Actuarial Standard of Practice No. 21

Responding to or Assisting Auditors or Examiners in Connection with Financial Audits, Financial Reviews, and Financial Examinations

STANDARD OF PRACTICE

TRANSMITTAL MEMORANDUM

September 2016

TO: Members of Actuarial Organizations Governed by the Standards of Practice of the Actuarial Standards Board and Other Persons Interested in Responding to or Assisting Auditors or Examiners in Connection with Financial Audits, Financial Reviews, and Financial Examinations

FROM:  Actuarial Standards Board (ASB)

SUBJ:  Actuarial Standard of Practice (ASOP) No. 21

This document contains the final version of a revision of ASOP No. 21, now titled Responding to or Assisting Auditors or Examiners in Connection with Financial Audits, Financial Reviews, and Financial Examinations.

Background

In 2002, the ASB decided that a revision of ASOP No. 21, whose predecessor was originally adopted in 1974 and was revised and published in 1993, was necessary because accounting and financial reporting had become increasingly complex since the original standard was issued and because audit issues had received increased attention in recent years. As a result, the version preceding this revision was adopted in 2004.

In 2014, the ASB decided that another revision of ASOP No. 21 was necessary. Financial audits, financial reviews, and financial examinations had evolved significantly since 2004. The prior version of ASOP No. 21 did not address the actuary’s responsibility with respect to process and controls in the Sarbanes-Oxley environment, and was adopted before the National Association of Insurance Commissioners promulgated the Model Audit Rule. Furthermore, audits, reviews, and examinations are increasingly conducted on a risk-focused basis and this contributed to the need for a revision to ASOP No. 21.

Accordingly, in 2014, the ASB created a task force, under the direction of the General Committee, to consider revisions to this standard. An exposure draft was released in September 2015 with a comment deadline of December 31, 2015. Nineteen comment letters were received and considered in making changes that were reflected in this final revised standard. For a summary of the substantive issues contained in the comment letters on the exposure draft, please see appendix 2.

The General Committee would like to thank former committee members Jeremy J. Brown, Charles F. Cook, John C. Lloyd, Cande J. Olsen, and Lance J. Weiss for their contribution to the development of this ASOP.

The ASB voted in September 2016 to adopt this standard.

 

Task Force to Revise ASOP No. 21
Barbara L. Snyder, Chairperson

Rowen B. Bell                          Elizabeth C. Rogalin
Ralph S. Blanchard, III             Lisa A. Slotznick
Burton D. Jay                           John T. Stokesbury
Tonya B. Manning

General Committee of the ASB
Maria M. Sarli, Chairperson

Shawna S. Ackerman               Dale S. Hagstrom
Ralph S. Blanchard III              Margaret Tiller Sherwood
Raymond R. Brouillette            Mary H. Simmons
David L. Driscoll                       Thomas D. Snook

Actuarial Standards Board
Maryellen J. Coggins, Chairperson

Christopher S. Carlson              Barbara L. Snyder
Beth E. Fitzgerald                     Kathleen A. Riley
Darrell D. Knapp                       Frank Todisco
Cande J. Olsen                          Ross A. Winkelman

 

The Actuarial Standards Board (ASB) sets standards for appropriate actuarial practice in the United States through the development and promulgation of Actuarial Standards of Practice (ASOPs). These ASOPs describe the procedures an actuary should follow when performing actuarial services and identify what the actuary should disclose when communicating the results of those services.

Section 1. Purpose, Scope, Cross References, and Effective Date

1.1 Purpose

This actuarial standard of practice (ASOP) provides guidance to actuaries when performing actuarial services while responding to or assisting auditors or examiners in connection with a financial audit, financial review, or financial examination.

1.2 Scope

This standard applies to actuaries when performing actuarial services as a responding actuary or as a reviewing actuary in connection with a financial audit or financial review in accordance with generally accepted auditing standards or a financial examination for the purpose of oversight of the financial condition of an entity. This standard does not apply to actuaries when providing services in connection with filings such as rate filings, tax returns, or the schedules of actuarial information filed with the Form 5500. For example, this standard does not apply to Schedules SB or MB attached to the Form 5500 but would apply to the plan audit. The standard does not apply to actuaries providing services in connection with the audit, review, or examination of contract performance. This standard applies to actuaries working as part of an internal audit function only to the extent that the actuary directly assists an auditor or examiner.

