September 25, 2000
Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street
Washington, DC 20549-0609
Re: Proposed Revision of the Commission's Auditor Independence Requirement - File No. S7-13-00
Dear Mr. Katz:
The American Insurance Association (AIA) is a trade association consisting of
more than 360 property-casualty insurers that provide coverage to businesses and individuals throughout the United States and internationally. Most of our members are affiliates of publicly held groups that are registrants with the Securities and Exchange Commission (SEC). Accordingly, the Proposed Revision would affect our members' auditors, who would be subject to this independence requirement. AIA is concerned that the sweeping nature of the Proposal as it relates to insurance policies (Section 2-01(c)(1)(ii)(F)), would make it impossible for large insurers to find auditors who could satisfy the independence requirements.
Section 2-01(c)(1)(ii)(F) indicates that: "An accountant is not independent where the accounting firm, any covered person in the firm, or any of his or her immediate family members [spouse, spousal equivalent or dependents] has any individual policy or professional liability policy originally issued by an insurer that is an audit client or an affiliate of an audit client." Further, Section 2-01(f)(13) defines "covered persons in the firm" to include, among others: "Any partner, principal, or shareholder from an `office' of the accounting firm that participates in a significant portion of the audit." (emphasis added) Finally, Section 2-01(f)(17) defines "office" to mean: "a distinct sub-group within an accounting firm, whether distinguished along geographic or practice lines." (emphasis added)
It is common for large insurers to have offices around the United States and sometimes around the world, and many of those offices may represent a significant portion of the audit. In addition, audits of these large insurers are usually conducted by the "Big Five" accounting firms and involve the insurance practice of these firms. Therefore, it would appear that all of the partners, principals and shareholders from all of the offices that participate in the audits as well as the partners, principals and shareholders in the insurance practices of these firms (as well as the spouses, spousal equivalents and dependents of these individuals) are prohibited from having insurance policies originally issued by an insurer that is a client of the firm or the independence of the firm would be considered impaired.
Even if the world were static, it would represent a significant effort to be certain that none of these individuals (or their spouses, spousal equivalents or dependents) had an individual insurance policy (e.g., life, health, auto, homeowners or umbrella) with any insurance client. But, of course, the world is not static: accounting firms acquire new clients and insurance companies are merging with and acquiring other insurance companies at a record pace. (In 1999 alone, at least 119 groups of insurers merged with or acquired other groups of insurers - and each group often included many individual insurers.) As a practical matter, it would not be possible for the covered persons and their immediate family members to keep track of all of these changes.
Further, it could create a hardship for some to terminate policies if an auditing firm's acquisition of a new insurance client, or an insurance company's merger or acquisition, or an accountant's marrying a new spouse were to create an impairment to an auditor's independence. Most notably, if an auditor or a new spouse has an existing life or health insurance policy and a conflict develops in any of the ways enumerated above, it could create a financial hardship. That hardship could occur if the auditor or spouse has, since the policy was originally issued, developed any condition that would change the cost or coverage or even prevent the auditor or spouse from replacing the coverage with another insurer, i.e., an ailment that becomes a "pre-existing condition" for a new policy.
AIA has two suggestions to address these problems that might jeopardize the independent audits of insurers because of unknown or unavoidable conditions. First, establish a minimum premium amount with an insurer client, e.g., $10,000 per year, above which the existence of a policy (except for a professional liability policy) would be considered an impairment of an auditor's independence. In most cases, the viability of the insurer does not create an impairment of an auditor's independence because the insurance coverage can usually be replaced with another carrier.
Second, in the event that a claim above a certain amount, e.g., $10,000 per year, is made by or on behalf of an affected policyholder against an insurer client, or, if the affected policyholder would have to pay more than a certain amount, e.g., $10,000 per year, to replace an existing coverage, the affected auditor would be prohibited from participating in the audit in any way. In this way, an auditor with even the appearance of impaired independence would be precluded from taking part in the audit. At the same time, it would avoid the hardship that might otherwise occur due to circumstances beyond the control of the affected auditor or spouse.
Thank you for this opportunity to submit comments. We would be pleased to respond to any questions.
Financial Reporting and
Associate General Counsel
cc: Committee on Financial Reporting Principles