Alert Your Record Keeper
As the audit approaches, let your record keeper know when the audit will take place. Most record keepers can provide a "read only” username for the auditor to access the online database, but this requires time to set up, so ask early. Also, the record keeper can provide items such as the Form 5500, Service Organization Controls report and other important documents, so the sooner you inform him or her, the likelier you will be to have necessary items on the first day of the audit.
Investing in paperless technology can benefit you as well as the auditor. Today, many service providers make payroll ledgers and participant statements available in electronic format, so the days of clunky binders are in the past. The electronic format reduces the time the auditor spends searching and allows the payroll department to quickly query information.
Get a Jump on the Audit Request Letter
As in any audit, obtaining the documents requested in the audit request letter beforehand will reduce the number of interruptions by the auditor. The best approach is to print the audit request letter and make a notation next to each item as to whether it is present or not applicable, with an explanation for all non-applicable items. Leaving the audit request letter to the morning of the audit is the most common cause of delays in any audit, so gathering the items early should be a priority.
Keep Files Neat
Because they contain so much information needed for a 401(k) audit, the employees’ personnel files are the primary focus of the audit effort. Keeping each file as neat and organized as possible from its inception will speed the audit no matter the size of the plan. Of course, employee files can get pretty thick over the years, so a cover sheet with a detailed list of the contents will help the auditor navigate the file much quicker. Fastening down all loose papers in the file will help prevent documents from falling out of place and will also add confidence that the file is complete.
Document All Changes
“Employee Action Forms” that highlight major changes in the employee’s salary and 401(k) deferrals are extremely important during a 401(k) audit. Having this form, signed by the employee and by management, for every change in salary or 401(k)-deferral rate will minimize questions by the auditors. Documenting every little change may seem cumbersome, but will save time during the audit.
If the plan has developed new service provider agreements or large expenses, keep related documentation aside for the auditor. Also, maintaining neat, clear minutes during any quarterly committee meeting is important for the 401(k) plan as well as the auditor, and is another way to ensure a smooth audit. Note any changes within the plan—for example, a change in auditor, record keeper or even investment options—in the meeting minutes. If there are no major changes and a meeting is not warranted, document that, with key personnel acknowledging a meeting was not held.
Wrap It Up in Person
The conclusion of the audit is the auditor’s presentation of findings to the audit committee. While a phone meeting is certainly an option, a face-to-face meeting is more efficient for both parties. As such, scheduling an audit when all personnel related to the 401(k) plan, including the CFO, will be present will expedite any open questions.
Do Not Wait to Investigate
Finally, the auditor may leave the audit with some open questions for the contact in charge of the 401(k) plan. Don’t throw these questions aside with the intention to revisit them later. Start investigating the questions as soon as possible to prevent multiple calls from the auditor. If possible, copy the auditor as you send questions out to various service providers, so that the auditor can clarify any questions the service providers might have.
The key to a smooth 401(k) audit is not only to prepare right before the auditor comes, but also to implement simple changes throughout the year. Lindquist LLP is committed to making the audit process as efficient as possible, and if we work together, we can do just that.
Nick Motwani is a senior auditor at Lindquist LLP. In his current role, Nick reviews, evaluates and summarizes Service Organization Control (SOC) reports and prepares them for Lindquist LLP’s use in audits. He has six years of experience auditing employee benefit plans and not-for-profit organizations. A graduate of the University of California, Santa Cruz, Nick earned a Bachelor of Arts degree in economics and legal studies.