COMMITTEE SUBSTITUTE
FOR
H. B. 2757
(By Delegates Perry, Shook, Ashley, Schoen, Moore, Manchin,
Miley, Skaff,Reynolds and Frazier)
(Originating in the Committee on Finance)
[March 19, 2009]
A BILL to
amend and reenact §33-33-1, §33-33-2, §33-33-3, §33-33-4,
§33-33-5, §33-33-6, §33-33-8, §33-33-9, §33-33-10, §33-33-10a,
§33-33-11, §33-33-12, §33-33-13, §33-33-14 and §33-33-15 of
the Code of the West Virginia, 1931, as amended; and to amend
said code by adding thereto a new section, designated
§33-33-16, all relating to financial audits of insurers;
defining terms; providing general requirements for filing
annual audited financial reports; providing for creation of
audit committee; requiring financial reports to include
certain items; requiring the designation of an independent
certified public accountant by insurers; providing
requirements for the independent certified public accountants;
prohibiting use of indemnification agreements by independent
certified public accountants performing certain audits;
permitting mediation or arbitration agreements in certain
circumstances; requiring audit to be performed in accordance
with generally accepted auditing standards; requiring independent certified public accountants to report adverse
financial condition of insurers; requiring independent
certified public accountants to report material weaknesses
regarding internal control of insurers; requiring independent
certified public accountants to provide letter of
qualifications; requiring that workpapers of independent
certified public accountants be available for review by
Insurance Commissioner; providing for requirements of audit
committee; requiring certain conduct of insurer regarding
preparation of reports and documents; providing requirements
for conducting financial audits of Canadian and British
insurers; requiring report from insurers regarding internal
control over financial reporting; providing exemptions; and
providing effective dates of provisions.
Be it enacted by the Legislature of West Virginia:
That §33-33-1, §33-33-2, §33-33-3, §33-33-4, §33-33-5,
§33-33-6, §33-33-8, §33-33-9, §33-33-10, §33-33-10a, §33-33-11,
§33-33-12, §33-33-13, §33-33-14 and §33-33-15 of the Code of West
Virginia, 1931, be amended and reenacted; and that said code be
amended by adding thereto a new section, designated §33-33-16, all
to read as follows:
ARTICLE 33. ANNUAL AUDITED FINANCIAL REPORT.
§33-33-1. Declaration of policy and purpose.
(a) The purpose of this article is to improve the Insurance
Commissioner's surveillance of the financial condition of insurers by requiring:
an annual examination by independent certified
public accountants of the financial statements reporting the
financial condition and the results of operations of insurers
(1) An annual audit of financial statements reporting the
financial position and the results of operations of insurers by
independent certified public accountants;
(2) Communication of internal control related matters noted in
an audit; and
(3) Management's report of internal control over financial
reporting.
(b) Every insurer, as defined in subdivision (7), section two
of this article, shall be subject to this article. Insurers having
direct premiums written in this state of less than $1 million in
any calendar year and less than one thousand policyholders or
certificate holders of directly written policies nationwide at the
end of the calendar year shall be exempt from this article for the
year, unless the commissioner makes a specific finding that
compliance is necessary for the commissioner to carry out statutory
responsibilities. However, insurers having assumed premiums
pursuant to contracts and/or treaties of reinsurance of $1 million
or more will not be so exempt.
(b) (c) Foreign or alien insurers filing audited financial
reports in another state, pursuant to the other state's requirement
for filing of audited financial reports which has been found by the
commissioner to be substantially similar to the requirements
herein, are exempt from
sections three through eleven of this article if:
(1) A copy of the audited financial report, report on
significant deficiencies in internal controls and the accountant's
letter of qualifications which are filed with the other state are
filed with the commissioner in accordance with the filing dates
specified in sections three, ten and ten-a of this article,
respectively. Canadian insurers may submit accountants' reports as
filed with the
Canadian dominion department of insurance Office of
the Superintendent of Financial Institutions, Canada.
(2) A copy of any notification of adverse financial condition
report filed with the other state is filed with the commissioner
within the time specified in section nine of this article.
(c) (d) This article shall not prohibit or preclude or in any
way limit the commissioner from performing examinations of insurers
as specified in section nine, article two of this chapter or any
other examinations as the commissioner may be authorized by this
chapter to perform.
§33-33-2. Definitions.
As used in this article:
(a) (1) "Accountant" and or "independent certified public
accountant" means an independent certified public accountant or
accounting firm in good standing with the American Institute of
Certified Public Accountants and in all states in which the
accountant is licensed to practice; for Canadian and British
companies, the terms mean a Canadian-chartered or British-chartered accountant.
(b) (2) "Annual statement" means the annual financial
statement required to be filed by insurers with the commissioner
pursuant to the provisions of this chapter An "affiliate" of, or
person "affiliated" with a specific person, is a person that
directly, or indirectly through one or more intermediaries,
controls or is controlled by, or is under common control with, the
person specified.
(3) "Audit committee" means a committee or equivalent body
established by the board of directors of an entity for the purpose
of overseeing the accounting and financial reporting processes of
an insurer or group of insurers, and audits of financial statements
of the insurer or group of insurers. The audit committee of any
entity that controls a group of insurers may be deemed to be the
audit committee for one or more of these controlled insurers solely
for the purposes of this article at the election of the controlling
person. If an audit committee is not designated by the insurer,
the insurer's entire board of directors shall constitute the audit
committee.
