SUBCHAPTER A. Examination and Financial Analysis
28 TAC §7.85
1. INTRODUCTION. The Texas Department of Insurance proposes amendments to §7.85 concerning audited financial reports. The amendments are necessary to add to the definition of "Generally Accepted Auditing Standards" to implement Senate Bill 1591 enacted by Acts 2005, 79th Legislature, ch. 408, eff. Sept. 1, 2005 which added to Insurance Code Article 1.15A, the auditing standards adopted by the Public Company Accounting Oversight Board; revise subsection (e) of the section to implement the amendment to Article 1.15A by Senate Bill 1591 to require that the accountant conducting the audit consider the standards specified in the subsection; clarify the accounting and valuation requirements for certain investments by adding a reference to §7.18 of this title (relating to National Association of Insurance Commissioners Practices and Procedures Manual) in subsections (e) and (g) of the section; and add a balance sheet in subsection (f) of the section to assist in the reconciliation of any differences between the audited financial report and the department's reporting requirements. The amendments are also necessary to update references to statutes and correct grammatical errors.
2. FISCAL NOTE. Ms. Betty Patterson, Senior Associate Commissioner, Financial Program, has determined that for the first five years the amended section is in effect, there will be no fiscal implications for state or local government as a result of the amendments, and there will be no effect on local employment or the local economy.
3. PUBLIC BENEFIT/COST NOTE. Ms. Patterson has also determined that for each year of the first five years the proposed amendments are in effect, the public benefit will be more efficient regulation of insurers subject to examination under Insurance Code Article 1.15 because of the utilization of the required report and workpapers by the department in conducting examinations of insurers. There is no financial cost to persons required to comply as a result of the adoption, enforcement or administration of the proposed amendments as these amendments are the result of the enactment of the amendments to the Insurance Code Article 1.15A by the 79 th Texas Legislature and the department's proposed amendments to §7.18 of this title (relating to National Association of Insurance Commissioners Accounting Practices and Procedures Manual) published elsewhere in this issue of the Texas Register. Because these amendments are not a result of the adoption, enforcement or administration of the proposed amendments, it is the department's position that the adoption of the amendments will have no adverse economic effect on small and micro businesses.
4. REQUEST FOR PUBLIC COMMENT. To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on December 19, 2005 . All comments should be submitted to Gene C. Jarmon, General Counsel and Chief Clerk, Texas Department of Insurance, Mail Code 113-2A, P. O. Box 149104 , Austin , Texas 78714-9104 . An additional copy of the comments should be submitted simultaneously to Betty Patterson, Senior Associate Commissioner, Financial Program, Texas Department of Insurance, Mail Code 305-2A, P.O. Box 149104 , Austin , Texas 78714-9104 . A request for a public hearing on the proposal should be submitted separately to the Office of the Chief Clerk.
5. STATUTORY AUTHORITY. The amendments are proposed under the Texas Insurance Code Article 1.15A and §36.001. Article 1.15A, §10(f) requires the Commissioner to adopt rules governing the information to be included in the audited financial report prepared by an accountant or accounting firm, which is reviewed by the department during the conduct of the examination of insurers under Article 1.15. Section 36.001 provides that the Commissioner may adopt any rules necessary and appropriate to implement the powers and duties of the department under the Insurance Code and other laws of this state.
6. CROSS REFERENCE TO STATUTE. Insurance Code Article 1.15A is affected by this proposal.
§7.85. Audited Financial Reports.
(a) Definitions. The following words and terms, when used in this section, shall have the following meanings, unless the context clearly indicates otherwise.
(1) Accountant--An independent certified public accountant or accounting firm that meets the requirements of Insurance Code, Article 1.15A, §12.
(2) Audited Financial Report--The annual audit report required by Insurance Code, Article 1.15A.
(3) Commissioner--The Commissioner of Insurance.
(4) Department--The Texas Department of Insurance.
(5) Examiner--Staff appointed by the Commissioner pursuant to Insurance Code, Articles 1.17 and 1.18.
