The Cost Of Sarbanes-Oxley Provisions In A Model Audit Rule Is A Point Of Debate

By Jim Connolly

Cost will be one of the main arguments insurers advance when they make the case for dropping any provisions that replicate the Sarbanes-Oxley Act of 2002 in proposed Model Audit Rule regulation.

But some regulators, including Doug Stolte, assistant insurance commissioner with the Virginia Insurance Bureau, will be arguing that the cost of not using such a tool could be future insolvencies.

Stolte says regulators will hear the industry out but notes that other sectors of the financial services industry are required to attest to internal financial reporting controls in Section 404 of Sarbanes-Oxley and insurers should be no different.

Retaining this provision would allow regulators to focus more on compliance than on verifying balance sheets, he says.

During a hearing at the summer meeting of the National Association of Insurance Commissioners next month, insurers will discuss what they estimate will be the internal and external costs of complying with Section 16 of the proposed regulation, which is similar to Section 404 of Sarbanes-Oxley.

Insurers that are public companies already are complying with Sarbanes-Oxley. Under a provision in the Model Audit Rule model regulation, there is an exemption for companies with under $25 million in premium.

But for nonpublic insurers that could be required to comply with the provisions, there will be a hefty increase in cost, according to responses from 7 members of the National Association of Mutual Insurance Companies, Indianapolis. (See chart on page 25.)

Additionally, a survey conducted by the Chicago law firm, Foley & Lardner, LLP, produced 115 responses suggesting significant cost increases for complying with SOX. The survey found that the average cost to a company with annual revenue under $1 billion increased $1.6 million or 130% from the inception of SOX through fiscal year 2003, including an increase of $736,000 during FY 2003. The survey was not specific to insurance companies.

The American Council of Life Insurers, Washington, says it is not uncommon for companies to spend between 30,000 and 60,000 hours of internal and external advisor time complying with internal control requirements associated with Section 404. ACLI also cited a survey of 321 companies by Financial Executive International which found that total costs of first-year compliance with Section 404 could exceed $4.6 million for each of the largest U.S. companies.

Responding to regulators’ statements that the provisions in the model could stave off insolvencies, ACLI said that in 51% of cases, insolvencies are caused by insufficient and/or inadequate pricing.

“SOX was designed for companies that have significantly less disclosure in their financial statements than insurance companies do,” says Steve Broadie, an assistant vice president with the Property Casualty Insurers of America, Des Plaines, Ill. Insurers also are far more regulated than many other types of companies, he adds.

The board of the Life Insurers Council, Atlanta, has decided to examine the issue, which Scott Cipinko, LIC executive director, says is a concern to small companies.

Jan R. Van Gordon, senior executive vice president, secretary and general counsel with Erie Insurance Group, Erie, Pa., explained that an independent auditor who does the financial audits must audit the internal controls. Essentially, he says, 3 opinions need to be completed: a financial opinion; an assessment that material aspects of those controls are in place; and, an attestation that management has fairly stated internal controls.

It is a “monumental undertaking” just to make sure that there are internal document controls, he adds. It can take as much time or more as a full-time audit, he continues.


Reproduced from National Underwriter Edition, May 28, 2004. Copyright 2004 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.