If the actuary departs from the guidance set forth in this standard in order to comply with applicable law (statutes, regulations, and other legally binding authority), or for any other reason the actuary deems appropriate, the actuary should refer to section 4.

1.3 Cross References

When this standard refers to the provisions of other documents, the reference includes the referenced documents as they may be amended or restated in the future, and any successor to them, by whatever name called. If any amended or restated document differs materially from the originally referenced document, the actuary should consider the guidance in this standard to the extent it is applicable and appropriate.

1.4 Effective Date­

This standard will be effective for any actuarial work in connection with a financial audit, financial review, or financial examination for fiscal periods beginning on or after December 15, 2016.

Section 2. Definitions

The terms below are defined for use in this standard of practice.

2.1 Auditor

The external firm or professional engaged to conduct a financial audit or financial review in accordance with generally accepted auditing standards for the purpose of issuing an opinion on a financial statement.

2.2 Contract Performance

The fulfillment of an entity’s obligations required by a contract, for example, compliance under the provisions of a reinsurance contract or under a contract that includes a retrospective rate adjustment or experience refund.

2.3 Entity

An institution, company, corporation, partnership, government agency, university, employee benefit plan, or other organization that may be subject to a financial audit, financial review, or financial examination, as well as the individuals who are authorized to act on behalf of the organization.

2.4 Examiner

An employee of or contractor to state or federal regulators performing a financial examination on behalf of a governmental agency responsible for oversight of the financial condition of the entity.

2.5 Financial Audit

An evaluation of financial statements or internal controls over financial reporting by an auditor, conducted under generally accepted auditing standards, with a view to expressing an opinion on whether the financial statements are presented fairly in all material respects within the applicable financial reporting framework or on the effectiveness of the entity’s internal controls over financial reporting.

2.6 Financial Examination

An evaluation of an entity’s financial condition by an examiner. It will generally include a review of the financial statement and will often include a review of financial strength, corporate governance, or management oversight.

2.7 Financial Review

An evaluation, by performing limited procedures, of financial statements or internal controls over financial reporting by an auditor, conducted under generally accepted auditing standards. The evaluation supports an auditor’s opinion on whether any material modifications should be made to the financial statements or to the entity’s internal controls over financial reporting. A financial review is often performed on interim financial statements. For this standard, a financial review does not include a review conducted for any other purpose, such as in support of a potential M&A or IPO transaction.

2.8 Financial Statements

Reports on the financial position and the financial activities of an entity, prepared in accordance with accounting requirements prescribed or permitted by insurance regulators or accounting standards.

2.9 Generally Accepted Auditing Standards

Sets of standards promulgated by various standards-setting bodies by which audits or reviews are performed and against which the quality of audits or reviews may be judged.

2.10 Responding Actuary

An actuary who is authorized by the entity to respond to the auditor or examiner on behalf of the entity being audited, reviewed, or examined with respect to specified elements of the entity’s financial audit, financial review, or financial examination that are based on actuarial considerations. Any given financial audit, financial review, or financial examination may involve one or more  responding actuaries.

2.11 Reviewing Actuary

An actuary designated by the auditor or examiner to assist with the financial audit, financial review, or financial examination with respect to specified elements of the financial audit, financial review, or financial examination that are based on actuarial considerations. Any given financial audit, financial review, or financial examination may involve one or more reviewing actuary.

Section 3. Analysis of Issues and Recommended Practices

3.1 Scope and Planning for a Financial Audit, Financial Review, or Financial Examination

The reviewing actuary should, to the extent practicable, review the scope and assist with the planning associated with actuarial work on a financial audit, financial review, or financial examination.

3.1.1 Understanding the Scope

The reviewing actuary should understand the relevant aspects of the scope of the financial audit, financial review, or financial examination as well as the auditor’s or examiner’s expectations regarding the nature, extent, and timing of the reviewing actuary’s procedures, including how the results will be communicated.

3.1.2 Informing the Responding Actuary

The reviewing actuary should, to the extent practicable, inform the responding actuary about the scope and timing of the actuarial procedures and describe the type of information to be requested by the reviewing actuary.

3.2 Discussion between Responding Actuary and Entity

The responding actuary should consider discussing the nature, format, and timing of the responding actuary’s responses with the entity subject to the financial audit, financial review, or financial examination.