(6) Generally Accepted Accounting Principles (GAAP)--The conventions, rules, and procedures that define accepted accounting practice, including broad guidelines and detailed procedures, set forth by the Accounting Principles Board of the American Institute of Certified Public Accountants, which was superseded by the Financial Accounting Standards Board, and which principles are specifically defined by SAS Number 69 (AU §411.05).
(7) Generally Accepted Auditing Standards (GAAS)--The standards adopted by the American Institute of Certified Public Accountants or Public Company Accounting Oversight Board to conduct an audit and to ensure the quality of the performance by accountants who are engaged in an audit of financial statements.
(8) NAIC--The National Association of Insurance Commissioners.
(9) Statutory Examination--An examination performed by the Department's examiners or other persons or firms retained by the Department specifically for examination of insurers, corporations, or associations.
(10) Work Papers--The records kept by the accountant supporting that accountant's audit opinion, including the audit records defined by Insurance Code, Article 1.15A, §17(a); the accountant's audit planning records; and any record of communications related to the audit between the accountant and the insurer pursuant to the Insurance Code, Article 1.15A, §17(b).
(11) Material--As defined in the NAIC Accounting Practices and Procedures Manual adopted in §7.18 of this title (relating to NAIC Accounting Practices and Procedures Manual).
(b) Priority of Accounting Guidance. The priority for determination of accounting standards is set out in §7.18 of this title.
(c) Applicability. This section applies only to audited financial reports with audit dates as of December 31, 1995 , or later. A foreign or alien insurer may be exempt from this rule if the foreign or alien insurer files an audited financial report in another state and the requirements for that state's audited financial reports are determined by the Commissioner pursuant to the Insurance Code, Article 1.15A, §6(a), to be substantially similar to the requirements in Insurance Code, Article 1.15A. A foreign or alien insurer is exempt from this rule if the foreign or alien insurer files an audited financial report in another state and the requirements for that state's audited financial reports have already been determined by the Commissioner pursuant to the Insurance Code, Article 1.15A, §6(a), to be substantially similar to the requirements in Insurance Code, Article 1.15A.
(d) Purpose. The Department recognizes that the Insurance Code, Article 1.15A, requires audited financial reports to be prepared, and that statutory examinations are periodically conducted pursuant to the Insurance Code. To improve coordination between the audited financial reports and statutory examinations, and to promote the utilization of work papers to the fullest extent during the conduct of statutory examinations, certain minimum standards, guidelines, and procedures must be incorporated by the accountant during the preparation of the work papers and the audited financial report. The purpose of this section is to establish those requirements.
(e) Conduct of audit. The annual audit required by the Insurance Code, Article 1.15A, shall be conducted in accordance with GAAS. It is not the department's intent to expand audit testing beyond the requirements of GAAS.
The accountant conducting the audit shall consider [
To the extent not inconsistent with GAAS, consideration shall be given to ] the procedures and conventions set out in paragraphs (1) - (4) of this subsection, as follows:
(1) audit procedures and format contained in the NAIC Examiners Handbook;
(2) accounting treatments for the particular line(s) of insurance contained in §7.18 of this title and the NAIC Annual Statement Instructions adopted by the Commissioner;
(3) valuation procedures contained in the NAIC Purposes and Procedures of the Securities Valuation Office manual and §7.18 of this title ; and
(4) any order(s) of the Commissioner issued to a particular company.
(f) Contents of audited financial reports. In addition to the contents specified in the Insurance Code, Article 1.15A, §10(a) - (c), audited financial reports shall contain the statements and reports set out in paragraphs (1) - (3) of this subsection.
audit ] procedures and format contained in the NAIC Examiners Handbook
(2) The balance sheet, statement of gain or loss from operations, statement of changes in capital and surplus, and the statement of cash flow prepared in accordance with the Texas Administrative Code and the NAIC Annual Statement Instructions adopted by the Commissioner.
