One of the most significant points of your benefit plan audit is determining the strength of internal controls with regard to reliable financial reporting. Here is a description of the three types of deficiencies that you want to avoid:
- Material weakness – A deficiency, or combination of deficiencies in internal control such that there is a reasonable possibility that a material misstatement of the entity’s financial statements will not be prevented, or detected and corrected on a timely basis.
- Significant deficiency – A deficiency, or combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance.
- Deficiencies in internal control – Exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis.
Because internal controls are critical to good fiduciary management, I want to make sure that you have examples of issues that could cause a problem for you. Here are types of circumstances that may be material weaknesses or significant deficiencies:
– Lack of controls or faulty controls over an account or process related to preparing financial statements. Examples include:
- Inappropriate expense allocation
- Census data errors that result in misstatement of obligation information
– Lack of attention to detail regarding controls, such as:
- An outsourced administrative function without strict accountability to management
- Investment choices that are not properly vetted and documented
- Monitoring of claims paid for a health and welfare plan
- Tax compliance testing such as discrimination testing
- Cash received from individual employers in a multi-employer plan
– Lack of qualifications and training of employees and management in a fiduciary role.
Next week, I’ll talk about how audit findings need to be handled.