(c) (4) "Audited financial report" means and includes those
items specified in section four of this article.
(d) (5) "Indemnification" for the purposes of this article
means an agreement of indemnity or a release from liability where
the intent or effect of the agreement or release is a shifting or
a limitation to any degree of is to shift or limit in any manner
the potential liability to of the person or firm for failure to adhere to applicable auditing or other professional standards,
regardless of whether the potential liability arises from known
whether or not resulting in part from knowing of other
misrepresentations made by the insurer or its representatives.
(6) "Independent board member" has the same meaning as
described in subdivision (3), section twelve of this article.
(e) (7) "Insurer" for purposes of this article means any
domestic insurer as defined in section six, article one of this
chapter and includes any domestic stock insurance company, mutual
insurance company, reciprocal insurance company, farmers' mutual
fire insurance company, fraternal benefit society, hospital service
corporation, medical service corporation, health care corporation,
health maintenance organization, captive insurance company or risk
retention group and any licensed foreign or alien insurer defined
in article one of this chapter.
(8) "Group of insurers" means those licensed insurers included
in the reporting requirements of article twenty-seven of this
chapter, or a set of insurers as identified by management for the
purpose of assessing the effectiveness of internal control over
financial reporting.
(9) "Internal control over financial reporting" means a
process effected by an entity's board of directors, management and
other personnel designed to provide reasonable assurance regarding
the reliability of the financial statements. The process includes
the requirements set forth in subdivisions (2) through (7),
subsection (b), section four of this article and those policies and procedures that:
(A) Pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and
dispositions of assets;
(B) Provide reasonable assurance that transactions are
recorded as necessary to permit preparation of the financial
statements and that receipts and expenditures are being made only
in accordance with authorizations of management and directors; and
(C) Provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of
assets that could have a material effect on the financial
statements.
(10) "SEC" means the United States Securities and Exchange
Commission.
(11) "Section 404" means section 404 of the Sarbanes-Oxley Act
of 2002 and the SEC's rules and regulations promulgated thereunder.
(12) "Section 404 report" means management's report on
"internal control over financial reporting" as defined by the SEC
and the related attestation report of the independent certified
public accountant as described in subdivision (1) of this section.
(13) "SOX Compliant Entity" means an entity that either is
required to be compliant with, or voluntarily is compliant with,
all of the following provisions of the Sarbanes-Oxley Act of 2002:
(A) The preapproval requirements of Section 201, Section
10A(I) of the Securities Exchange Act of 1934;
(B) The audit committee independence requirements of Section 301, Section 10A(m)(3) of the Securities Exchange Act of 1934; and
(C) The internal control over financial reporting requirements
of Section 404, Item 308 of SEC Regulation S-K.
(f) "Workpapers" means and includes audit planning
documentation, work programs, analyses, memoranda, letters of
confirmation and representation, abstracts of company documents and
schedules or commentaries prepared or obtained by the independent
certified public accountant in the course of the examination of the
financial statements of an insurer and which support the opinion
thereon.
§33-33-3. General requirements related to filing and extensions
for filing of annual audited financial reports and
audit committee appointment.
(a) Annual audited financial reports must be filed by all
insurers All insurers shall have an annual audit by an independent
certified public accountant and shall file an audited financial
report with the commissioner on or before June 1 for the year
ending December 31 immediately preceding. The commissioner may
require an insurer to file an audited financial report earlier than
June 1 with ninety days advance notice to the insurer.
(b) Extensions of the filing date on June 1 may be granted by
the commissioner for thirty-day periods upon showing by the insurer
and its independent certified public accountant the reasons for
requesting the extension and determination by the commissioner of
good cause for an extension. A request for extension must be submitted in writing not less than ten days prior to the due date
in sufficient detail to permit the commissioner to make an informed
decision with respect to the requested extension.
(c) If an extension is granted in accordance with the
provisions in subsection (b) of this section, a similar extension
of thirty days is granted to the filing of management's report of
internal control over financial reporting.
(d) Every insurer required to file an annual audited financial
report pursuant to this article shall designate a group of
individuals as constituting its audit committee, as defined in
subdivision (3), section two of this article. The audit committee
of an entity that controls an insurer may be deemed to be the
insurer's audit committee for purposes of this article at the
election of the controlling person.
§33-33-4. Contents of annual audited financial report.
(a) The annual audited financial report shall report the
financial condition of the insurer as of the end of the most recent
calendar year and the results of its operations, cash flows and
changes in capital and surplus for the year then ended in
conformity with statutory accounting practices for preparation of
the annual statement or as otherwise permitted by the commissioner
prescribed, or otherwise permitted, by the Insurance Commissioner
of the state of domicile.
(b) The annual audited financial report shall include the
following:
(1) Report of independent certified public accountant;
(2) Balance sheet reporting admitted assets, liabilities,
capital and surplus;
(3) Statement of gain or loss from operations; or statement of
revenue and expenses
(4) Statement of cash flows statement flow;
(5) Statement of changes in capital and surplus;
(6) Notes to financial statements. These notes shall be those
required by the appropriate National Association of Insurance
Commissioners annual statement instructions and accounting
practices and procedures manual, as amended, including
reconciliation differences, if any, between the audited statutory
financial statements and the annual statement filed pursuant to
section fourteen, article four of this chapter, with a written
description of the nature of these differences; and
(7) The financial statements included in the audited financial
report shall be prepared in a form and using language and groupings
substantially the same as the relevant sections of the annual
statement of the insurer filed with the commissioner, and
(A) The financial statement shall be comparative, presenting
the amounts as of December 31 of the current year and the amounts
as of the immediately preceding December 31. Provided, That
However, in the first year in which an insurer is required to file
an audited financial report, the comparative data may be omitted.
