Accounting
Navigating peer reviews and DOL inspections of 401(k) audits
Peer reviews and Department of Labor inspections of 401(k) audits can be challenging for CPA firms, especially small and midsized firms. Auditors often find themselves facing questions about their methods, documentation, and procedures, with feedback ranging from legitimate findings to subjective preferences.
Knowing how to distinguish between what is required by standards and what is opinion is crucial for auditors to confidently navigate these reviews and inspections.
Before diving into some real-world examples, it’s important to emphasize that understanding the standards governing 401(k) audits is non-negotiable. Compliance risks in auditing employee benefit plans can have serious consequences for CPA firms, including heavy fines, reputational damage, and, in extreme cases, the loss of a firm’s license to practice.
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These risks underscore why it’s vital for firms to fully understand the nature of any findings they face and the reasons behind them. To effectively defend against a reviewer’s findings, auditors must not only be familiar with the standards but also be able to reference them during reviews. Having a deep understanding of the standards empowers CPA firms to push back when necessary and confidently challenge findings that are based on subjective opinions rather than clear requirements.
The fine line between standards and opinion
A good example of this confusion is the issue of audit documentation for Form 5500 filings. As part of the audit procedures, the auditor must obtain and read the draft Form 5500 to identify material inconsistencies, if any, with the audited ERISA plan financial statements. However, nowhere in the codified standards does it say that a final copy must be maintained in the audit binder when management agrees to make the requested changes.
Consider this real-world situation: As part of an audit, “Sam” reviewed the draft Form 5500, and identified material inconsistencies that needed to be corrected. Both management and the service provider agreed, and the changes were made to Form 5500 so no material inconsistencies remained.
However, the changes were made on October 15, and Sam did not place the final draft in the audit binder, leaving only the original draft in the documentation. A peer reviewer dinged Sam’s firm, claiming that a final copy should have been in the binder.
What’s the standard? The standard is to review the draft Form 5500 to ensure that it is substantially complete and doesn’t contain material inconsistencies, which is exactly what they did. If Sam’s CPA firm had familiarized themselves with the standards — in this case, AU-C Section 703, “Considerations Relating to Form 5500 Filing” — they could have confidently pushed back against the peer reviewer. Instead, they accepted the penalty, not because of a legitimate issue, but because the auditor didn’t know the standard well enough to defend his position.
Key takeaway: If you’re facing findings, always refer to the specific standards. If the standards don’t explicitly require what the reviewer is claiming, it’s a subjective opinion, not a matter of compliance. Don’t be afraid to push back when necessary.
You don’t get points for extra credit
Confusion doesn’t always start at the peer review level. It can happen before the audit is submitted, among your own audit team. A good example of this involves whether auditors are required to verify the census data used for plan compliance tests, such as discrimination testing.
A compliance officer at a CPA firm wanted her audit team to verify the accuracy of the census data used in compliance testing. One of her auditors pushed back, pointing out that nowhere in the standards does it say auditors must reperform compliance tests or verify census data.
Instead AU-C 703, Section .A31 only requires auditors to confirm that a plan’s TPA has performed the relevant IRC compliance tests, and whether any failures were identified and corrected. The auditor is only responsible for ensuring that the plan performed the required tests and passed, not for redoing the tests themselves.
What’s the lesson? Auditors are often pressured to perform steps that aren’t required by the standards. In this case, verifying the census data might seem like thorough auditing. How else would you know they passed correctly if you didn’t also know the census data was accurate? But it’s not required. As long as the compliance testing has been performed and reviewed by management, the standard is satisfied. Double-checking the compliance testing only adds unnecessary time to what is already a laborious audit process.
Key takeaway: Understand what is required by the standards and what is simply “nice to do.” Over-auditing isn’t necessary and can lead to inefficiencies. Know where to draw the line between what’s required and what’s not.
What you don’t know can hurt you
Another area of confusion arises when it comes to testing benefit payments and distributions in defined contribution plans. The AICPA Auditing and Accounting Guide for Employment Benefit Plans provides several acceptable methods for testing participant benefit distributions and withdrawals. Some methods make sense in today’s digital age — others, not so much.
A DOL agent reviewing a 401(k) audit claimed the audit was deficient because the firm didn’t use cancelled checks to test benefit payments. However, the auditor had used an alternative method: comparing the payee’s name on electronic funds transfers to participant records, which is a satisfactory method explicitly mentioned in the AICPA Guide (Chapter 5, “Auditing Considerations for DC Plans”). The DOL agent argued that without the cancelled checks, the benefit payments couldn’t be fully tested.
What’s the lesson? The AICPA Guide lists several methods for testing benefit payments, including comparing EFT records. Cancelled checks, while still a valid testing approach, are no longer commonly returned by banks, making it an impractical method in today’s world. By pushing back with reference to the audit guide, the auditor successfully convinced the DOL agent that their approach was compliant, even though it wasn’t the method the agent preferred.
