NAIC Subgroup Adopts Internal Control Over Financial Reporting Requirements
The NAIC/AICPA Working Group of the Financial Condition (E) Committee has adopted Sarbanes-Oxley Act requirements to amend the Model Audit Rule. The revisions incorporate certain best practices regarding Title IV: Enhanced Financial Disclosures of Sarbanes-Oxley Act. These revisions along with the previously adopted revisions for Title II: Auditor Independence and Title III: Corporate Governance will be forwarded to the Financial Condition (E) Committee for approval.
The Title IV revision requires that the management of insurance companies with more than $500 million in direct and assumed premiums perform an annual assessment of its internal control over financial reporting. The Company would report to its state insurance department regarding any unremediated material weaknesses.
From the initial Model Act Amendment, the Subgroup increased the exemption level from $25 million to $500 million and eliminated the attestation requirement by the company‘s external auditor regarding management‘s assessment on internal controls over financial reporting. It retains the requirements that exemptions must be filed for and received from the domiciliary insurance commissioner. The exemptions may not be granted if risk based capital levels or company actions present a financial hazard.
The collective revisions will be reviewed by the Financial Condition (E) Committee. In its current form, the amendment requires full adoption by 2009.
The unfortunate aspect of the revision is that it appears to be different than the conclusions of the Federal Government. The Final Report of The Advisory Committee on Smaller Public Companies to the U.S. Securities and Exchange Commission due out April 23, 2006 suggests that exemptive relief for smaller companies should be at the $250 million. The rationale was that companies with revenues in excess of $250 million are generally complex and rely on process controls to generate their financial statements. This was derived from database financial analysis of registrants. The NAIC Subgroup appears to have been influenced by the Banking Regulations that exempts certain financial institutions with assets less than $500 million. It remains to be seen whether the exemption level will be agreed or whether Sarbanes-Oxley Act protection for policyholder will have to wait until the enactment of the proposed SMART Act.
We expect this to remain a highly discussed topic and subject to change.
If you have any questions regarding the adoption of Sarbanes-Oxley Act for insurance companies, please contact us at (630) 243-0117 or E-mail at MFischer@riskinc.net.