(B) Amounts may be rounded to the nearest thousand dollars;
(8) Supplementary data and information. This shall include any additional clarifying information or data which the
commissioner may require to be disclosed.
§33-33-5. Designation of independent certified public accountant.
(a) Each insurer required by this article to file an annual
audited financial report must, within sixty days after becoming
subject to the requirements, register with the commissioner in
writing the name and address of the independent certified public
accountant or accounting firm retained to conduct the annual audit
set forth in this article. Insurers not retaining an independent
certified public accountant on the effective date of this article
shall register the name and address of their retained independent
certified public accountant not less than six months before the
date when the first audited financial report is to be filed.
(b) The insurer shall obtain a letter from the accountant, and
file a copy with the commissioner stating that the accountant is
aware of the provisions of this code and rules this code and
legislative rules promulgated pursuant to article three, chapter
twenty-nine-a of this code that relate to accounting and financial
matters and affirming that he or she the accountant will express
his or her opinion on the financial statements in terms of their
his or her conformity to the statutory accounting practices
prescribed or otherwise permitted by the Insurance Commissioner
specifying any exceptions as he or she may believe appropriate.
(c) If an accountant who was not the accountant for the
immediately preceding filed audited financial report is engaged to audit the insurer's financial statements, the insurer shall within
thirty days of the date the accountant is engaged notify the
commissioner of this event.
(d) (c) If an accountant who was the accountant for the
immediately preceding filed audited financial report is dismissed
or resigns, the insurer shall within five business days notify the
commissioner of this event. The insurer shall also furnish the
commissioner with a separate letter within ten business days of the
above notification stating whether in the twenty-four months
preceding the notification there were any disagreements with the
former accountant on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction
of the former accountant, would have caused him or her to make
reference to the subject matter of the disagreement in connection
with his or her opinion. The disagreements required to be reported
in response to this section include both those resolved to the
former accountant's satisfaction and those not resolved to the
former accountant's satisfaction. Disagreements contemplated by
this section are those that occur at the decision-making level
between personnel of the insurer responsible for presentation of
its financial statements and personnel of the accounting firm
responsible for rendering its report. The insurer shall also in
writing request the former accountant to furnish it a letter
addressed to the insurer stating whether the accountant agrees with
the statements contained in the insurer's letter and, if not, stating the reasons for which he or she does not agree; and the
insurer shall furnish the responsive letter from the former
accountant to the commissioner together with its own.
§33-33-6. Qualifications of independent certified public
accountants.
(a) The commissioner may not recognize any person or firm as
a qualified independent certified public accountant for purposes of
performing the annual audited financial report if the person or
firm:
(1) Is not in good standing with the American Institute of
Certified Public Accountants and in all states in which the
accountant is licensed to practice, or, for a Canadian or British
company, that is not a chartered accountant; or
(2) Has either directly or indirectly entered into an
agreement of indemnification or release from liability with respect
to an audit of the insurer.
(b) Except as otherwise provided herein, the commissioner
shall recognize an independent certified public accountant as
qualified as long as he or she conforms to the standards of his or
her profession, as contained in the Code of Professional Ethics of
the American Institute of Certified Public Accountants and the
Rules and Regulations and Code of Ethics and Rules of Professional
Conduct of the West Virginia Board of Accountancy, or similar code.
(c) A qualified independent certified public accountant may
enter into an agreement with an insurer to have disputes relating to an audit resolved by mediation or arbitration. In the event a
delinquency proceeding is commenced against the insurer under
article ten of this chapter, the mediation or arbitration
provisions shall operate at the option of the receiver.
(d) No partner or other person responsible for rendering a
report (1) The lead or coordinating audit partner having primary
responsibility for the audit may not act in that capacity for more
than seven five consecutive years. Following a period of service,
the person shall be disqualified from acting in that or a similar
capacity for the same company or its insurance subsidiaries or
affiliates for a period of two five consecutive years. An insurer
may make application to the commissioner for relief from the above
rotation requirement on the basis of unusual circumstances. This
application should be made at least thirty days before the end of
the calendar year. The commissioner may consider the following
factors in determining if the relief should be granted:
(1) (A) Number of partners, expertise of the partners or the
number of insurance clients in the currently registered firm;
(2) (B) Premium volume of the insurer; or
(3) (C) Number of jurisdictions in which the insurer transacts
business.
(2) The insurer shall file, with its annual statement filing,
the approval for relief from subdivision (1) of this subsection
with the states that it is licensed in or doing business in and
with the National Association of Insurance Commissioners. If the
nondomestic state accepts electronic filing with the National Association of Insurance Commissioners, the insurer shall file the
approval in an electronic format.
(e) The commissioner may not recognize as a qualified
independent certified public accountant, nor accept any annual
audited financial report, prepared, in whole or in part, by any
natural person who:
(1) Has been convicted of fraud, bribery, a violation of the
Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C.
Sections 1961-1968, or any dishonest conduct or practices under
federal or state law;
(2) Has been found to have violated the insurance laws of this
state with respect to any previous reports submitted under this
article; or
(3) Has demonstrated a pattern or practice of failing to
detect or disclose material information in previous reports filed
under the provisions of this article.
