Employee Benefits: Limited Scope Audit Exemption Should Be Repealed
(Testimony, 02/12/98, GAO/T-AIMD-98-75).

Pursuant to a congressional request, GAO discussed the provisions in
H.R. 2290 to enhance the employee benefit plan information available to
plan participants, plan administrators, and others.

GAO noted that: (1) 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 occured; (2) audits help to
provide discipline by evaluating whether plan administrators have
fulfilled their fiduciary duties and complied with laws and regulations;
(3) according to the Department of 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 Employee Retirement Income Security Act
(ERISA) or other legal violations; (4) 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; (5) GAO believes 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; (6) this
would require that such violations be reported significantly sooner than
under the current annual reporting process; (7) GAO previously reported
that neither ERISA nor its implementing regulations require audit firms
to participate in peer review programs; and (8) 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.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  T-AIMD-98-75
     TITLE:  Employee Benefits: Limited Scope Audit Exemption Should Be 
             Repealed
      DATE:  02/12/98
   SUBJECT:  Accounting procedures
             Auditing standards
             Law enforcement
             Accountants
             Internal controls
             Employee benefit plans
             Reporting requirements
             Fraud
             Audit reports
             Proposed legislation

             
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Cover
================================================================ COVER


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

GAO/AIMD-98-75T


(911837)


Abbreviations
=============================================================== ABBREV

  ERISA - Employee Retirement Income Security Act of 1974

============================================================ Chapter 0

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


--------------------
\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). 


   LIMITED SCOPE DIMINISHES VALUE
   OF AUDITS
---------------------------------------------------------- Chapter 0:1

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. 

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
---------------------------------------------------------- Chapter 0:2

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 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
---------------------------------------------------------- Chapter 0:3

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
---------------------------------------------------------- Chapter 0:4

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. 


-------------------------------------------------------- Chapter 0:4.1

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. 

*** End of document. ***