Ian Dingwall sits with Marla Janness, Leaders' Edge Editor, for an interview on pension reform.

As chief accountant of the Employee Benefits Security Administration, CPA Ian Dingwall is carrying out the Department of Labor’s stepped up efforts in pension reform. A DOL study identified deficiencies in about one-third of pension audits nationwide. Armed with new audit standards that focus on increased documentation and reporting internal control deficiencies, Mr. Dingwall is leveraging the impact of his small staff by concentrating on the quality of independent audits by certified public accountants.

Mr. Dingwall addressed nearly 200 plan auditors at MACPA’s 2008 Audits of Employee Benefit Plans Forum on June 11, 2008. He followed up his morning keynote address with an afternoon webinar broadcast to auditors in 30 states, then spent some time with Leaders’ Edge Editor Marla Janness for this Q&A.

LE: Pension plan audits are the subject of a lot of attention from the DOL. Can you provide a brief overview of the issue, and explain the approach being taken by the DOL?

Dingwall: Pension plans hold assets that participants expect to receive in retirement and to cover their health claims. At the DOL, we’ve determined we can leverage our limited resources to protect plan assets by making sure plan audits are done in accordance with professional standards. We’ve put an emphasis on disclosure, with the idea being that sunlight is the best “disinfectant.” By requiring plan administrators to account for plan assets through the Form 5500 process, and requiring independent public accountants attest to that information, we can be fairly comfortable that plan assets are being protected. The stakes are very high – the amount of money in pension plans is enormous and growing all the time.

LE: What pension plans are included?

Dingwall: Defined benefit plans and defined contribution plans – all kinds of plans including profit sharing plans, money purchase plans, 401(k) plans, ESOPs, etc.

LE: Why are the audits of pension plans so important?

Dingwall: The audits are important as a means of making sure plan assets are safeguarded. We want to know that plan assets exist, and that they are being properly administered. In many respects, the reporting process is an x-ray of how well a plan is being administered. The Form 5500 is a way we learn the identity of plans, what their assets are and how they’re operated. We don’t have the resources to go out to visit the millions of plans that exist, so we need to focus on the reporting process and emphasize the quality of the audits by the certified public accountants.

LE: How big is the problem with pension plan audits?

Dingwall: We know from doing an industry survey that about one-third of plan audits are not done in accordance with audit standards – they’re deficient. In other words, the audit has failed one or more GAAS requirements.

LE: What underlying issues have led to these problems?

Dingwall: As a fundamental matter, auditors have not necessarily appreciated that plan audits are unique. Employee benefit plans require specialized knowledge, specialized audits. And, frankly, plan administrators generally haven’t placed much value on the audit – many think of the audit as a commodity to fulfill a regulatory requirement. Because of that attitude, administrators haven’t wanted to pay much for these audits. Plus, the auditors unfortunately have not done all the work they’re required to do; many of them blame the fact that they’ve gotten a very low fee for these types of audits.

LE: How can CPAs help clients to understand the importance of the audit?

Dingwall: It’s important to recognize that the client is the plan participant, the beneficiary. The client is not the guy sitting across the table from you. These audits are done on behalf of plan participants and beneficiaries who DO value these audits. They DO expect their plan assets to be there. They DO expect to realize their benefits. They care very much that these audits occur.

As an example, I’ll tell you a real story about a woman named Jackie. Her husband was killed in 1982 in an air crash, and she now has a lot of money. A widow suffering with dementia and hospitalized, Jackie is counting on the system and the integrity of the system to make sure she receives the money she needs to live. She has no real ability to do anything more than trust the system. Accountants add the integrity to the system; and the independent audit is part of the integrity of the system. If the system has no integrity, then people don’t save for retirement and they don’t want to put their money into retirement plans. Frankly, the key is our independent certified public accountants. That’s what the statute had in mind.

LE: What are the primary deficiencies you’re seeing with the audits?

Dingwall: The audit deficiencies are generally related to areas unique to employee benefit plans – the audit of investments, the audit of contributions, the audit of benefit payments, participant data and allocations, and the audit of related party transactions (prohibited transactions). Auditors don’t always appreciate the need to audit in these unique areas. Oftentimes, they (auditors) just don’t do the work in these areas.

LE: What resources does the DOL offer to help auditors get it right?