(f) The commissioner may hold a hearing to determine whether
a an independent certified public accountant is qualified and,
considering the evidence presented, may rule that the accountant is
not qualified for purposes of expressing an opinion on the
financial statements in the annual audited financial report made
pursuant to this article and require the insurer to replace the
accountant with another whose relationship with the insurer is
qualified within the meaning of this article.
(g) (1) The commissioner may not recognize as a qualified
independent certified public accountant, nor accept an annual audited financial report, prepared, in whole or in part, by an
accountant who provides to an insurer, contemporaneously with the
audit, the following nonaudit services:
(A) Bookkeeping or other services related to the accounting
records or financial statements of the insurer;
(B) Financial information systems design and implementation;
(C) Appraisal or valuation services, fairness opinions, or
contribution-in-kind reports;
(D) Actuarially-oriented advisory services involving the
determination of amounts recorded in the financial statements. The
accountant may assist an insurer in understanding the methods,
assumptions and inputs used in the determination of amounts
recorded in the financial statement only if it is reasonable to
conclude that the services provided will not be subject to audit
procedures during an audit of the insurer's financial statements.
An accountant's actuary may also issue an actuarial opinion or
certification on an insurer's reserves if the following conditions
have been met:
(i) Neither the accountant nor the accountant's actuary has
performed any management functions or made any management
decisions;
(ii) The insurer has competent personnel or engages a third
party actuary to estimate the reserves for which management takes
responsibility; and
(iii) The accountant's actuary tests the reasonableness of the
reserves after the insurer's management has determined the amount of the reserves;
(E) Internal audit outsourcing services;
(F) Management functions or human resources;
(G) Broker or dealer, investment adviser, or investment
banking services;
(H) Legal services or expert services unrelated to the audit;
or
(I) Any other services that the commissioner determines, by
legislative rule, are impermissible.
(2) In general, the principles of independence with respect to
services provided by the qualified independent certified public
accountant are largely predicated on three basic principles,
violations of which would impair the accountant's independence.
The principles are that the accountant cannot function in the role
of management, cannot audit his or her own work, and cannot serve
in an advocacy role for the insurer.
(h) Insurers having direct written and assumed premiums of
less than $1 million in any calendar year may request an exemption
from subdivision (1), subsection (g) of this section. The insurer
shall file with the commissioner a written statement discussing the
reasons why the insurer should be exempt from these provisions. If
the commissioner finds, upon review of this statement, that
compliance with subdivision (1), subsection (g) of this section
would constitute a financial or organizational hardship upon the
insurer, an exemption may be granted.
(i) A qualified independent certified public accountant who performs the audit may engage in other nonaudit services, including
tax services, that are not described in subdivision (1), subsection
(g) of this section or that do not conflict with subdivision (2),
subsection (g) of this section, only if the activity is approved in
advance by the audit committee, in accordance with subsection (j)
of this section.
(j) All auditing services and nonaudit services provided to an
insurer by the qualified independent certified public accountant of
the insurer shall be preapproved by the audit committee. The
preapproval requirement is waived with respect to nonaudit services
if the insurer is a SOX Compliant Entity or a direct or indirect
wholly-owned subsidiary of a SOX Compliant Entity or:
(1) The aggregate amount of all such nonaudit services
provided to the insurer constitutes not more than five percent of
the total amount of fees paid by the insurer to its qualified
independent certified public accountant during the fiscal year in
which the nonaudit services are provided;
(2) The services were not recognized by the insurer at the
time of the engagement to be nonaudit services; and
(3) The services are promptly brought to the attention of the
audit committee and approved prior to the completion of the audit
by the audit committee or by one or more members of the audit
committee who are the members of the board of directors to whom
authority to grant such approvals has been delegated by the audit
committee.
(k) The audit committee may delegate to one or more designated members of the audit committee the authority to grant the
preapprovals required by subsection (j) of this section. The
decisions of any member to whom this authority is delegated shall
be presented to the full audit committee at each of its scheduled
meetings.
(l) The commissioner may not recognize an independent
certified public accountant as qualified for a particular insurer
if a member of the board, president, chief executive officer,
controller, chief financial officer, chief accounting officer, or
any person serving in an equivalent position for that insurer, was
employed by the independent certified public accountant and
participated in the audit of that insurer during the one-year
period preceding the date that the most current statutory opinion
is due. This section shall only apply to partners and senior
managers involved in the audit. An insurer may make application to
the commissioner for relief from the above requirement on the basis
of unusual circumstances.
(2) The insurer shall file, with its annual statement filing,
the approval for relief from subdivision (1) of this subsection
with the states that it is licensed in or doing business in and the
National Association of Insurance Commissioners. If the
nondomestic state accepts electronic filing with the National
Association of Insurance Commissioners, the insurer shall file the
approval in an electronic format acceptable to the National
Association of Insurance Commissioners.
§33-33-8. Scope of audit and report of independent certified public accountant.
