In 2010 the IRS requested a selected group of 1,200 employers to complete a compliance questionnaire. Based on the responses to those questionnaires, in 2013 the IRS issued a final report with its conclusions.
Among those conclusion – having internal controls is a critical aspect of effectively run and legally compliant plans. And since the report was issued IRS representatives have publicly stated that internal controls will become a significant aspect of plan examinations. The implication is that plans without, or with poor, internal controls face tougher examinations and more scrutiny.
This makes it well worth it for plan sponsors to understand and have internal controls. The concept is very familiar to the accounting profession, but not so much to the rest of us. In general, internal controls refer to procedures that affect a plan’s operations, compliance with regulations and financial reporting.
The benefit to the plan and the plan sponsor of having internal controls are many.
- A less intensive IRS examination
- A more effectively run plan
- A system to detect problems earlier and correct them under generally forgiving IRS correction programs.
Accountants focus on five key areas (and so will the IRS) to determine whether those in charge of a plan have appropriate controls in place:
- The Control Environment: This is essentially about the plan sponsor’s attitude, philosophy, integrity, commitment to competence, ethics, and the assignment or delegation of authority.
- Risk Assessment Once: the agent understands the control environment, he or she will assess where the risks are and where to put his or her examination focus. Possible risk indicators are manual data entry, changes in personnel, installation of new information systems and other stressors such as corporate acquisitions and other events.
- Information and Communication Systems: The agent will look at how information is recorded, processed and reported, how errors are corrected and the communication of that information among the various individuals who have responsibility for internal controls. Communication between those responsible for the overall governance of the plan and those responsible for its direct administration will be especially important.
- Control Activities: This examination includes whether there policies and procedures in place, how transactions are authorized, frequency of checks and reviews of work, the safeguarding of assets, the reconciliation of individual participant accounts, and the verification of data.
- Monitoring: The agent will want to know about the quality of the plan’s monitoring process. For example, what are its sources of its information and what is the basis for determining the reliability of information and data.
This is not your grandfather’s IRS plan examination. Expect he IRS to thoroughly probe plans whose control structures are weak.