3.3 Relationship with the Entity Whose Financial Statement is Being Audited, Reviewed, or Examined

The reviewing actuary should disclose to the auditor or examiner any relationships with the entity whose financial statement is being audited, reviewed, or examined, or any relationship with the entity’s affiliates.

3.4 Communication from Responding Actuary

The responding actuary should be appropriately responsive to requests from the auditor or examiner, including the reviewing actuary, within the scope of the financial audit, financial review, or financial examination. The responding actuary may involve other individuals in responding to the auditor or examiner.

3.5 Requests for Information

The reviewing actuary and the responding actuary should cooperate in the compilation of the information needed by the reviewing actuary in order to perform the actuarial procedures. The responding actuary should also cooperate in the compilation of information requested by the auditor or examiner in order to perform the financial audit, financial review, or financial examination.

3.5.1 Information Request Communication

The reviewing actuary should communicate, preferably in writing, what information is requested by the reviewing actuary in order to perform the actuarial procedures. To the extent practicable, the reviewing actuary should communicate with the entity about the time frame within which the information is requested and work with the entity if there are conflicts or time frames that cannot be met. The reviewing actuary should consider whether the information requested is within the scope of the financial audit, financial review, or financial examination.

3.5.2 Responding to Requests for Information

In responding to requests for information, the responding actuary should consider the following:

a. the extent to which the information requested is readily available;

b. if the information requested is not readily available, what other information is available or reasonably can be produced that can meet the auditor’s or examiner’s needs; and

c. whether the information requested is within the scope of the financial audit, financial review, or financial examination.

To the extent practicable, the responding actuary should work with the auditor or examiner if there are conflicts or time frames that cannot be met.

3.5.3 Disagreement on Provision or Use of Information

In the event of disagreement between the responding actuary or the entity being audited, reviewed, or examined and the reviewing actuary regarding the information requested, the reviewing actuary should discuss the issue with the auditor or examiner and the entity.

3.5.4 Data, Assumptions, Methods, Models, and Controls

The responding actuary should be prepared to discuss with the auditor or examiner, including the reviewing actuary, the following items underlying those elements of the  financial statement or other elements within the scope of the financial audit, financial review, or financial examination for which the actuary is the responding actuary:

a. the data used;

b. the methods and assumptions used and judgments applied, and the rationale for those methods, assumptions, and judgments;

c. the source of any methods and assumptions not set by the responding actuary;

d. the models used;

e. the design and effectiveness of controls around the process, procedures, and models;

f. any significant risks to the entity considered by the responding actuary; and

g. the reasoning to support results and conclusions.

3.5.5 Changing Conditions

The responding actuary should be prepared to discuss with the auditor or examiner circumstances that, in the actuary’s professional judgment, had or may have a significant effect on the preparation of those elements of the  financial statement or other elements within the scope of the financial audit, financial review, or financial examination that are based on actuarial considerations. Examples of such circumstances may include the following:

a. changes in the operating environment;

b. trends in experience;

c. product or plan changes and changes in product mix or demographic mix;

d. changes in the entity’s policies or procedures, or in valuation bases; and

e. compliance with relevant new or revised accounting rules, laws and regulations, or other government promulgations.

3.5.6 Confidentiality

The reviewing actuary and the responding actuary should be aware that a financial audit, financial review, or financial examination may give rise to the exchange of confi­dential information. Such confidential information shall be handled consistent with Precept 9 of the Code of Professional Conduct.

3.6 Documentation

The reviewing actuary and the responding actuary may produce independent documentation appropriate for their respective teams or principals.

3.6.1 Documentation of Findings by Reviewing Actuary

The reviewing actuary should document findings from the actuarial procedures. The reviewing actuary’s documentation should include the following:

a. evidence that the reviewing actuary’s procedures have been planned and coordinated with the auditor or examiner;

b. a summary description of the items subject to the reviewing actuary’s actuarial audit, review, or examination procedures;

c. a summary description of the procedures followed by the reviewing actuary; and

d. a summary description of the results of the review, providing conclusions or findings.

3.6.2 Documentation by Responding Actuary

The responding actuary should consider documenting information provided to the auditor or examiner.

