14 Va. Admin. Code § 5-270-80

Current through Register Vol. 40, No. 22, June 17, 2024

Section 14VAC5-270-80 - Qualifications of accountant

A. The commission shall not recognize a person or firm as a qualified accountant if that person or firm:

1. Is not in good standing with the AICPA 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 indemnity or release from liability, collectively referred to as indemnification, with respect to the audit of the insurer.

B. Except as otherwise provided in this chapter, the commission shall recognize an independent certified public accountant as qualified as long as the accountant conforms to the standards of the profession, as contained in the AICPA Code of Professional Conduct and the regulations of the Virginia Board of Accountancy (18VAC5-21) 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. However, in the event of a delinquency proceeding commenced against the insurer under Chapter 15 (§ 38.2-1500 et seq.) of Title 38.2 of the Code of Virginia, the mediation or arbitration provisions shall operate at the option of the statutory successor.

D. The lead (or coordinating) audit partner (having primary responsibility for the audit) may not act in that capacity for more than five consecutive years. 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 five consecutive years. An insurer may make application to the commission for relief from the above rotation requirement on the basis of unusual circumstances. This application shall be made at least 30 days before the end of the calendar year. The commission may consider the following factors in determining if the relief should be granted:

1. Number of partners, expertise of the partners or the number of insurance clients in the currently registered firm;

2. Premium volume of the insurer; or

3. Number of jurisdictions in which the insurer transacts business.

The insurer shall file, with its annual statement filing, the commission's letter granting relief from this subsection with the states in which it is licensed or doing business and with the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the letter granting relief in an electronic format acceptable to the NAIC.

E. The commission shall not recognize as a qualified accountant or accept any annual Audited Financial Report prepared in whole or in part by any person who:

1. Has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act ( 18 USC § 1961 et seq.) or any dishonest conduct or practices under federal or state law;

2. Has violated the insurance laws of this Commonwealth with respect to any previous reports submitted under this chapter; 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 chapter.

F. The commission may:

(i) make a determination as to whether an accountant is qualified and may, based upon the facts considered, determine that such accountant is not qualified for purposes of expressing an opinion on the financial statements in the annual Audited Financial Report made pursuant to this chapter; and

(ii) require the insurer to replace such accountant with another whose relationship with the insurer is qualified within the meaning of this chapter.

G. The commission shall not recognize as a qualified independent certified public accountant or 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:

1. Bookkeeping or other services related to the accounting records or financial statements of the insurer;

2. Financial information systems design and implementation;

3. Appraisal or valuation services, fairness opinions or contribution-in-kind reports;

4. 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 (opinion) on an insurer's reserves if the following conditions have been met:

a. Neither the accountant nor the accountant's actuary has performed any management functions or made any management decisions;

b. The insurer has competent personnel (or engages a third-party actuary) to estimate the reserves for which management takes responsibility; and

c. The accountant's actuary tests the reasonableness of the reserves after the insurer's management has determined the amount of the reserves;

5. Internal audit outsourcing services;

6. Management functions or human resources;

7. Broker or dealer, investment adviser, or investment banking services;

8. Legal services or expert services unrelated to the audit; or

9. Any other services that the commission determines, by regulation, are impermissible.

(In general, the principles of independence with respect to services provided by the accountant are largely predicated on three basic principles, violations of which would impair the accountant's independence. These principles are that the accountant cannot function in the role of management, cannot audit his own work, and cannot serve in an advocacy role for the insurer.)

H. Insurers having direct written and assumed premiums of less than $100 million in any calendar year may request an exemption from subsection G of this section. The insurer shall file with the commission a written statement discussing the reasons why the insurer should be exempt from these provisions. An exemption may be granted if the commission finds, upon review of this statement, that compliance with this chapter would constitute a financial or organizational hardship upon the insurer.

I. An accountant who performs the audit may engage in other nonaudit services, including tax services, that are not described in or that do not conflict with 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 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 nonaudit services provided to the insurer constitutes not more than 5.0% of the total amount of fees paid by the insurer to its 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 commission shall not recognize an 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 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 subsection shall only apply to partners and senior managers involved in the audit. An insurer may make application to the commission for relief from the above requirement on the basis of unusual circumstances.

The insurer shall file, with its Annual Statement filing, the commission's letter granting relief from this subsection with the states in which it is licensed or doing business and the NAIC. If the nondomestic state accepts electronic filing with the NAIC, the insurer shall file the letter granting relief in an electronic format acceptable to the NAIC.

14 Va. Admin. Code § 5-270-80

Derived from Regulation 39, Case No. INS910072, § 9, eff. September 1, 1991; amended, Virginia Register Volume 16, Issue 5, eff. January 1, 2000; Volume 19, Issue 21, eff. July 1, 2003; Volume 24, Issue 12, eff. January 1, 2010.

Statutory Authority

§§ 12.1-13 and 38.2-223 of the Code of Virginia.