Reducing Audit Friction Starts With Operational Efficiency

Ingrid Boyd

For many plan sponsors, the annual audit is viewed as the year’s largest, most tedious, compliance exercise, and the work required to support the audit often extends far beyond the audit itself.

While plan sponsors are responsible for administering their plans, maintaining appropriate controls, and ensuring participants receive their entitled benefits, other employees that support the audit often balance those responsibilities with their daily workloads. The once-a-year scramble for all the proper information, in addition to strained resources and increased regulations, leads to operational friction across teams.

Ultimately, operational inefficiency threatens future compliance, and if plan sponsors want to close the gap between this created friction and seamless compliance, they need to implement improved processes that save time, decrease cost, eliminate regulatory risk, and reduce strain on valuable company resources.

Insert Friction

The largest source of audit friction stems from a lack of understanding of what information auditors will need, in what format it should be provided, and for what period of time. This information is generated across HR, payroll, finance, benefits, and accounting teams to help fulfill audit requirements. Plan sponsor teams spend dozens of hours collecting information, answering questions, and coordinating across organizations.

However, the consequences of audit friction extend far beyond information gathering inconvenience. Employees involved in the audit are still expected to complete their day-to-day responsibilities while responding to audit-related requests. As organizations work with fewer resources, long audits not only consume valuable employee time but create additional demands on teams that are already stretched thin. This, in turn, increases error rates, which increase costs for both sponsors and auditors.

Additionally, from a plan sponsor’s perspective, eliminating friction is just as important as compliance because the Department of Labor, Internal Revenue Service, and other Employee Retirement Income Security Act governing bodies have increased regulatory oversight in today’s audit landscape. These regulators have a heightened sense of awareness of, for example, whether or not a plan sponsor has set up proper internal controls; if controls were not set up correctly, it can expose sponsors to greater regulatory scrutiny.

Coordination, Collaboration, and Connectivity Equal Better Outcomes

To remove friction and increase the operational efficiency needed for successful audits, plan sponsors should leverage the following avenues for success:

1. Coordination

An audit can feel a bit disjointed if the right structure is not in place to support it. Imagine a situation in which a plan changed payroll providers mid-year. During the planning call for the audit, the auditor identified that two payroll systems would be involved. The plan sponsor pulled reports from both systems before the audit’s fieldwork began, avoiding multiple follow-up requests during testing and ensuring that they still had access to the data from the old payroll system.

There is immense value in defining requirements up front, identifying the exact reports needed, and conducting planning conversations well before the audit kicks off. It is just as important for an auditor to designate a single point of client contact to channel communication through one source, and requests for data and information can be appropriately distributed internally. More often than not, audits become cumbersome for all parties involved when they are subject to a stop-and-start process, as information is submitted ad hoc over the course of a few months rather than delivered in a concentrated transmission. Sponsors that provide requested information at a specific moment in time and designate a single point of contact tend to experience dramatically improved audit outcomes.

2. Collaboration

Better coordination goes hand-in-hand with increased collaboration; auditors should be viewed as partners rather than once-a-year compliance providers. They are there to help maintain proper oversight and controls. This shift in operational mindset opens the door to total, year-round, audit preparedness. When the audit becomes a collaborative, direct engagement between auditors, advisers, and service providers, it reduces the need for plan sponsors to serve as intermediaries. That frees up valuable time for plan sponsor staff members to focus on other timely deliverables. Benefits of this style of engagement also include standardizing recurring deliverables, reducing duplicate requests, and minimizing last-minute, disruptive requests. 

Critical information sits with the third-party administrator, payroll provider, or recordkeeper, but they are not engaged until auditors request it. When organizations bring in these parties from the moment new plan provisions are implemented or when a response is needed to address new regulatory changes, they can help identify potential issues early on, rather than only coming to light as an audit finding later.

3. Technology

One of the best tools a plan sponsor has at its disposal to reduce audit friction is technology that removes manual effort. Plan sponsors with fully integrated, communicative systems that allow payroll, recordkeeping, and other related platforms to seamlessly share information face fewer operational challenges. Certain payroll-system providers allow for auditors to have direct access to payroll information, thereby eliminating the need for the plan sponsor to have to manually obtain critical information for the auditors, saving time and resources.

Technology can also support data reconciliations, analysis, and internal-control activities before information is submitted to auditors. Identifying participant-election discrepancies, for example, before the audit begins allows sponsors to communicate those issues through their own control processes so auditors can document the issue immediately rather than spending time investigating and reconstructing events months later.

Without coordinated technology tools, organizations relying on disconnected manual systems spend more time managing data and responding to questions on their submitted information, which create more room for error in the audit.

Looking Ahead

The smoothest audits occur when auditors and plan sponsors operate as partners rather than simply requestors and responders. It is important for plan sponsors to remember that the biggest challenge around audits is usually outdated, disjointed, and inefficient processes that lead to costly, time-consuming mistakes. The most-effective solutions to eliminate the obstacles to efficiency span from early planning meetings to having a dedicated audit coordinator as well as early involvement of TPAs, recordkeepers, and payroll providers, to facilitate request tracking and frequent communication. When these practices are in place, audits typically require fewer follow-up requests, less disruption to HR and finance personnel, and a shorter audit cycle overall, while still maintaining a high-quality audit.

It is critical to remember that this process is not intended to limit an auditor’s hours, but greater efficiency naturally will reduce the total audit effort needed. It will also reduce the burden on the plan sponsor’s internal team.

Sponsors already operate under significant pressure, managing plan responsibilities while balancing limited time and resources. Organizations that reduce audit friction most effectively can produce time savings for personnel and reduce audit-cycle duration. They can also result in cost savings from fewer fee overages due to unforeseen problems, removal of regulatory risk through earlier identification of operational errors, and reduced strain on valuable company resources.

Ingrid Boyd, CPA, is a principal and leader of the employee benefits plan audit service line at Sikich, a professional services company specializing in consulting, technology, and compliance. With more than 25 years of experience in public and industry accounting services, she specializes in employee benefit plan audits and brings a strong background in technical accounting, SEC compliance, and global financial oversight.

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the authors do not necessarily reflect the stance of ISS STOXX or its affiliates.