Your annual plan audit does not have to be stressful. We will review plan audit requirements and how you can best be prepared for your audit to make it a more efficient and less stressful experience. Specific areas will include common audit findings: coordinating information from your plan service providers; timely completing your auditor’s requests; and wrapping up the audit. We will also discuss your fiduciary responsibility and risk regarding your plan audit and why you should be concerned in having an experienced firm perform your audit.

1. Getting Prepared
for Your Employee
Benefit Plan Audit
Lawrence J. Hoffman, CPA/CFF, CVA, CFE
Senior Partner, AICPA EBPAQC Designated Partner
March 27, 2013
Thrive. Grow. Achieve.

2. AGENDA
• Seminar objectives
• Unique aspects of the EBP reporting and audit environment
• Who are the players?
• Employee benefit plan audit requirements
• The importance of a quality plan audit
• Understanding your auditor’s responsibilities
• Understanding your responsibilities
• Working with your auditor
• Common audit findings
• Suggested resources
• Q&A
Getting Prepared for Your Employee Benefit Plan Audit 2

3. SEMINAR OBJECTIVES
• Help you to better prepare for your EBP audit
• Better understand what your responsibilities are as plan
management and in the audit process
• Better understand what your auditors’ responsibilities are and
what they do in an audit
• Anticipate areas of concern for auditors
• Make your audit more efficient and timely
Getting Prepared for Your Employee Benefit Plan Audit 3

4. UNIQUE ASPECTS OF THE EBP
REPORTING AND AUDIT ENVIRONMENT
Getting Prepared for Your Employee Benefit Plan Audit 4

5. WHO ARE THE PLAYERS?
• Sponsor – generally the employer.
– Human Resources.
– Finance & Accounting
– Audit / Finance Committee
– Compensation / Benefits Committee
• Participant – employee, former employee, beneficiaries, members.
• Plan administrator / record keeper – day-to-day administration of
the plan. Could be the sponsor; a trustee (bank trust dept); insurance
company; investment advisor; or a person designated by the trustee,
if an unrelated third party – “third party administrator” (TPA)
• Trustee (fiduciary) – responsible for the operation and
administration of the plan assets.
• Custodian – charged with the safekeeping of the plan assets.
• Service providers – benefits consultant, investment manager,
accountants, lawyers (ERISA counsel), actuary (defined benefit).
Getting Prepared for Your Employee Benefit Plan Audit 5

6. WHO ARE THE PLAYERS?
THIRD-PARTY ADMINISTRATORS
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7. WHO ARE THE PLAYERS?
PLAN CUSTODIANS / TRUSTEES
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8. EMPLOYEE BENEFIT PLAN AUDIT
REQUIREMENTS
• TYPES OF PLANS REQUIRING AN AUDIT:
• Defined Contribution Plans
• Defined Benefit Plans
• Health and Welfare Plans
• TYPES OF PLANS THAT DO NOT REQUIRE AN
AUDIT:
• Governmental plans (ERISA section 3(32))
• Church plans (ERISA section 3(33))
• “Safe Harbor” Plans (DOL regulation 29 C.F.R. § 2510.3-
2(f))
Getting Prepared for Your Employee Benefit Plan Audit 8

9. EMPLOYEE BENEFIT PLAN AUDIT
REQUIREMENTS
AUDIT REQUIREMENT
• Generally when a plan has 100 or more participants at the
beginning of the plan year.
• A participant is defined as those who are eligible to participate
in the plan (that is, contribute to the plan), as well as those who
are participating.
• Must count those obtaining or maintaining benefits – those who
are no longer employed yet have vested balances or benefits to
be paid.
• 80/120 rule.
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10. EMPLOYEE BENEFIT PLAN AUDIT
REQUIREMENTS
• IF LAST YEAR YOU FILED FORM 5500-SF AND THIS YEAR YOU HAVE:
PARTICIPANTS TAX FILINGS AUDIT REQUIRED?
<100 FILE FORM 5500-SF NO
100-120 CAN ELECT 5500-SF NO
>120 MUST FILE FORM 5500 YES
• IF LAST YEAR YOU FILED A FORM 5500 AND THIS YEAR YOU HAVE:
<100 FILE FORM 5500-SF NO
>100 MUST FILE FORM 5500 YES
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11. EMPLOYEE BENEFIT PLAN AUDIT
REQUIREMENTS
AUDIT SCOPE
• FULL SCOPE AUDIT.
• LIMITED SCOPE AUDIT:
• C.F.R. 2520-103.8.
• Proper certification from a qualifying institution-bank, trust
company or insurance company
• Only applies to investment and investment-related
information at the plan level.
• Must include the words “complete and accurate.”
• Authorized signature on certification.
Getting Prepared for Your Employee Benefit Plan Audit 11

