United States General Accounting Office

GAO Testimony

Before the Subcommittee on Human Resources,

Committee on Government Reform and Oversight, House

of Representatives

For Release on Delivery

Expected at

9:30 a.m.

Thursday,

February 12, 1998

EMPLOYEE BENEFITS

Limited Scope Audit

Exemption Should Be

Repealed

Statement of David L. Clark

Director, Audit Oversight and Liaison

Accounting and Information Management Division

GAO/T-AIMD-98-75

Mr. Chairman and Members of the Subcommittee:

I am pleased to be here today to discuss provisions in H.R. 2290 to

enhance the employee benefit plan information available to plan

participants, plan administrators, and others. H.R. 2290 would amend the

Employee Retirement Income Security Act of 1974 (ERISA) by, among other

things, eliminating the limited scope audit exemption, requiring more

timely reporting of ERISA and other violations of the law to the Secretary of

Labor or plan administrator, and requiring auditors of plans to participate

in a peer review program that would include the examination of at least

one plan audit. We support the proposed amendments, which are

consistent with prior recommendations we have made.1

Limited Scope

Diminishes Value of

Audits

ERISA was enacted to protect employee benefit plan assets from

mismanagement, fraud, and abuse and to ensure that plan participants

receive the benefits to which they are entitled. Prior to enacting ERISA, the

Congress found that pension plan participant interests were not

adequately protected, in part, because the participants lacked information

about their plans. To address this problem, ERISA established annual

reporting and disclosure requirements for plan administrators and

required that the reports be made available to participants so that they

could monitor their plans. Under ERISA, the Department of Labor generally

requires that an employee benefit plan having 100 or more participants

obtain an annual financial statement audit by an independent public

accountant.

ERISA allows plan administrators to exclude investments held by certain

regulated institutions, such as banks and insurance companies, from the

scope of a plan audit. Under this limited scope audit, the auditor is

required to obtain financial statements from the company holding the

investments and a certification from that company that the statements are

accurate and are a part of the company’s annual report. However, the

auditor would not perform the normal procedures designed to provide

certain basic assurances about the existence, ownership, and value of a

plan’s assets held in trust. The resulting lack of audit work can result in an

auditor disclaiming an opinion on the financial statements. According to

Labor, in 1994 (the most recent year for which information is available)

about 34,000 employee benefit plans received limited scope audits and a

disclaimer of opinion.

1

See Audits of Employee Benefit Plans Need to Be Strengthened (GAO/T-AFMD-90-25, July 24,

1990) and Employee Benefits: Improved Plan Reporting and CPA Audits Can Increase Protection

Under ERISA (GAO/AFMD-92-14, April 9, 1992).

Page 1 GAO/T-AIMD-98-75
The disclaimer can cause two problems. First, it can diminish the value of

an audit by leaving a significant gap in the information intended to help

participants evaluate their plan. For example, plan participants would

have no basis for judging whether excluded investments are vulnerable to

mismanagement, fraud, or abuse.

Second, the disclaimer language could confuse the participant. It says that

the auditor does not express an opinion on the financial statements and

supplemental schedules, but that the auditor does provide some assurance

that the form and content of information included in statements and

schedules comply with the Department of Labor rules and regulations. As

a result of this potentially confusing wording, users of limited scope audit

reports could be uncertain about what, if any, assurance these reports

provide.

More Timely

Reporting of

Violations of Law

H.R. 2290 would require the plan administrator or auditor to notify the

Secretary of Labor or the plan administrator within 5 business days of the

date they determine that there is evidence that certain violations of law

may have occurred. Specific reportable violations include theft,

embezzlement, bribery, and kickbacks involving employee benefit plans

and their operations. This provision is consistent with a recommendation

we previously made.

Audits help to provide discipline by evaluating whether plan

administrators have fulfilled their fiduciary duties and complied with laws

and regulations. According to Labor, annual reports provided by

plans—including audit reports—are its most valuable source of

information for targeting investigations because they may contain

information indicative of ERISA or other legal violations. While both plan

participants and Labor have significant interest in violations of the law,

there is no requirement in ERISA or Labor’s implementing regulations that

either party be promptly and directly informed by the auditor when fraud

or serious fiduciary breaches are discovered.

We believe that the interests of plan participants and the government

would be better served by plan administrators and auditors promptly

reporting serious ERISA or other violations of the law directly to the

Secretary of Labor or the plan administrator, if the auditor identified the

violation. This would require that such violations be reported significantly

sooner than under the current annual reporting process. H.R. 2290

addresses this issue by requiring the plan administrator or the auditor to

Page 2 GAO/T-AIMD-98-75
report to the Secretary of Labor or the plan administrator within 5

business days after determining that there is evidence that an irregularity

in a plan may have occurred.

Peer Reviews Help

Ensure Quality Audits

Peer review is the cornerstone of the accounting profession’s quality

assurance efforts. Requirements for these reviews currently exist, for

example, for auditors of federal organizations, programs, and activities, as

established by generally accepted government auditing standards, and for

members of the American Institute of Certified Public Accountants who

audit public companies. Under the peer review function other audit firms

essentially verify that the firm reviewed has a system of quality controls

that reasonably ensures that audits meet established standards.

Peer review procedures are tailored to the size and nature of a firm’s audit

work. However, they typically include a review of a firm’s audit reports,

working papers, and other necessary documents (for example,

correspondence and continuing education documentation) as well as

interviews with the reviewed firm’s professional staff.

We previously reported that neither ERISA nor its implementing regulations

require audit firms to participate in peer review programs. H.R 2290 would

require all firms that audit employee benefit plans to participate in a peer

review program and that the review include at least one plan audit. This

would help ensure that audit firms performing plan audits adhere to

auditing standards and perform quality audits.

Summary The reporting and auditing provisions in H.R. 2290, particularly the repeal

of the limited scope audit provision as well as the requirements for more

timely reporting of violations of ERISA and other laws and peer reviews,

would bring about important changes in the audits of employee benefit

plans and in the information available to plan participants. These changes

would provide participants with a better tool to monitor their plans and to

help achieve the intended accountability objective of ERISA.

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to questions you or other Members of the Subcommittee may

have at this time.

(911837) Page 3 GAO/T-AIMD-98-75
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