Insurers dodge a bullet on ties to auditors

Accountants may be irritated by new auditor independence rules, but insurance companies are breathing a sigh of relief.

“We were delighted with the outcome,” says Carl Wilkerson, chief counsel of securities at the American Council of Life Insurers in Washington, which represents about 500 U.S. life insurance companies.

The cause for elation is a Securities and Exchange Commission decision to drop a provision that could have complicated relationships between auditors and insurance companies.

The updating of the rules –the first in 18 years — is intended to prevent conflicts of interest that could compromise the integrity of a public company’s financial statements.

The SEC’s primary goal is to assure investors that the financial statements they review are free of any conflicts “in fact and appearance” emanating from the relationships that accounting firms may have with their audit clients.

While most of the attention focused on consulting relationships between accounting firms and the companies they audit, insurers were quietly waiting to find out how the SEC would handle the provision targeting their industry.

As originally proposed, the measure would have created an undue hardship for auditors and their insurance company clients, the industry argued.

The rule, for example, would have banned accountants from owning insurance policies issued by companies that they audit.

The provision would have applied to immediate family members as well.

The ACLI also claimed that the proposed rule would have imposed additional undue hardship if an auditor were forced to surrender a policy. The move could force the auditor into a higher risk class or create problems getting equivalent insurance.

“Bottom line is that our members would have had a difficult time finding anyone to conduct their annual audits,” says Phil Schwartz, vice president of financial reporting at the American Insurance Association in Washington, a trade group representing companies that provide property and casualty insurance.

satisfied

In the end, the SEC agreed to a compromise that satisfied both the industry and accountants.

“It represents a sensible solution to a difficult issue,” says Mr. Wilkerson.

The final rule says it’s all right to hold a policy as long as the accountant or family member owned it before the accountant’s firm was hired to conduct an audit. The insurance company, however, cannot be headed for insolvency.

Mr. Wilkerson says his organization had no way to estimate the cost, but notes that “most auditing firms are fairly sophisticated and take care of long-term financial needs [for employees] through life insurance and annuity products.”

Although the SEC adopted the rule Nov. 15 in front of a standing-room-only crowd, the final version was not immediately made public.

While a summary made available at the public meeting outlined the general provisions of the rule, it did not address how insurance product ownership would be handled.

The industry was in the dark about the provision until the final rule was issued at the end of last month.

“We had asked for a complete blanket exclusion with regard to ownership of insurance products,” says Mr. Wilkerson. “The SEC came about 99% close to that.”