To the Point by Jack Bobo

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The Enron debacle has, to be sure, cast a pall over the entire business community and, in the process, devastated the accounting profession. Auditors, whose main credibility has always been derived from their ability to be independent and forthright with their clients, appear to have lost ground in both these areas.

Observers in the press offer a variety of explanations for this loss, but in one way or another they imply that clients are able to manipulate or influence audit results more attuned to corporate objectives than accounting standards.

Perhaps it is just a natural result of bigness. A client paying an accounting firm $10 million or $12 million a year for a variety of services holds a large hammer, which may be used to nail down results a smaller client could not demand.

I have no doubt that the Enron experience and a few others of similar nature will have a cathartic effect upon the accounting profession and, in the process, both business and the public will be better served. While much blame has been dumped upon accounting firms, it is important, I believe, that each line of business take a look at its own activities to examine what, if any, of their initiatives may have improperly exploited the reputation of their independent auditors.

That raises the question, at least for purposes of this column: Is the life insurance business in any way vulnerable or perhaps even guilty of questionable practices? I do not have the resources or ability to comment on the main line accounting and actuarial functions of insurance companies, so I will leave that arena to state regulators and others more qualified. However, I do believe we could be subject to criticism in an important area that might not immediately come to mind.

A few years back, the American Council of Life Insurers spearheaded the formation of an organization called the Insurance Marketplace Standards Association (IMSA). Faced with an increasing number of lawsuits from consumers over marketing practices pandemic at the time, IMSA was viewed as a way to correct our marketing problems and reduce litigation against the industry.

A life insurance company could voluntarily join IMSA, but only after it had met certain standards in about 52 major categories of marketing function, and been certified by IMSA trained and approved auditors. Auditors were trained by IMSA in two special sessions in Chicago.

I attended one of these training sessions along with a number of other people with extensive insurance marketing background. However, by far the largest number of people being trained were from major accounting firms. While these were obviously people skilled in accounting, it was apparent from the questions asked that most did not have a clue about what the marketing of life insurance was about.

Companies that joined IMSA were able to display the IMSA logo in their ads and other publications. The logo and the organization behind it were to serve as a bolster of public opinion and confidence in our business. All very noble and worthwhile objectives.

However, while IMSA may have been conceived in purity, it was born with the taint of original sin. I am not aware that anyone with an insurance marketing background was ever selected by a company to do an IMSA audit or even be a member of an audit team. Rather, most, if not all, companies turned to their accounting auditors for this additional service. As a consequence, the people “without a clue” were given a job for which they had doubtful credentials.

During this period I received a phone call from a prominent life underwriter in New York City. He said to me, “Youd never guess who I have in my office right now.” I agreed that I couldnt guess, and he continued, “There are 15 people from one of the big five accounting firms here to look over my operation–none of them have ever been in an agents office and they want to see how it works.” So, in the span of a couple of hours they became experts–presumably.

Was the original intent of IMSA faulted or was the system corrupted by its members? Given the lack of visible results over the past four years, I believe a strong case could be made for the latter. Is it possible that accounting firms were chosen because the weight of other business and fees could be brought to bear upon those doing the marketing audit, thereby influencing the results? I dont know the answer, but I suspect we may be vulnerable.

I have yet to meet an agent who acknowledges that the existence of IMSA has made any kind of difference. In fact, when you mention IMSA most say, “whats that?” I do not see the IMSA logo in many company ads anymore, so I assume they have either dropped their membership or feel it is unimportant. I am not aware that any IMSA member has been expelled or censured for violations. If there have been some, I dont believe anyone has noticed.

IMSA may have a good idea, but its execution has been flawed and has not served the industry well. Like the “old soldier” of the barracks ballad, its time for IMSA to “fade away.”


Reproduced from National Underwriter Life & Health/Financial Services Edition, June 10, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.