Dingwall: The Department has a toll-free help desk number: 1-866-GOEFAST (1-866-463-3278). Auditors can get answers to questions on filing requirements, preparation of Form 5500 and audit issues.

We’re also working to improve the amount of educational materials available to auditors, so we’re working closely with the AICPA’s Audit Quality Center for Employee Benefit Plans. Each year, we write an Audit Risk Alert and the Guide to Audits of Employee Benefit Plans. And, we’re always working to improve instructions to Form 5500. The rest is a matter of compliance assistance, we do answer the telephone… call the help desk toll-free number.

Up until now, we’ve focused educational and training opportunities at the national level, now you’ll see us reaching out to the states. We’re paying particular attention to states where we find the audit deficiency rate is worse than the national average.

LE: What level of concern and response have you seen in Michigan?

Dingwall: MACPA has seized the opportunity to creatively put together training programs to help solve the audit problems in Michigan. It has been the most proactive of all the state societies we have dealt with so far. Today’s forum and webinar are examples of the level of importance placed on this issue. Plus, the MACPA has formed a special task force to develop future educational opportunities. The MACPA wants to make Michigan the best in pension plan audits.

LE: What is the DOL seeing/hearing related to the more stringent requirements for communicating internal control deficiencies, SAS 112 letters in particular?

Dingwall: In the past, when employee benefit plan auditors found indications of weaknesses, they didn’t necessarily have to write a letter. SAS 112 mandates that plan auditors write to their clients and advise them about material weaknesses and significant deficiencies they find as a result of the audit. Before 112, which kicked in for the 2006 audit cycle, there was no requirement for such a letter. Now we’re in the second year of the cycle, and we’re reminding auditors that the 112 letters have to be given even if they repeat what was written last year. The 112 letters are still appropriate if the plan administrators have not cleaned up their act.

LE: What’s the impact of the SAS 112 letter?

Dingwall: The auditors are writing the letters, and we’re hoping administrators will take the letters seriously and take steps to ameliorate whatever problems the auditors are identifying. Unlike the report on financial statements, these SAS 112 letters are far more “living” documents. They are very valuable for the plan administrator because it tells them where they need to focus to fix their problems.

The biggest problem with the SAS 112 letters is that people don’t want them because it documents their failures. It’s like a bad report card. Attorneys in particular have tried to protect their clients from getting these letters. So we caution auditors that they are required to give them under professional standards. If the auditors don’t write the letters when there’s a problem, we would view that audit as not being done in accordance with professional standards.

LE: What, if any, additional guidance is expected to help practitioners and plan administrators?

Dingwall: The AICPA plans to put out future compendiums of comments on SAS 112 and providing examples of SAS 112 communications.

LE: Can you tell us more about new requirements on the horizon, particularly in relation to 403(b) plans?

Dingwall: There’s going to be about a 10 percent increase in the number of audits as a result of including 403(b) plans (plans of not-for-profit organizations i.e. local hospitals, private colleges, etc.). Starting with plan year 2009, audits will be required of 403(b) plans. In the past, they have filed abbreviated information with us. In the future, they will be required to report on par with 401(k) plans. Frankly, it’s because there have been a lot of abuses in 403(b) plans, based upon complaints we’ve received.

LE: What does this mean for Michigan CPAs?

Dingwall: Between now and 2010 (when the 2009 plan audits are due), CPAs have an opportunity to make sure clients are on the right track. We’ll require that financial statements be comparative. So, now is the time to reach out to clients and tell them about this new requirement. Make sure they’re going to be able to put together comparative records for the 2008 year and the 2009 year, which is when the audit requirement actually starts.

LE: What would be your best word of advice for those CPAs performing only a few employee benefit plan audits?

Dingwall: First, I would stress a concern about the potential for fraud. Economically, it’s not the best day for Michigan, and especially the Detroit area. There are a lot of employers who are looking at these pension plans as honey pots. When business is bad, people look for cash, see cash, take cash. CPAs really need to consider fraud – especially in this down economy.

Also, I think CPAs will need to make a business decision to determine if doing these audits is worth the investment. It takes quite an investment to do them correctly: time, effort and training. They are unique difficult entities to audit, and CPAs will have to decide to spend the time to do it right. They’ll need to dedicate themselves to auditing these plans, as they are crucial to workingmen and women in America.

Editor’s note: The views expressed in this article are those of the speaker and do not necessarily represent the official position of the Department of Labor.

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