12. EMPLOYEE BENEFIT PLAN AUDIT
REQUIREMENTS
FILING REQUIREMENTS
• Form 5500 (with audited financial statements for large plans).
• Due 7 months after year end (e.g., 12/31 year end = 7/30 due
date).
• Automatic 2½ month extension if form 5558 is filed with IRS.
Getting Prepared for Your Employee Benefit Plan Audit 12

13. THE IMPORTANCE OF A QUALITY
PLAN AUDIT
• An important accountability mechanism.
• Plan administrator’s duty to hire an independent auditor and
ensure the plan has obtained a quality audit in accordance with
ERISA and DOL requirements.
• ERISA holds plan administrators responsible for ensuring that
plan’s financial statements are properly audited in accordance
with generally accepted auditing standards (GAAS).
• Penalties for audit failures can be substantial! ($1,100 a day
capped at $50,000 per annual report filing where the required
auditor’s report is missing or deficient.)
• Your audit firm should be a member of the AICPA employee
benefit plan audit quality center.
Getting Prepared for Your Employee Benefit Plan Audit 13

14. UNDERSTANDING YOUR AUDITOR’S
RESPONSIBILITIES
AUDIT OBJECTIVES
• The audit is conducted in accordance with auditing standards
generally accepted in the United States (GAAS).
• Auditor is responsible to plan and perform the audit to obtain
reasonable assurance that material misstatements, whether
caused by error or fraud, are detected.
• Expression of an opinion on the financial statements.
• Whether the DOL-required supplemental schedules attached to
the Form 5500 are presented fairly in all material respects, in
relation to the financial statements as a whole.
Getting Prepared for Your Employee Benefit Plan Audit 14

15. UNDERSTANDING YOUR AUDITOR’S
RESPONSIBILITIES
THE AUDIT PROCESS
• Generally accepted auditing standards require, among other
things:
− Proper planning and risk assessment.
− Understanding the design and implementation of
internal controls.
− Gathering of sufficient evidence.
− Documentation of findings.
Getting Prepared for Your Employee Benefit Plan Audit 15

16. UNDERSTANDING YOUR AUDITOR’S
RESPONSIBILITIES
RISK ASSESSMENT
• Plan management – tone?
• Control environment.
• Financial condition of plan sponsor and industry.
• Plan administration and personnel.
• Accounting and personnel records.
• Fraud risk factors.
• Change in trustees, custodians or other advisors.
• Significant accounting or auditing issues – MAPS, e.g.,
hard-to-value investments, fair value disclosures.
Getting Prepared for Your Employee Benefit Plan Audit 16

17. UNDERSTANDING YOUR AUDITOR’S
RESPONSIBILITIES
FRAUD RISKS
• Trustee of small plan created a fictitious employee in the census
data, made employer contributions, and then took out loans
against the balance.
• HR manager requested distributions for persons who left
company 2+ years ago. He had been successful 3 times for
over $10,000. Discovered when bank refused to direct the
deposit, since deposit name differed from account holder’s
name.
• Plan investments managed in-house. Company controller is
also plan administrator. Controller borrowed funds from the
plan to cover cash flow needs of the Company.
• An HR employee, who also assisted with payroll, diverted both
payroll taxes and plan contributions into his personal account
for six months, then left the country. This employee also had
responsibility for reconciling payroll bank accounts.
Getting Prepared for Your Employee Benefit Plan Audit 17

18. UNDERSTANDING YOUR AUDITOR’S
RESPONSIBILITIES
FRAUD RISKS (cont.)
• A person was offered a job but never actually started the job.
The plan sponsor entered the person as an employee into the
HR system, enrolled the person in the plan, and then started
issuing paychecks with deductions for contributions to the plan.
This went on for three years, until the employee running the
scam requested a distribution, at which time the fraud was
discovered.
Getting Prepared for Your Employee Benefit Plan Audit 18