Key takeaway: Know the multiple methods allowed by the audit guide for testing benefit payments. If a peer reviewer or inspector prefers a method that’s not required by the guide, don’t hesitate to defend your choice of an alternative method.
Practical tips for navigating peer reviews and DOL inspections
While peer reviews and DOL inspections can seem intimidating, you can protect yourself and your firm by taking a few simple steps:
1. Know the standards: This can’t be emphasized enough. If you’re uncertain about a finding, look it up. Knowing the codified standards allows you to differentiate between subjective opinion and objective requirements.
2. Be ready to push back: Not all findings are grounded in standards. Some reflect personal preferences or common practices that aren’t required. Always ask for clarification on where the requirement is codified before accepting a finding.
3. Document, document, document: Proper documentation is key. Whether it’s the Form 5500 review or compliance testing, maintain thorough records. This doesn’t mean you need to over-audit, but it does mean you need clear evidence of compliance with the required steps.
4. Use the AICPA Audit Guide: This resource is invaluable for addressing many of the grey areas in 401(k) audits. Refer to the guide when determining which procedures to follow, especially in areas like benefit distributions where there are multiple testing methods.
5. Seek clarification on ambiguities: When faced with a finding that you’re unsure about, consult with the AICPA’s audit guide or the standards. Engage in a constructive dialogue with peer reviewers or DOL inspectors to clarify what’s required versus what’s a matter of personal preference.
Navigating a peer review or DOL inspection of your 401(k) audit can be complex, but it doesn’t have to be daunting. The key to success lies in your understanding of the standards, knowing when to push back against subjective opinions, and using the right resources to support your audit process.
As demonstrated in the examples above, a strong grasp of the ASC and the AICPA’s audit guide can be the determining factor between a successful audit review and one that results in costly penalties or even a failed inspection. Stay informed, stay prepared, and always ensure your practices align with the written standards — not subjective opinions.
OK, I admit it. I tend to procrastinate. I also tend to lose track of what the date is, or sometimes what year it is (just kidding on the last one). Nevertheless, I’ve been accumulating stuff for a gift guide column for a while, and it’s time to start actually writing about at least a few of them. One or all of these would be appropriate for staff, coworkers and clients, or to surprise yourself with on the gift-opening holiday (Oh! How did you know? It’s just what I wanted!)
I do a lot of reading. Physical books are my favorite, but so many books these days are available in Kindle or other electronic formats. I’ve been using a tablet for the past several years to do much of my reading, especially if I’m traveling. The tablet I’ve been using is a fairly decent one, but it’s several years old. It’s been replaced by a new TCL Tab 10 Nxtpaper. While the Nxtpaper is a very workable tablet, it’s also excellent when you want to relax with a book. The 10.4-inch screen has a resolution of 2,000 by 1,200 pixels and a brightness of 600 nits, similar to some laptops. The screen has a finish that cuts down on glare and reflection, though it’s a little hard to read outdoors in the sun. It offers several settings that change the appearance of color pages, which is great when you are reading a color book or magazine. The tablet offers 5G cellular connectivity, but right now Verizon is the only carrier supported. What I like about the tablet is that it offers a really good reading experience. At the moment, it’s priced at $240 from Verizon, so if you (or the intended user) have service from another carrier, this might not be the best choice. I don’t use my tablets on cellular service (most of the airlines I fly offer internet connectivity, as do the hotel rooms) so the 5G connectivity feature is not a deal breaker for me, though it might be for you or the person you have in mind.
Another great gift item is a USB monitor to use as a second display for a laptop. With more people using a laptop for their main PC, being tied to a single screen can diminish productivity. My main productivity PC has a 35-inch main display and a 27-inch secondary display, so I used to feel really constrained when I’ve had to use my laptop. I’ve been using a second monitor for several years and I find it a must to get much work done when I’m at a conference. But monitor technology, like everything else, has progressed over the years, so I replaced my old USB monitor with a ViewSonic TD1656-2K. The TD1656-2K isn’t the least expensive solution, coming in at about $350, but the features make it worthwhile. It has a 16-inch 2560 x 1600 display and a touch screen. The screen offers auto-pivot, so if you want to use it in portrait mode rather than landscape, just turn the monitor and the display will flip. The cover does dual duty as a stand, and weighs 2.8 pounds with the stand, about the same as an extra laptop. The sound is actually pretty good from the two 2.5-watt speakers, and there are two USB-C ports at the left and right bottom of the display. Both of these ports support 65-watt pass-through if your laptop offers power delivery. Best of all, the 16-inch screen is larger than the one on my laptop.
Or how about a mini home theater? Many of us, or our clients or children, don’t have room for a home theater. And gifting a large screen TV is usually not an option. Video projectors are a great way to get many of the benefits of an enhanced video experience without having to dedicate a large amount of room and wall space to a big screen TV. Or maybe you have a staff member who has to travel and make presentations. The $400 Nebula Capsule Air is one of the smallest projectors you can buy, about the size of a can of soda. It’s not tremendously bright (as is common for projectors this small and inexpensive). With a light output of 150 lumens, you’ll need to use it in a darkened room. It has Google TV built in, and an optional $140 Power Bank Tripod gives you an extra two hours of runtime, added to the two-hour run time of the Capsule Air itself.