The examination of the insurer's financial statements by the
independent certified public accountant shall be conducted in
accordance with generally accepted auditing standards and such
other procedures illustrated in the examiners' handbook promulgated
by the national association of Insurance Commissioners as the
independent certified public accountant deems necessary. The
commissioner may from time to time prescribe that additional
auditing procedures be observed by the accountant in the
examination of the financial statements of insurers pursuant to
this article. Financial statements furnished pursuant to section
four of this article shall be examined by the independent certified
public accountant. The audit of the insurer's financial statements
shall be conducted in accordance with generally accepted auditing
standards. In accordance with AU Section 319 of the professional
standards of the American Institute of Certified Public
Accountants, "Consideration of Internal Control in a Financial
Statement Audit" or its replacement, the independent certified
public accountant should obtain an understanding of internal
control sufficient to plan the audit. To the extent required by AU
319, for those insurers required to file a management's report of
internal control over financial reporting pursuant to section
fifteen of this article, the independent certified public
accountant should consider, as that term is defined in Statement on
Auditing Standards No. 102, "Defining Professional Requirements in Statements on Auditing Standards" or its replacement, the most
recently available report in planning and performing the audit of
the statutory financial statements. Consideration shall be given
to the procedures illustrated in the Financial Condition Examiners
Handbook promulgated by the National Association of Insurance
Commissioners as the independent certified public accountant deems
necessary.
§33-33-9. Notification of adverse financial condition.
(a) The independent certified public accountant shall
immediately notify, in writing, the insurer's board of directors or
its audit committee and the commissioner of any determination by
the independent certified public accountant that the insurer has
materially misstated its financial condition as reported to the
commissioner as of the thirty-first day of December immediately
preceding or of any determination that the insurer does not meet
the applicable minimum capital and surplus requirement of this
chapter or, in the case of an insurer not subject to capital and
surplus requirement, that the surplus of the insurer is less than
one hundred thousand dollars as of the thirty-first day of December
immediately preceding. For purposes of this article, material
misstatement shall have the meaning prescribed by the professional
standards and pronouncements of the American institute of certified
public accountants: Provided, That the independent certified
public accountant shall report a misstatement that overstates the
surplus as regards policyholders in single financial statement items by five percent or more or, when taken together with all
financial statement items, the surplus as regards policyholders is
overstated by ten percent or more. The insurer required to furnish
the annual audited financial report shall require the independent
certified public accountant to report, in writing, within five
business days to the board of directors or its audit committee any
determination by the independent certified public accountant that
the insurer has materially misstated its financial condition as
reported to the commissioner as of the balance sheet date currently
under audit or that the insurer does not meet the minimum capital
and surplus requirements of this chapter as of that date. An
insurer that has received a report pursuant to this subsection
shall forward a copy of the report to the commissioner within five
business days of receipt of the report and shall provide the
independent certified public accountant making the report with
evidence of the report being furnished to the commissioner. If the
independent certified public accountant fails to receive the
evidence within the required five business day period, the
independent certified public accountant shall furnish to the
commissioner a copy of his or her report within the next five
business days.
(b) No independent public accountant shall be liable in any
manner to any person for any statement made in connection with
subsection (a) of this section if the statement is made in good
faith in compliance with said subsection.
(c) If the accountant, subsequent to the date of the audited financial report filed pursuant to this article, becomes aware of
facts which might have affected the report, the commissioner notes
the obligation of the accountant to take action as prescribed in
volume 1, section AU 561 of the professional standards of the
American Institute of Certified Public Accountants.
§33-33-10. Communication of internal control related matters
noted in an audit.
(a) In addition to the annual audited financial reports
report, each insurer shall furnish the commissioner with a written
report prepared by the accountant describing significant
deficiencies in the insurer's internal control structure
communication as to any unremediated material weaknesses in its
internal control over financial reporting noted by the accountant
during the audit. Such communication shall be prepared by the
accountant within sixty days after the filing of the annual audited
financial report, and shall contain a description of any
unremediated material weakness, as the term material weakness is
defined by Statement on auditing standards Auditing Standards (SAS)
No. 60, "Communication of Internal Control Structure Related
Matters Noted in an Audit" or its replacement, AU Section 325 of
the professional standards of the American institute of certified
public accountants, requires an accountant to communicate
significant deficiencies, known as "reportable conditions", noted
during a financial statement audit to the appropriate parties
within an entity as of December 31 immediately preceding, so as to coincide with the audited financial report discussed in subsection
(a), section three of this article, in the insurer's internal
control over financial reporting noted by the accountant during the
course of their audit of the financial statements. No report
should be issued if the accountant does not identify significant
deficiencies. If no unremediated material weaknesses were noted,
the communication should so state.
(b) If significant deficiencies are noted, the written report
shall be filed annually by the insurer with the commissioner within
sixty days after the filing of the annual audited financial
reports. The insurer is required to provide a description of
remedial actions taken or proposed to correct significant
deficiencies unremediated material weaknesses, if the actions are
not described in the accountant's report communication.
§33-33-10a. Accountant's letter of qualifications.
(a) The accountant shall furnish the insurer in connection
with, and for inclusion in, the filing of the annual audited
financial report, a letter stating:
(1) That the accountant is independent with respect to the
insurer and conforms to the standards of his or her profession as
contained in the code of professional ethics and pronouncements of
the American Institute of Certified Public Accountants and the
rules of professional conduct of the West Virginia Board of
Accountancy, or similar code;
(2) The background and experience in general, and the experience in audits of insurers of the staff assigned to the
engagement and whether each is an independent certified public
accountant. Nothing within this article shall be construed as
prohibiting the accountant from utilizing such staff as he or she
deems appropriate where use is consistent with the standards
prescribed by generally accepted auditing standards;
(3) That the accountant understands the annual audited
financial report and the his or her opinion thereon will be filed
in compliance with this article and that the commissioner will be
relying on this information in the monitoring and regulation of the
financial position of insurers;
(4) That the accountant consents to the requirements of
section eleven of this article and that the accountant consents and
agrees to make available for review by the commissioner, or the
commissioner's designee or appointed agent, the workpapers, as
defined in section eleven of this article;
(5) A representation that the accountant is properly licensed
by the West Virginia board of accountancy an appropriate state
licensing authority and is a member in good standing in the
American Institute of Certified Public Accountants; and
(6) A representation that the accountant is in compliance with
the requirements of section six of this article.
