Nearly 16 months after Congress passed the Sarbanes-Oxley corporate governance reform act, insurance industry executives are still coming to grips with the full ramifications of the measure-and with possible tech solutions that will keep them in compliance.Named after Sen. Paul Sarbanes, D-Maryland, and Rep. Michael Oxley, R-Ohio, the legislation was passed in the wake of the Enron and WorldCom scandals that threatened to shake the confidence of investors.
The law, which affects all publicly traded companies in the U.S., is intended to improve corporate responsibility, increase public disclosure, improve the quality and transparency of financial reporting and auditing, and strengthen penalties for securities fraud and other violations. Under the law, CEOs and CFOs are required to sign statements verifying the completeness and accuracy of their financial reports.
At the heart of Sarbanes-Oxley is the requirement that CEOs, CFOs and auditors must attest to the effectiveness of internal controls for financial reporting along with an assessment of those procedures.
Although most companies are still evaluating the compliance implications of Sarbanes-Oxley, 85% of firms polled by Boston-based AMR Research anticipate that they'll need to upgrade their back-end systems. Indeed, nearly 65% of companies surveyed by AMR indicate they're considering enterprise resource planning tools, and 40% are evaluating performance management software which provides financial modeling, budgeting and consolidated reporting across and organization.
Insurers are addressing many of the same technical challenges that other industries have in documenting internal control procedures, but there are some issues that are unique to the industry.
For example, when Sarbanes-Oxley was first published last year, there was concern that a popular life insurance product known as split dollar might be construed as a loan to company executives, and thus prohibited under the legislation.
As a result, the American Council of Life Insurers appealed to the Securities and Exchange Commission to grant an exception for split dollar products. However, the issue became moot when the product was disallowed under Internal Revenue Service rules.
Another insurance industry issue that's being addressed is how to extend the corporate governance procedures outlined in Sarbanes-Oxley to the mutual companies, which do not fall under the purview of the law.
Massachusetts Insurance Commissioner Julie Bowler has taken the lead by developing a set of corporate governance "best practices" that she believes goes beyond merely imposing Sarbanes-Oxley restrictions on the mutuals by taking into account the unique complexities of the insurance industry.
And, the Kansas City, Mo-based National Association of Insurance Commissioners has raised the possibility of modifying its model audit rule to bring it more in line with Sarbanes-Oxley, Although no firm proposals have surfaced, the NAIC did sponsor a Sarbanes-Oxley training program just prior to its annual Winter Meeting in 2002, indicating that corporate governance is an issue that won't be ignored by state regulators anytime soon.
Finally there was this reaction by AIG Chairman and CEO Maurice "Hank" Greenberg, who, in a recent interview in Reactions, raised the specter of too many new regulations hobbling companies' ability to innovate.
"That does not mean you should do away with some of the reforms," Greenberg stated. "Some were necessary. But you should keep it in perspective and not have everyone spending so much time on accountancy issues, corporate issues and ratings agencies' concerns that they have to work a second shift to actually run a company."
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