Department of Labor Independence Rules – Restrictions on Financial Interests of Auditors

Plan Sponsors face many different issues as they navigate the rules and regulations imposed by the Employee Retirement Income and Security Act (“ERISA”). Throughout the years, these issues change as plan regulations and conditions change. Sponsors often struggle with implementing new regulations, yet, over time, systems are put in place and compliance becomes relatively painless. However, some regulations seem to trip sponsors up and compliance is compromised. One such regulation that challenges public company plan sponsors is the Department of Labor (“DOL”) auditor independence rule 29 CFR 2509.75-9.

This mandates that qualified plans (covered by Title 1 of ERISA) required to engage an auditor annually to audit their plan’s financial statements, engage an “independent” plan auditor. The independence of a plan auditor helps ensure that the plan is receiving unbiased, effective, and accurate audit results. While the rationale for independence seems reasonable and acceptable, it is the DOL’s definition of an “independent accountant” that is restrictive, especially for public company plan sponsors. The American Institute of Certified Public Accountants (“AICPA”) and the Securities and Exchange Commission (“SEC”) each have their own independence rules that must be adhered to as well. When it comes to the rules regarding members/employees of the audit firm having a financial interest (owning stock), the DOL independence rules are the most restrictive.

According to ERISA, an accounting firm is not independent if “during the period of professional engagement to examine the financial statements being reported, at the date of the opinion or during the period covered by the financial statements, the accountant or his or her firm, or a member thereof had, or was committed to acquire, any direct financial interest in such plan, or the plan sponsor…” 

For instance, if public company XYZ, Inc. is looking to hire an independent auditor for the plan year January 1, 2011 to December 31, 2011, the firm that they hire must ensure that none of their partners or employees in the office performing the work held ANY stock in XYZ from January 1, 2011 through December 31, 2011. If XYZ does not start their audit search process until October 2011, any firm with partners or employees holding stock during the 2011 year will not be deemed independent. If a firm requires the sale of all XYZ stock immediately, that firm will be independent to the XYZ employee benefit plan for the plan year January 1, 2012 through December 31, 2012.

For large, well-known public companies, this DOL standard poses significant issues when selecting an accounting firm to prepare the annual benefit plan audit, since their corporate stock is likely to be held by partners and employees of the accounting firm. In order to identify a truly independent firm, the public company plan sponsor MUST begin their search BEFORE the year they intend to have audited. So, in the example of XYZ Company above, XYZ must start searching for an auditor during 2010 in order to allow the firm time to sell any stock their partners and employees have prior to January 1, 2011.

When selecting an audit firm, plan sponsors must inquire about the firm’s knowledge of, and compliance with, the DOL, AICPA and, if applicable, SEC independence requirements. The DOL independence rules differ significantly from the AICPA and SEC independence rules. It is the plan sponsor’s responsibility to engage an independent accounting firm. In addition, firms that are knowledgeable of all such requirements should have quality control procedures in place to ensure their firm’s compliance.

As introduced above, the financial interest rules are merely one aspect of the independence regulations and close attention must be paid to all of the restrictions in order to ensure an audit firm is and remains independent year after year. 


Diane Wasser is the Partner-in-Charge of the firm’s Pension Services Group. She has more than 20 years of experience providing employee benefit plan audit and consulting services to publicly and privately owned entities across the United States.

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