19. UNDERSTANDING YOUR AUDITOR’S
RESPONSIBILITIES
• AUDIT AREAS
1. Contributions and receivables.
– Employee
– Employer
– Rollover
2. Investments and investment income.
3. Benefits and benefit payments.
4. Liabilities and plan obligations.
5. Participant data and allocations.
6. Loans to participants
7. Administrative expenses
8. Parties in interest and prohibited transactions
9. Plan tax status
Getting Prepared for Your Employee Benefit Plan Audit 19

20. UNDERSTANDING YOUR AUDITOR’S
RESPONSIBILITIES
AUDITOR COMMUNICATIONS
• Required to make certain communications to “those charged
with governance” throughout the audit.
–
Planning stage.
–
During field work.
–
Conclusion of the audit (SAS 114 letter).
–
TCWG defined as the person(s) with responsibility for
overseeing the strategic direction of the plan and
obligations related to the accountability of the plan.
• Engagement letter.
• Management representation letter.
• Communicating internal control related matters identified in an
audit (SAS115 letter):
– Material Weaknesses.
– Significant Deficiencies.
Getting Prepared for Your Employee Benefit Plan Audit 20

21. UNDERSTANDING YOUR
RESPONSIBILITIES
• The financial statements are those of plan management – only
the opinion is the auditor’s!
• The selection and application of accounting policies.
• Establishing and maintaining effective internal controls over
financial reporting.
• Designing and implementing programs and controls to prevent
and detect fraud.
• Identifying and ensuring that the plan complies with the laws
and regulations applicable to the plan.
Getting Prepared for Your Employee Benefit Plan Audit 21

22. UNDERSTANDING YOUR
RESPONSIBILITIES
• Know your plan and plan requirements.
• Know your service providers and their responsibilities.
• Make sure participant accounts and information is reconciled to
the service organization records on a timely basis (contribution
records and census data agree with payroll information).
• System of internal controls (who has access to the data
provided to the service organization and can override controls?)
• Controls of a benefit plan are composed of controls at both the
plan sponsor, as well as at the service organization (SSAE 16
report). Review these reports.
• The DOL holds plan management responsible for the proper
reporting of plan investments. Watch for proper fair value
reporting and disclosures.
Getting Prepared for Your Employee Benefit Plan Audit 22

23. WORKING WITH YOUR AUDITOR
• Have a point person.
• The “PBC” list.
• Timely turnaround of requested documents and schedules (but
review them first!).
• Contact your service providers early to assure they will have the
necessary information on a timely basis, e.g., “Audit package.”
• Obtaining service organizations’ SSAE 16 control reports (now
SOC1, 2 and 3 reports).
• Scheduling audit field work – be ready!
Getting Prepared for Your Employee Benefit Plan Audit 23

24. COMMON AUDIT FINDINGS
• Late deposit of participant deferrals and loan repayments.
• Failure to properly apply plan’s definition of compensation.
• Failure to follow plan’s eligibility provisions.
• Failure to update plan documents.
• Incorrect employer contributions (including match).
• Failure to properly apply plan’s vesting provisions.
• Improper use of plan forfeitures.
• Not covering the proper employees, or excluding eligible
employees.
• Failing to identify defaulted loans.
• Not limiting employee deferrals and employee contributions to the
maximum limits between all available plans.
• Failure to satisfy hardship distribution requirements.
Getting Prepared for Your Employee Benefit Plan Audit 24

25. SUGGESTED RESOURCES
• Selecting an auditor for your employee benefit plan, DOL
Employee Benefits Security Administration:
http://www.dol.gov/ebsa/publications/selectinganauditor.html
• AICPA Employee Benefit Plan Audit Quality Center:
http://www.aicpa.org/InterestAreas/EmployeeBenefitPlanAuditQ
uality/Pages/EBPAQhomepage.aspx
• Raffa, P.C. website – Employee Benefit Plan Services Resource
Center:
http://www.raffa.com/ProfessionalServices/EBP/Pages/default.a
spx
Getting Prepared for Your Employee Benefit Plan Audit 25

