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NALC What's New... Read the latest NALC publications: In the News
Upcoming Meetings Register Today
2012 Spring Conference
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The Sarbanes Oxley Act and the NAICEd Stephenson,
Director of Operations One of the more controversial and wide reaching issues to come up at the NAIC in the last several years has been the proposal to add provisions of the federal Sarbanes-Oxley Act (SOx) to the NAIC Model Regulation Requiring Annual Audited Financial Statements otherwise known as the Model Audit Rule (MAR). The proposal as currently exposed by the NAIC/AICPA Working Group would require changes to corporate governance and a report on internal controls very much like the SOx provisions for all insurers with annual premium revenue exceeding $25M, whether they were SEC registrants or not. The provisions would require the company to appoint an independent audit committee from among the board of directors unless the composition of the board was otherwise prescribed by state law, changes to the rules regarding auditor qualifications and an annual audited report attesting to internal controls. The proposal is being largely pushed by the VA Deputy Commissioner and Chair of the NAIC/AICPA Working Group Doug Stolte. Several other members of the committee, notably Mike Motil of OH, Steve Johnson of PA and Jim Armstrong of IA have expressed support in varying degrees. Other regulators, notably MI, have expressed their doubts. The industry, almost as a whole, suggested that the NAIC/AICPA Working Group review the provisions of SOx and make a measured determination of what may or may not be covered in the current regulatory and examination process, and modify it, rather than simply pasting SOx into the MAR. NALC representatives have consistently and strenuously objected to the audit committee requirements that will force the appointment of "independent" members onto the board of an otherwise private, closely held company. The NALC contends that, while the requirement may have some validity in protecting rationally disinterested owners, the legal affect and need are unproven in protecting policyholders. These concerns have been largely dismissed by the regulators on the NAIC/AICPA Working Group. The Working Group sent the proposal to Auditor Independence (Title II), Corporate Governance (Title III) and Internal Controls (Title IV) Subgroups for consideration and revision. The Title IV group waited for the other two near completion of their work. The Title II group made very few changes to the original and has referred them back to the Working Group. The Title III Subgroup has made some revisions, including lowering the required number of independent members of the audit committee for smaller companies. Three unresolved issues remain: whether the independent board member requirements can be accomplished by a regulation as opposed to a change in state law; the amounts and types of the thresholds between full and partially independent audit committees; and, the requirement definition and needed safe harbors for a "qualified financial expert" requirement on the audit committee. The Title IV Subgroup has just begun organization and three important issues have emerged: what, if any, exemption will there be for companies from internal controls reporting; will there be requirement that the outside auditor attest to the effectiveness of the internal controls or will a management attestation suffice; and, will there be flexibility regarding the internal controls framework (SOx requires the AICPA’s COSO Framework). Each of these could make a significant difference in the burden of an internal controls requirement. The Working Group is also considering a letter to state commissioners recommending treatment of SEC Section 404 reports. The MAR and SOx have different definitions of the internal controls conditions that are identified to management and those that are reported to outside regulators. Industry’s comments are that the MAR and the AICPA’s accompanying guidance have not changed, and that nothing need be reported that wasn’t required before. There will be regulator a call on February 28th to discuss the issue further. |
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