§33-33-11. Definition, availability and maintenance of
independent certified public accountant
workpapers.
(a) Workpapers shall be kept by the independent certified
public accountant of the procedures followed, the tests performed,
the information obtained and the conclusions reached pertinent to
the examination of the financial statements of an insurer.
Workpapers are the records kept by the independent certified public
accountant of the procedures followed, the tests performed, the
information obtained, and the conclusions reached pertinent to the
accountant's audit of the financial statements of an insurer.
Workpapers may include audit planning documentation, work programs,
analyses, memoranda, letters of confirmation and representation,
abstracts of company documents and schedules or commentaries
prepared or obtained by the independent certified public accountant
in the course of his or her audit of the financial statements of an
insurer and which support the accountant's opinion.
(b) Every insurer required to file an audited financial report
pursuant to this article shall require the accountant to make
available for review by the commissioner the all workpapers
prepared in the conduct of the examination accountant's audit and
any communications related to the audit between the accountant and
the insurer, at the offices of the insurer, at the insurance
department or at any other reasonable place designated by the
commissioner. The insurer shall require that the accountant retain
the audit workpapers and any communications related to the audit
between the accountant and the insurer, at the offices of the
insurer, at the insurance department or at any other reasonable
place designated by the commissioner. The insurer shall require that the accountant retain the audit workpapers and communications
until the commissioner has filed a report of examination, as
required by section nine, article two of this chapter, covering the
period of the audit but no longer than seven years from the date of
the audit report.
(c) In the conduct of the aforementioned periodic review by
the commissioner, it shall be agreed that copies of pertinent audit
workpapers may be made and retained by the commissioner. Reviews
by the commissioner shall be considered investigations and all
workpapers and communications obtained during the course of any
such investigations shall be afforded the same confidentiality as
other examination workpapers generated by the commissioner.
§33-33-12. Requirements for audit committees.
Examinations of insurers conducted by the commissioner
pursuant to section nine, article two of this chapter may, at the
discretion of the commissioner, include and be supplemented by
audit procedures performed by an independent certified public
accountant as herein provided. This section shall not apply to
foreign or alien insurers licensed in this state or an insurer that
is a SOX Compliant Entity or a direct or indirect wholly-owned
subsidiary of a SOX Compliant Entity.
(1) The audit committee shall be directly responsible for the
appointment, compensation and oversight of the work of any
accountant, including resolution of disagreements between
management and the accountant regarding financial reporting, for the purpose of preparing or issuing the audited financial report or
related work pursuant to this article. Each accountant shall report
directly to the audit committee.
(2) Each member of the audit committee shall be a member of
the board of directors of the insurer or a member of the board of
directors of an entity elected pursuant to subdivision (3), section
two of this article and subdivision (5) of this section.
(3) In order to be considered independent for purposes of this
section, a member of the audit committee may not, other than in his
or her capacity as a member of the audit committee, the board of
directors, or any other board committee, accept any consulting,
advisory or other compensatory fee from the entity or be an
affiliated person of the entity or subsidiary thereof. However, if
law requires board participation by otherwise nonindependent
members, that law shall prevail and such members may participate in
the audit committee and be designated as independent for audit
committee purposes, unless they are an officer or employee of the
insurer or one of its affiliates.
(4) If a member of the audit committee ceases to be
independent for reasons outside the member's reasonable control,
that person, with notice by the responsible entity to the state,
may remain an audit committee member of the responsible entity
until the earlier of the next annual meeting of the responsible
entity or one year from the occurrence of the event that caused the
member to be no longer independent.
(5) To exercise the election of the controlling person to designate the audit committee for purposes of this article, the
ultimate controlling person shall provide written notice to the
commissioners of the affected insurers. Notification shall be made
timely prior to the issuance of the statutory audit report and
include a description of the basis for the election. The election
can be changed through notice to the commissioner by the insurer,
which shall include a description of the basis for the change. The
election shall remain in effect for perpetuity, until rescinded.
(6)(A) The audit committee shall require the accountant that
performs for an insurer any audit required by this article to
timely report to the audit committee in accordance with the
requirements of Statement of Auditing Standards (SAS) No. 61,
"Communication with Audit Committees" or its replacement,
including:
(i) All significant accounting policies and material permitted
practices;
(ii) All material alternative treatments of financial
information within statutory accounting principles that have been
discussed with management officials of the insurer, ramifications
of the use of the alternative disclosures and treatments, and the
treatment preferred by the accountant; and
(iii) Other material written communications between the
accountant and the management of the insurer, such as any
management letter or schedule of unadjusted differences.
(B) If an insurer is a member of an insurance holding company
system, the reports required by paragraph (A) of this subdivision may be provided to the audit committee on an aggregate basis for
insurers in the holding company system, provided that any
substantial differences among insurers in the system are identified
to the audit committee.