26. QUESTIONS AND ANSWERS
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27. BIOGRAPHY
• 35 years of consulting, audit, accounting and tax experience in the public and private
sectors.
• Started career with a Big-Four international accounting firm in Washington, DC.
• Founded a regional certified public accounting and consulting firm in 1982 and grew it to
Lawrence J. on of the Washington, DC’s largest firms in seven years. Merged his practice with Raffa
Hoffman, CPA/CFF, P.C. in 2008.
CVA, CFE • Managed and conducted audit and accounting engagements ranging from small
privately held to large publicly held businesses in various industries, including multi-
national businesses, nonprofit organizations, and governmental entities and agencies.
• Performed economic and financial analysis, including projections and forecasts, in
support of litigation and claims for lost earnings and profits, business interruption,
shareholder disputes, patent and trademark infringements, bankruptcy and restructuring,
and structural settlements; assistance with interrogatories, document requests and
depositions; and serving as an expert and consulting witness.
• Performed and supervised business valuations for both public and closely held
companies in a variety of industries, individuals and estates, family limited partnerships
and limited liability companies, including valuations for business combinations (SFAS
Senior Partner 141R), mergers, acquisitions, and divestitures, estate and gift taxes, marital dissolution
Raffa, P.C. proceedings, buy-sell agreements, intangible assets and intellectual property, purchase
1899 L Street, NW price allocations, goodwill (SFAS 142) and long-lived asset (SFAS 144) impairment, fair
Washington, DC 20036 value accounting (SFAS 157), cheap stock (IRC 409A), stock-based compensation
(SFAS 123R), phantom stock and employee stock ownership plans.
Tel. 202-822-5408 • Conducted and led teams of forensic accountants on fraud audits and investigations,
Fax 202-822-0669 including fraudulent financial statements, misappropriations of assets and
lhoffman@raffa.com embezzlements; money laundering, kickbacks, bribery and conflicts of interest;
insurance claims; bankruptcy; financial institutions and loan fraud. Also has conducted
fraud risk assessments, anti-fraud programs, and fraud training and education.
Getting Prepared for Your Employee Benefit Plan Audit 27

28. BIOGRAPHY
• Assisted companies and nonprofits with restructuring and turnaround situations,
including recapitalizations, reorganizations and liquidations. Advised entities on
Chapters 11 and 7, bankruptcy filings and proceedings and non-judicial workouts.
Developed and administered crisis management plans, cash flows, liquidation and
turnaround analysis, debt restructuring and creditor negotiations, and turnaround plans.
Lawrence J.
Hoffman, CPA/CFF, • Formulated strategic short- and long-term business and financial planning for various
business organizations and served as interim “C” level positions, including for a major
CVA, CFE North American sports league, European and U.S. aircraft manufacturer, aviation charter
airline and travel company, and a multi-chain quick service food chain.
• Formulated syndication strategies and prepared business plans and private placement
offerings, including financial forecasts, market research and analysis, due diligence,
securities pricing and structuring for various public and private securities offerings,
including SEC filing.
• Founded and developed a regional NASD licensed broker dealer investment banking
firm. Placed over $150 million in debt and equity and represented over $200 million in
merger and acquisition transactions.
• Founded and developed two private equity funds in excess of $10 million, including
investments in early stage and mature emerging companies in the form of debt and
equity. Portfolio investments included aviation, food and hospitality, software and
technology, telecommunications, sports and entertainment, banking and financial
institutions, healthcare, and wholesale and retail.
• Co-founded and managed various real estate acquisition, ownership, and operating
entities, including commercial office buildings, shopping centers, flex warehouses,
residential housing and developed land.
• Performed tax and financial consulting services for individuals and closely held
businesses.
• Instructor in audit, accounting, finance, and forensic accounting.
Getting Prepared for Your Employee Benefit Plan Audit 28

29. BIOGRAPHY
EDUCATION & CERTIFICATIONS
• Bachelor of Science, Accounting – Mount St. Mary’s University
• Certified Public Accountant (CPA)
• Certified Fraud Examiner (CFE)
Lawrence J.
• Certified in Financial Forensics (CFF)
Hoffman, CPA/CFF,
CVA, CFE • Certified Valuation Analyst (CVA)
• Private Investigator (PI), Virginia
• Series 7 General Securities Representative (not active)
• Series 24 General Securities Principal (not active)
• Series 63 Uniform Securities Agent (not active)
PROFESSIONAL ASSOCIATIONS & AFFILIATIONS
• American Institute of Certified Public Accountants, Member
• Virginia Society of Certified Public Accountants
• Association of Certified Fraud Examiners
• National Association of Certified Valuation Analysts
• Institute of Business Appraisers
PERSONAL INTERESTS
• Private pilot with instrument, multi-engine, high performance complex and aircraft ratings
• Gold and fishing
• Reading and politics
Getting Prepared for Your Employee Benefit Plan Audit 29