DOL Updated Guidance on Benefit Plan Auditor Independence Could Lead to Improved Quality of Audits

Recent changes to a Department of Labor (DOL) rule governing the independence of employee benefit plan auditors are expected to allow plan sponsors greater flexibility in choosing a qualified auditing firm. At issue is the removal of an impediment that had existed since 1975 — when the previous rule was established — while still preventing conflicts of interest in the auditing process. Effective September 6, 2022, this new rule went into effect.

This is good news for benefit plan sponsors because they will have a greater chance to work with the most highly qualified audit firms.

First Change: Auditors Must Divest Assets Before Beginning an Audit

Until now, auditors were disqualified from being hired to conduct an audit on any company in which they held a financial interest during the period under audit. In contrast, the DOL’s new rule allows an auditor to divest any financial holdings in a publicly traded security before signing an initial engagement letter to perform an audit or before beginning to conduct the audit, whichever is earlier.

Previously, to be eligible to conduct an audit, an auditor would have to divest of any relevant assets a year in advance, to be free from a financial interest during the period to be audited. The change brings the rule into alignment with the Securities and Exchange Commission’s (SEC) rule governing audits.

Ali Khawar, Acting Assistant Secretary of Labor for the Employee Benefits Security Administration, said the overall goal of the DOL’s rule change was “to continue to foster proper auditor independence while removing outdated and unnecessary barriers to plans accessing highly qualified auditors and audit firms.”

By clearing the way for more auditors to be considered and hired to audit benefit plans, the updated rule is expected to lead to a wider pool of qualified accountants. That, in turn, is expected to improve the quality of audits by allowing highly qualified auditors — who may have been ineligible under the old rule — to be hired.

Second Change: The Definition of “Office” is Not Limited to a Physical Space

In 1974, when the DOL defined an “office” in the Federal Register, telecommuting did not exist. The world has changed since the DOL originally outlined the meaning. In this new ruling, the DOL incorporates a broader and more current definition of the term “office” used for determining who is considered a “member” of an auditing firm. The previous definition of “member” relied on working within an auditing firm’s physical office location.

The updated definition is more accurate and current — it reflects the ability to work from multiple physical locations. This update brings DOL rules on this topic in line with those of the American Institute of Certified Public Accountants (AICPA).

Insight: Broaden Your Search for the Best Auditors

The update on auditor independence is good news for benefit plan sponsors and for highly qualified auditing firms. The field of eligible auditors has expanded, which should allow the quality of audits to improve.