If you have a teenager, staff member, or have a client who is into technology or the Maker movement, how about a 3D printer? A great printer for a beginner is the Bambu Lab A1 mini. The $200 price is pretty easy to handle, and at $349, you can get the Combo, which includes the printer and an accessory that provides four-color printed objects. The A1 mini is pretty much assembled out of the box. You just have to cut some zip ties and attach a few pieces. It shouldn’t take more than about 15 minutes until it’s up and running. The internet has thousands of models to print.
Finally, if you are willing to go really overboard and have someone on your gift list who is an audiophile, a gift of a pair of in-ear monitors offers a really superior audio experience. In-ear monitors are like super bud earphones. They have a wider range than most earbuds and truer sound reproduction. When you watch a performer and notice they have ear buds while performing, they are wearing in-ear monitors. They are pretty expensive. The one I’m recommending is the $500 Sennheiser IE 600 model, but it’s far from the most expensive model available. In-ear-monitors, especially for performers, can run into the thousands.
That’s it for this time. I’ll dig further into the review pile in later blogs. Oh, and if you want to get in touch with me, you can DM me on Facebook.
Business management solutions provider
Zoho Payroll offers users federal, state and local tax compliance across all 50 states with automated calculating, paying and filing of taxes. The product also sports automated compliance updates to keep up with changes in law and regulations. Users can configure the software for how their organizations work, with the ability to set custom salary structure, unique benefits and more. There are also features for auto-generated exportable reports allowing users to gain more visibility into payroll expenses and tax withholdings. Beyond pay, the software can also handle employee benefits, including health care, retirement savings and paid time off, and manage contributions to an employee’s 401(k), 403(b), health savings account and flexible spending account.
The solution also offers access to a mobile-first employee self-service portal, available on iOS and Android devices, which enables employees to view pay slips, benefits contributions and salary breakdowns, modify tax-withholding preferences, and communicate with HR.
Zoho Payroll integrates with Zoho People, Zoho Expense and Zoho Books, which enables automatic syncing of employee data, initiation of expense reimbursements, and posting of payroll journal entries
“Zoho Payroll addresses the struggles our customers were facing in finding a system to keep up with endless revisions to tax codes, maintain accuracy and compliance across departments, and generate financial reports,” said Raju Vegesna, chief evangelist at Zoho. “The growth of our array of finance apps is driven by our customers, and that will never change.”
Zoho Practice has several new capacities. The new workpapers feature automatically fetches client financial statements from Zoho Books, enabling comparisons, adjustments, document management and collaboration for review and approval. The self-service portal enables accountants to collaborate with clients who use third-party services, facilitating document requests, digital signatures and communication. The solution boasts workflow automation, custom functions and scheduling options that support tailoring of operational workflow.
Zoho Books has also introduced a suite of new features, including support for direct filing of 1099- MISC and 1099-NEC forms with the IRS, with provisions for collecting and managing W-9 forms from contractors. Furthermore, the new progress-based invoicing capacity allows businesses to invoice customers incrementally. There are also new bill pay capabilities, which lets users auto-scan bills, set up vendor approval flows, perform three-way matches for accuracy, and process batch payments. Other advanced features include revenue recognition, which automatically recognizes revenue based on contractual obligations or when the service is delivered, and fixed asset management, allowing the recording of asset details, automatic depreciation calculations, and the generating of forecast reports.
Finally, in Zoho Inventory, advanced warehouse management capabilities—such as enhanced location tracking and labeling, stock counting, stock out alerts, and role-based access to the warehouse operations—offer more inventory control, accurate stock levels, and faster order processing. The product’s mobile apps help warehouse employees perform tasks more efficiently.
Payment solutions provider
“Without the right technology, the process of filing year-end forms for vendors and contractors can be complicated and time consuming for SMBs, plus it can be challenging to stay compliant,” said Ariege Misherghi, senior vice president and general manager of AP, AR and accountant channel at Bill. “That is why Bill is delivering an intuitive 1099 filing solution — empowering SMBs and their accountants to quickly collect, create and file 1099s in the same place where they’re already tracking vendor payments throughout the year. With Bill, businesses can now handle this critical component of tax season with ease and get back to what they do best — serving their customers.”
The new feature allows users to request and collect W-9s directly from within the platform, removing the need to navigate between disparate software solutions. They can also pick and choose which vendors are 1099 eligible with the “1099 Filing” tab in the left hand navigation. Users can view all payments made to a vendor and categorize payments in bulk. Once payments have been categorized, the software will generate all 1099 forms. The solution can then deliver 1099s either electronically or physically via USPS to all vendors for review. Once 1099 documents have been generated and reviewed by vendors, users can file all 1099s electronically with the IRS with the click of a button, provided the state they’re in is participating in the Combined Federal/State Filing program, listed at
W-9 collection capabilities are
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