(3) In addition to the items that must be recorded in the notes to the financial statements as required by the Insurance Code, Article 1.15A, §10(c), any exceptions to compliance with the financial, investment, and holding company provisions of the Insurance Code or the Texas Administrative Code noted during the audit and a schedule and explanation of material non-admitted assets shall also be recorded in notes. The notes shall also include those items required by the appropriate NAIC Annual Statement Instructions and the NAIC Accounting Practices and Procedures Manual. Furthermore, the notes shall include a reconciliation of any differences, if any, between the audited statutory financial statements and the Annual Statement filed with the department, with written description of the nature of these differences.
(g) Contents of work papers.
(1) For those items subjected to detailed tests by the accountant during the course of the audit, the work papers shall contain notation of whether any material exceptions exist for each of the items set out in subparagraphs (A) and (B) of this paragraph.
(A) For invested assets:
(i) compliance as an authorized investment has been determined and does not exceed statutory limitations;
(ii) ownership and possession have been verified; and
(iii) securities are valued in accordance with the instructions of the NAIC Purposes and Procedures of the Securities Valuation Office manual and §7.18 of this title .
(B) For assets other than invested assets:
(i) such assets are admitted in accordance with the appropriate provision of the Insurance Code or Texas Administrative Code; and
(ii) such assets are valued in accordance with the Texas Administrative Code and §7.18 of this title.
(2) If the regulated entity subject to the audit has any material reinsurance agreement or agreements, the work papers shall contain an outline addressing the items set out in subparagraphs (A) - (E) of this paragraph as follows:
(A) summary of the insurer's overall reinsurance program;
(B) explanation of relevant provisions by which liabilities are transferred to the reinsurer and any contingency provisions by which the reinsurer can cause the ceding insurer to reassume liabilities previously transferred to the reinsurer;
(C) explanation about assets held in trust, depositories, or letters of credit by which any reserve liabilities are collateralized;
(D) verification of any material reinsurance balance ceded or assumed; and
(E) explanation of amounts recoverable from unlicensed reinsurers that are not collateralized, or disputed reinsurance recoverables.
(3) The work papers of any audited entity shall contain:
(A) any letters from the accountant to management commenting on or explaining internal management operating procedures;
(B) computer-generated work papers;
(C) audit program;
(D) reports prepared by outside consultants;
(E) for policy liabilities, a note that reserves are established in accordance with policy and statutory provisions, and that required payments were made pursuant to any contract provisions;
(F) for all other liabilities, that all material liabilities of the company have been properly recorded; and
(G) internal control work papers.
(4) The work papers of any audited entity shall contain a notation that the accountant has determined that such entity met the requirements of subparagraphs (A) and (B) of this paragraph.
(A) Filing requirements have been met of the Insurance Code,
Chapter 823 [
Article 21.49-1, §3 and §4, ] and the Texas Administrative Code, including but not limited to the requirements that all dividends have been reported to the Department within two business days after declaration and at least ten days prior to payment, and that all dividends have been declared to have been paid in accordance with the provisions of Insurance Code, Articles 3.11, 21.31, 21.32, 21.32A, or
22.08 ], whichever statute is applicable.
(B) Unencumbered assets have been maintained in an amount at least equal to reserve liabilities as required by Insurance Code, Article 21.39-A.
(h) Accessibility of work papers. The accountant shall provide all work papers to the examiner, whether during or after the preparation of the audited financial report. The examiner may obtain, if necessary, photocopies of work papers as provided by the Insurance Code, Article 1.15A, §17(c), so as not to burden the accountant if a statutory examination is occurring at the same time as an annual audit. Information obtained under this section is subject to the confidentiality standards imposed by Insurance Code, Articles 1.15, §8(b); 1.15A, §17(c); 1.18; and
21.49-1, §10 ].
(i) Noncompliance with this section may result in the Commissioner initiating action pursuant to Insurance Code Article [
, Articles 1.10, §7, and ] 1.15A, §12(d)
and Chapter 82 .