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Avoid these 3 types of internal control issues – part 1 of 2

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:

  1. 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.
  2. 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.
  3. 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.

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