(7) The proportion of independent audit committee members
shall meet or exceed the following criteria:
Prior Calendar Year Direct Written and Assumed Premiums
|
$0-$300,000,000
|
Over $300,000,000-
$500,000,000
|
Over $500,000,000
|
No minimum
requirements.
|
Majority (50% or more)
of members shall be
independent.
|
Supermajority of
members (75% or more)
shall be independent.
|
(A) The commissioner has authority afforded by state law to
require the entity's board to enact improvements to the
independence of the audit committee membership if the insurer is in
a risk based capital action level event, meets one or more of the
standards of an insurer deemed to be in hazardous financial
condition, or otherwise exhibits qualities of a troubled insurer.
(B) All insurers with less than $500 million in prior year
direct written and assumed premiums are encouraged to structure
their audit committees with at least a supermajority of independent
audit committee members.
(C) Prior calendar year direct written and assumed premiums
shall be the combined total of direct premiums and assumed premiums
from nonaffiliated for the reporting entities.
(8) An insurer with direct written and assumed premium,
excluding premiums reinsured with the Federal Crop Insurance
Corporation and Federal Flood Program for less than $500 million, may make application to the commissioner for a waiver from this
section's requirements based upon hardship. The insurer shall
file, with its annual statement filing, the approval for relief
from this section with the states that it is licensed in or doing
business in and the National Association of Insurance
Commissioners. If the nondomestic state accepts electronic filing
with the National Association of Insurance Commissioners, the
insurer shall file the approval in an electronic format acceptable
to the National Association of Insurance Commissioners.
§33-33-13. Conduct of insurer in connection with the preparation
of required reports and documents.
(a) Upon written application by an insurer, the commissioner
may grant an exemption from compliance with this article if the
commissioner finds, upon review of the application, that compliance
with this article would constitute a financial or organizational
hardship upon the insurer. An exemption may be granted at any time
and from time to time for a specified period or periods. Within
ten days of a denial of an insurer's written request for an
exemption from this article, the insurer may request in writing a
hearing on its application for an exemption.
(b) Foreign insurers shall comply with this article for the
year ending the thirty-first day of December, one thousand nine
hundred ninety-three and each year thereafter, unless the
commissioner permits otherwise.
(a) No director or officer of an insurer shall, directly or indirectly:
(1) Make or cause to be made a materially false or misleading
statement to an accountant in connection with any audit, review or
communication required under this article; or
(2) Omit to state, or cause another person to omit to state,
any material fact necessary in order to make statements made, in
light of the circumstances under which the statements were made,
not misleading to an accountant in connection with any audit,
review or communication required under this article.
(b) No officer or director of an insurer, or any other person
acting under the direction thereof, shall directly or indirectly
take any action to coerce, manipulate, mislead or fraudulently
influence any accountant engaged in the performance of an audit
pursuant to this article if that person knew or should have known
that the action, if successful, could result in rendering the
insurer's financial statements materially misleading.
(c) For purposes of subsection (b) of this section, actions
that, "if successful, could result in rendering the insurer's
financial statements materially misleading" include, but are not
limited to, actions taken at any time with respect to the
professional engagement period to coerce, manipulate, mislead or
fraudulently influence an accountant:
(1) To issue or reissue a report on an insurer's financial
statements that is not warranted in the circumstances due to
material violations of statutory accounting principles prescribed
by the commissioner, generally accepted auditing standards, or other professional or regulatory standards;
(2) Not to perform audit, review or other procedures required
by generally accepted auditing standards or other professional
standards;
(3) Not to withdraw an issued report; or
(4) Not to communicate matters to an insurer's audit
committee.
§33-33-14. Canadian and British companies.
(a) In the case of Canadian and British insurers, the annual
audited financial report shall be defined as the annual statement
of total business on the form filed by the companies with their
domiciliary supervision authority duly audited by an independent
chartered accountant.
(b) For these Canadian and British insurers, the letter
required in subsection (b), section five of this article shall
state that the accountant is aware of the requirements relating to
the annual audited statement financial report filed with the
commissioner pursuant to section three of this article and shall
affirm that the opinion expressed is in conformity with those
requirements.
§33-33-15. Management's report of internal control over financial
reporting.
If any section or portion of a section of this article or the
applicability thereof to any person or circumstance is held invalid
by a court, the remainder of the article or the applicability of the provision to other persons or circumstances shall not be
affected thereby.
(a) Every insurer required to file an audited financial report
pursuant to this article that has annual direct written and assumed
premiums, excluding premiums reinsured with the Federal Crop
Insurance Corporation and Federal Flood Program, of $500 million,
or more, shall prepare a report of the insurer's or group of
insurers' internal control over financial reporting, as these terms
are defined in section two of this article. The report shall be
filed with the commissioner along with the communication of
internal control related matters noted in an audit described under
section ten of this article. Management's report of internal
control over financial reporting shall be filed as of December 31
immediately preceding.
(b) Notwithstanding the premium threshold in subsection (a) of
this section, the commissioner may require an insurer to file
management's report of internal control over financial reporting if
the insurer is in any risk-based capital level event, or meets any
one or more of the standards of an insurer deemed to be in
hazardous financial condition as defined in article ten of this
chapter.
