Employee Benefit Plan Audits - Key Tips for Avoiding Unnecessary Redundancies

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Employee benefit plans undergo a significant amount of testing and updating throughout their life cycle. Testing is required for all plans, including employee stock options (ESO's) and universal plans. Although initial testing may not uncover significant problems, ongoing review and monitoring are necessary to ensure the plan is financially sound and offers the expected benefits. Also, unlike financial reporting audits, employee benefit plan audits focus on plans' performance and liquidity rather than accounting standards. Consequently, the results of such audits are significantly different than traditional accounting audit results, especially in the area of cost benefit analysis.

Also, unlike financial reporting audits, employee benefit plan audits focus on the facts, rather than accounting standards. This means that a company may not have significant problems with its accounts receivable or inventory balances, even if it has incurred large amounts of costs in implementing its plans. The reality is that most companies don't have the resources to follow every bill and procedure to ensure that they are in compliance with the regulations and rules. Therefore, another significant difference between these two types of audits is the level of access that the employee beneficiaries have to information regarding the status of their benefit plans. In an ESO audit, beneficiaries typically have only restricted access to financial information that pertains to their accounts receivable or inventory balances.

On the other hand, financial reporting audits typically allow the auditor to review the plans and procedures in detail, as well as to request additional information regarding costs and/or benefits. Both types of employee benefit plan audits provide the company with a comprehensive picture of how their programs operate. Therefore, both types of audits can provide important information for understanding the company's business model and determining whether the additional costs are necessary. Additionally, practitioners conducting such reviews can use the information they discover to make changes to the benefit plans, which can often reduce costs or increase value.

During audits of employee benefit plans , many practitioners will also identify areas that may be inefficient, and which may be best addressed by modification or revision. Often, administrators cannot determine the appropriate course of action when these issues arise, as all types of employee benefit plans can have significant operational and/or tax benefits. However, by identifying areas that may need improvements, administrators can ensure that these areas are addressed before any problems become too complex or costly.

Although it is not uncommon for ESO audits to produce results that are contrary to the company's expectations, the nature of the review and the specific objectives of the audit can often impact the manner in which performance is communicated to management. For this reason, some ESO's aim to produce "non-illusory" findings, in an effort to reduce the potential for excessive cost and regulatory action. For this reason, ESO's frequently recommend more aggressive actions in comparison to more standard, non ESO's audits. Additionally, these recommendations are often coupled with instructions and guidance to address the problems identified during the review with additional efforts and guidance. This type of follow-up provides an employee benefit plan administrator additional tools to manage and resolve the identified issues. For example, if there are substantial enhancements that can be made to the plan in order to accommodate new retirement benefits for a particular employee, the administrator may wish to recommend this to the CPA, in order for the suggested changes to be incorporated in the annual financial report that will be submitted to the relevant tax authority.

In summary, an SOC 2 will likely conduct an employee benefit plan audit in order to determine whether the benefits provided to the company's employees are in compliance with applicable regulations, and if so, recommend specific corrective action. These recommendations will typically be non-binding, meaning that the auditor will not necessarily have the responsibility to implement the suggested recommendations (although they may be able to make recommendations in support of such initiatives). 

The extent to which the proposed guidance is implemented, and the extent to which the employee benefits are in compliance with the regulations and implementing regulations, will vary from case to case.Check out this post that has expounded on the topic: https://simple.wikipedia.org/wiki/Audit .