NAICSOXJune02jc –75 lines

Banner: Regulation

Section 404 Remains A Sticking Point

When state insurance regulators meet in mid-June to discuss incorporating elements of the Sarbanes-Oxley Act of 2002 in a model audit rule that is in place in 39 states, two of three pieces under discussion will be moving toward completion.

Recent discussions regarding Titles II and III potential changes, auditor independence and corporate governance, respectively, have resulted in changes that could be incorporated into draft revisions of the Model Regulation Requiring Annual Audited Financial Statements, also called the Model Audit Rule. MAR is a model of the National Association of Insurance Commissioners, Kansas City, Mo., which will be holding its summer national meeting June 11-14.

These two components of SOX changes will be held until work on Title IV which covers internal controls is finalized, says Doug Stolte, chair of the NAIC/AICPA working group and deputy commissioner of Virginia’s bureau of insurance. The goal is that all components will be advanced together through the NAIC and then be brought as one change to state legislatures, he explains.

Stolte has argued that recent events including restatement of financial statements at American International Group, New York, underscores the need for more stringent auditing requirements at the state level as well as the federal level.

Insurers argue that the costs outweigh the benefits of these changes. At press time, the National Association of Mutual Insurance Companies, Indianapolis, is finalizing a study that it says will quantify these costs. Results of that study could be released next week.

During a discussion of corporate governance or Title III issues, it was reaffirmed that when a state’s statutes differed from the draft’s requirements, the draft language deferred to state law.

The requirement that a financial expert be appointed by a company to an audit committee was removed because regulators maintained that states could not provide the same assurances of safe harbor protection from liability that federal law affords.

Ed Stephenson, representing the National Alliance of Life Companies, Rosemont, Ill., raised a concern that the model’s requirements regarding the appointment of an independent board of directors goes beyond the regulatory authority of a significant number of insurance commissioners and impinges on states’ statutes establishing corporate frameworks.

And, Bill Boyd, NAMIC’s financial regulation manager, says that although NAMIC still has major concerns regarding the Model, some of the changes on Title III were positive steps. Requirements in Title IV changes in Section 404 of the model is still a big issue for NAMIC, Boyd says.

Changes to MAR will also receive discussion during the summer meeting of the National Conference of Insurance Legislators, Troy, N.Y., during its summer meeting in Newport, Rhode Island on July 7-10.

Recent Events versus Cost-Benefits Remain An Issue