Security Administration (EBSA), was quoted as saying “The limited scope audit is practically useless” and “Limited scope audits do not protect participants”. Ian Dingwall, EBSA’s Chief Accountant, said recently about the limited scope audit “We don’t find limited scope audit reports very valuable”.
Although some will make an argument that although the investments are not audited, all of the other audit procedures that are done in a full scope audit are performed in a limited scope audit.
When you consider that on average about 90 to 98 percent of a benefit plan’s assets are made up of investments, that argument doesn’t provide much comfort.
As a plan Fiduciary who is responsible to safeguard the plan’s assets on behalf of its participants, you should probably reconsider whether or not a full scope audit is more appropriate for your plan and its participants.