(c) An insurer or a group of insurers may file its or its
parent's Section 404 Report and an addendum in satisfaction of this
section's requirement provided that those internal controls of the
insurer or group of insurers having a material impact on the
preparation of the insurer's or group of insurers' audited statutory financial statements were included in the scope of the
Section 404 Report and if the insurer or group of insurers is:
(1) Directly subject to Section 404;
(2) Part of a holding company system whose parent is directly
subject to Section 404;
(3) Not directly subject to Section 404 but is a SOX Compliant
Entity; or
(4) A member of a holding company system whose parent is not
directly subject to Section 404 but is a SOX Compliant Entity.
(d) The addendum referenced in subsection © of this section
shall be a positive statement by management that there is no
material process with respect to the preparation of the insurer's
or group of insurers' audited statutory financial statements
excluded from the Section 404 Report.
(e) If there are internal controls of the insurer or group of
insurers that have a material impact on the preparation of the
insurer's or group of insurers' audited statutory financial
statements and those internal controls were not included in the
scope of the Section 404 Report, the insurer or group of insurers
may either file:
(1) A report pursuant to subsection (a) of this section; or
(2) The Section 404 Report and a [Section 16] report pursuant
to subsection (a) of this section for those internal controls that
have a material impact on the preparation of the insurer's or group
of insurers' audited statutory financial statements not covered by
the Section 404 Report.
(f) Management's report of internal control over financial
reporting shall include:
(1) A statement that management is responsible for
establishing and maintaining adequate internal control over
financial reporting;
(2) A statement that management has established internal
control over financial reporting and an assertion, to the best of
management's knowledge and belief, after diligent inquiry, as to
whether its internal control over financial reporting is effective
to provide reasonable assurance regarding the reliability of
financial statements in accordance with statutory accounting
principles;
(3) A statement that briefly describes the approach or
processes by which management evaluated the effectiveness of its
internal control over financial reporting;
(4) A statement that briefly describes the scope of work that
is included and whether any internal controls were excluded;
(5) Disclosure of any unremediated material weaknesses in the
internal control over financial reporting identified by management
as of the December 31 immediately preceding. Management is not
permitted to conclude that the internal control over financial
reporting is effective to provide reasonable assurance regarding
the reliability of financial statements in accordance with
statutory accounting principles if there is one or more
unremediated material weaknesses in its internal control over
financial reporting;
(6) A statement regarding the inherent limitations of internal
control systems; and
(7) Signatures of the chief executive officer and the chief
financial officer, or the equivalent position or title.
(g) Management shall document and make available upon
financial condition examination the basis upon which its
assertions, required in subsection (f) of this section, are made.
Management may base its assertions, in part, upon its review,
monitoring and testing of internal controls undertaken in the
normal course of its activities.
(1) Management shall have discretion as to the nature of the
internal control framework used, and the nature and extent of
documentation, in order to make its assertion in a cost effective
manner and, as such, may include assembly of or reference to
existing documentation.
(2) Management's report on internal control over financial
reporting, required by subsection (a) of this section, and any
documentation provided in support thereof during the course of a
financial condition examination, shall be kept confidential by the
commissioner.
§33-33-16. Exemptions and effective dates.
(a) Upon written application of any insurer, the commissioner
may grant an exemption from compliance with any and all provisions
of this article if the commissioner finds, upon review of the
application, that compliance with this article would constitute a financial or organizational hardship upon the insurer. An
exemption may be granted at any time and from time to time for a
specified period or periods. Within ten days from a denial of an
insurer's written request for an exemption from this article, the
insurer may request in writing a hearing on its application for an
exemption.
(b) Unless otherwise provided in this section, the provisions
of this article shall become effective on January 1, 2010.
(c) Domestic insurers retaining a certified public accountant
on the effective date of this article who qualify as independent
shall comply with this article for the year ending December 31,
2010, and each year thereafter, unless the commissioner permits
otherwise.
(d) Domestic insurers not retaining a certified public
accountant on the effective date of this article who qualifies as
independent may meet the following schedule for compliance unless
the commissioner permits otherwise:
(1) As of December 31, 2010, file with the commissioner an
audited financial report; and
(2) For the year ending December 31, 2010, and each year
thereafter, such insurers shall file with the commissioner all
reports and communication required by this article.
(e) Foreign insurers shall comply with this article for the
year ending December 31, 2010, and each year thereafter, unless the
commissioner permits otherwise.
(f) The requirements of subsection (d), section six of this article shall be in effect for audits of the year beginning January
1, 2010, and each year thereafter.
(g) The requirements of section twelve of this article are to
be in effect January 1, 2010, and each year thereafter. An insurer
or group of insurers that is not required to have independent audit
committee members or only a majority of independent audit committee
members, as opposed to a supermajority, because the total written
and assumed premium is below the threshold and subsequently becomes
subject to one of the independence requirements due to changes in
premium shall have one year following the year the threshold
exceeded to comply with the independence requirements. An insurer
that becomes subject to one of the independence requirements as a
result of a business combination shall have one calendar year
following the date of acquisition or combination to comply with the
independence requirements.
(h) The requirements of section fifteen of this article are
effective beginning with the reporting period ending December 31,
2010, and each year thereafter. An insurer or group of insurers
that is not required to file a report because the total written
premium is below the threshold and subsequently becomes subject to
the reporting requirements shall have two years following the year
the threshold is exceeded to file a report. An insurer acquired in
a business combination shall have two calendar years following the
date of acquisition or combination to comply with the reporting
requirements.