Section 4. Communications and Disclosures

4.1 Communication and Disclosure

Both the reviewing actuary and the responding actuary should comply with ASOP No. 41, Actuarial Communications. The reviewing actuary and the responding actuary should include the following, as applicable, in their actuarial communications:

a. the disclosure in ASOP No. 41, section 4.2, if any material assumption or method was prescribed by applicable law (statutes, regulations, and other legally binding authority);

b. the disclosure in ASOP No. 41, section 4.3, if the actuary states reliance on other sources and thereby disclaims responsibility for any material assumption or method selected by a party other than the actuary; and

c. the disclosure in ASOP No. 41, section 4.4, if, in the actuary’s professional judgment, the actuary has otherwise deviated materially from the guidance of this ASOP.

Appendix 1 – Background and Current Practices

Note: The following appendix is provided for informational purposes, but is not part of the standard of practice.

Background

Financial Reporting Recommendation 2, Relations with the Auditor, was adopted in 1974 by the American Academy of Actuaries and revised in 1983. Recommendation 2 was limited in its application to audits in connection with financial statements of stock life insurance companies prepared in accordance with generally accepted accounting principles (GAAP). In 1993, Financial Reporting Recommendation 2 was replaced by ASOP No. 21, The Actuary’s Responsibility to the Auditor, which expanded the scope of the existing standard to apply to any actuary who acts for any organization in the preparation or in the review of a financial statement or report that is expected to be audited by a public accounting firm retained by that organization. Financial Reporting Recommendation 3, Actuarial Report and Statement of Actuarial Opinion for Stock Life Insurance Company Financial Statements Prepared in Accordance with GAAP, also adopted in 1974 and revised in 1983, was withdrawn in 1993 because the Actuarial Standards Board (ASB) determined that it was no longer needed.

In 2002, the ASB decided that a revision of ASOP No. 21 was necessary because accounting and financial reporting had become increasingly complex since the original standard was issued and because audit issues had received increased attention in recent years. As a result, the version preceding this revision was adopted by the ASB in 2004.

Further expansion of the breadth of audits, reviews, and examinations of financial statements to include risk-focused components led the ASB to decide in 2014 that another revision of ASOP No. 21 was appropriate. Not only has the breadth changed but Sarbanes-Oxley and the Model Audit Rule have become part of the landscape for audits, reviews, and examinations.

The format has been revised to be consistent with the current format adopted by the ASB and reflects the adoption of other standards since ASOP No. 21 was last revised.

Current Practices

Actuaries routinely work with auditors and examiners when financial statements are being audited, reviewed, or examined. Financial statements generally include the statement of financial position (balance sheet), statement of comprehensive income, reconciliation of capital or surplus, statement of cash flows, and accompanying notes.

During the process of revising ASOP No. 21, some additional considerations arose that may provide helpful additional information, as discussed below.

An external auditor is an outside firm engaged and paid by the entity subject to the audit. Internal auditors are employed by the organizations they audit and are employed to give objective assurance to the organization that employs them in accordance with that entity’s standards.

A number of organizations have developed sets of principles that represent generally accepted auditing standards and are intended to be encompassed in the definition of the phrase as used in this standard. In the United States, the final authority for the standards for public companies is the Public Companies Accounting Oversight Board (PCAOB), which in turn is subject to the oversight of the Securities and Exchange Commission (SEC). The standards setting body for other U.S. companies is the Auditing Standards Board, a division of the American Institute of Certified Public Accountants (AICPA). The Generally Accepted Government Auditing Standards, also known as the Yellow Book, is for use by auditors of government entities, entities that receive government awards, and other audit organizations performing Yellow Book audits. The International Federation of Accountants (IFA), through the International Auditing and Assurance Standards Board (IAASB), sets the International Standards on Auditing (ISA). There are potentially other standards in various worldwide territories.

Appendix 2 – Comments on the Second Exposure Draft and Task Force Responses

The exposure draft of this revision of ASOP No. 21, Responding to or Assisting Auditors or Examiners in Connection with Financial Audits, Financial Reviews, and Financial Examinations, was issued in September 2015 with a comment deadline of December 31, 2015. Nineteen comment letters were received, some of which were submitted on behalf of multiple commentators, such as by firms or committees. For purposes of this appendix, the term “commentator” may refer to more than one person associated with a particular comment letter. The Task Force carefully considered all comments received, and the General Committee and ASB reviewed (and modified, where appropriate) the proposed changes.

Summarized below are the significant issues and questions contained in the comment letters and the responses to each.

The term “reviewers” includes the Task Force, General Committee, and the ASB. Unless otherwise noted, the section numbers and titles used below refer to those in the exposure draft.

Click here to read appendix 2 in its entirety.