The National Association of Insurance Commissioners (NAIC) has been studying how portions of the Sarbanes-Oxley Act can be applied to state regulatory reform.The Title IV working group is specifically concerned with what it considers to be inadequate financial reporting under current state laws.
"The old requirement is that insurers have to provide positive assurance of internal controls over financial reporting only when there are significant deficiencies," says Doug Stolte, chair of the working group and deputy commissioner of the Virginia State Commission's bureau of insurance. "Most states have had that rule on the books for 13 or 14 years," he says. "But we'd like a substantive type of audit, and the reporting needs to focus more closely on internal controls."
The group is advocating for a system that ensures similar internal controls as those required under Section 404 of Sarbanes Oxley.
SOX requires public companies to include a statement of management's responsibility for establishing and maintaining adequate internal controls and an assessment of how effective the controls are for financial reporting. In addition, Section 404 requires a company's auditor to review the financial controls as well.
"We want to know that management has assessed and tested its internal controls over financial reporting and everything is working effectively," Stolte says. "And, we want to see an audit that verifies that management has assessed and tested its internal controls."
At the NAIC's annual meeting in May, the group met and developed the following eight guiding principles that it believes should be considered when revising the Model Audit Rule:
* There needs to be a solvency focus.
* The requirements should be risk-based with a focus on significant risks.
* The required reporting should be at the appropriate level.
* Existing risk approaches should be used for the framework.
* The implementation dates should be reasonable.
* The subgroup should consider the confidentiality of information provided to them.
* The revisions should have minimal impact on SEC registrants who have prepared reports required by the Sarbanes-Oxley Act.
* The subgroup should recognize the issues associated with small companies that have limited resources.
Stolte says the NAIC has asked the industry for a proposal to address its concerns regarding internal controls over financial reporting. The American Council of Life Insurers, Washington, D.C., has filed a proposal, which the working group is scheduled to review at its meeting this month.
The Property Casualty Insurers Association of America, Des Plaines, Ill., opposes any SOX-like financial reporting requirements by the states, arguing that they will put an unnecessary financial burden on small and mutual insurance companies.
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