Clarified Guidance for Audits of Insurance Companies

By Arthur M. Salvadori, CPA
8/24/2017
The American Institute of CPAs (AICPA) issued revised guidance to address the application of AU-C 800, “Special Considerations – Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks,” with regard to insurance statutory basis financial statements prepared in accordance with accounting practices and procedures adopted by the National Association of Insurance Commissioners (NAIC). These revisions change the way auditors assess the adequacy of disclosure requirements for financial statements prepared in accordance with the NAIC statutory accounting framework.

AU-C 800 provides special considerations to an audit of financial statements prepared in accordance with an other comprehensive basis of accounting (OCBOA) such as a tax, cash, contractual, or regulatory framework (which includes the statutory accounting framework developed by the NAIC). AU-C 800 requires an auditor to obtain acknowledgement from management that management’s financial statements prepared in accordance with an OCBOA framework includes informative disclosures similar to those required by U.S. generally accepted accounting principles (GAAP) when items within the financial statements are similar to those in financial statements prepared in accordance with GAAP. These additional GAAP disclosures beyond those required by the NAIC statutory framework or any other OCBOA framework are considered by AU-C 800 to be necessary in order to achieve “fair presentation” of the audited financial statements. These disclosures can be presented within an OCBOA financial statement consistent with the presentation required under GAAP or in a manner that communicates the substance of that disclosure.

Effective April 17, 2017, the AICPA issued revisions to its Audit and Accounting Guides for both life and health insurance entities and property and liability insurance entities. These revisions clarify that GAAP disclosures rejected by the NAIC for purposes of the NAIC statutory accounting framework do not need to be evaluated by the auditor of an insurance carrier’s financial statements prepared in accordance with the NAIC statutory accounting framework. GAAP disclosures rejected by the NAIC for purposes of its accounting framework now are determined to no longer be needed for purposes of assessing whether such statutory financial statements achieve fair presentation as defined under AU-C 800.

However, if the NAIC has not finalized an action regarding GAAP disclosures (either rejection, acceptance, or acceptance with modification of such disclosures), then such GAAP disclosures still must be evaluated by the auditor in order to determine whether such disclosures are needed for an audited statutory basis financial statement to achieve fair presentation as defined under AU-C 800. This assessment occurs when the insurance carrier is required to adopt an accounting pronouncement for GAAP. When required supplementary information (RSI) is included in the audited financial statements, the auditor does not need to apply the requirements of AU-C 800 to RSI, as AICPA professional auditing standards do not consider RSI to be a part of the basic financial statements. Therefore, RSI is not required to achieve fair presentation of those financial statements.

These revisions were effective immediately and should be considered for audited NAIC statutory basis financial statements.