28 Tex. Admin. Code § 7.85 - Audited Financial Reports

(a) Definitions. The following words and terms, when used in this section, will have the following meanings, unless the context clearly indicates otherwise.

(1) Accountant--An independent certified public accountant or accounting firm that meets the requirements of Insurance Code § 401.014.

(2) Audited Financial Report--The annual audit report required by Insurance Code Chapter 401, Subchapter A.

(3) Commissioner--The commissioner of insurance.

(4) TDI--The Texas Department of Insurance.

(5) Examiner--Staff appointed by the commissioner under Insurance Code Chapter 401, Subchapter C.

(6) GAAS--Generally Accepted Auditing Standards. The standards adopted by the American Institute of Certified Public Accountants or Public Company Accounting Oversight Board to conduct an audit and to ensure the quality of the performance by accountants who are engaged in an audit of financial statements.

(7) Material--As defined in the NAIC's Accounting Practices and Procedures Manual under § 7.18 of this title.

(8) NAIC--The National Association of Insurance Commissioners.

(9) Statutory Examination--An examination performed by TDI's examiners or other persons or firms retained by TDI specifically for examination of insurers, corporations, or associations.

(10) Work Papers--The records kept by the accountant supporting that accountant's audit opinion, including the audit records and the accountant's audit planning records; and any record of communications related to the audit between the accountant and the insurer under Insurance Code § 401.020.

(b) Priority of Accounting Guidance. The priority for determining accounting standards is set out in § 7.18 of this title.

(c) Applicability. This section applies only to audited financial reports with audit dates as of December 31, 1995, or later. A foreign or alien insurer may be exempt from this rule if the foreign or alien insurer files an audited financial report in another state and the requirements for that state's audited financial reports are determined by the commissioner under Insurance Code § 401.007 to be substantially similar to the requirements in Insurance Code Chapter 401. A foreign or alien insurer is exempt from this rule if the foreign or alien insurer files an audited financial report in another state and the requirements for that state's audited financial reports have already been determined by the commissioner under Insurance Code § 401.007 to be substantially similar to the requirements in Insurance Code Chapter 401.

(d) Purpose. Insurance Code Chapter 401 requires audited financial reports to be prepared, and that statutory examinations are periodically conducted under the Insurance Code. To improve coordination between the audited financial reports and statutory examinations, and to promote the utilization of work papers to the fullest extent during the conduct of statutory examinations, certain minimum standards, guidelines, and procedures must be incorporated by the accountant during the preparation of the work papers and the audited financial report. The purpose of this section is to establish those requirements.

(e) Conduct of audit. The annual audit required by Insurance Code Chapter 401 must be conducted in accord with GAAS. It is not TDI's intent to expand audit testing beyond the requirements of GAAS. The accountant conducting the audit must consider the procedures and conventions set out in paragraphs (1) - (4) of this subsection, as follows:

(1) audit procedures and format contained in the NAIC Examiners Handbook;

(2) accounting treatments for the particular line(s) of insurance contained in § 7.18 of this title and the NAIC Annual Statement Instructions adopted by the commissioner under § 7.68 of this title;

(3) valuation procedures contained in the NAIC Investment Analysis Office's Purposes and Procedures Manual and § 7.18 of this title; and

(4) any orders of the commissioner issued to a particular company.

(f) Contents of audited financial reports. In addition to the contents specified in Insurance Code § 401.009, audited financial reports must contain the statements and reports set out in paragraphs (1) - (3) of this subsection.

(1) Audit procedures and format contained in the NAIC Examiners Handbook.

(2) The balance sheet, statement of gain or loss from operations, statement of changes in capital and surplus, and statement of cash flow prepared in accord with the Texas Administrative Code, including the NAIC Annual Statement Instructions adopted by the commissioner in § 7.68 of this title.

(3) In addition to the items that must be recorded in the notes to the financial statements under Insurance Code § 401.009(b), the notes must include:

(A) any exceptions to compliance with the financial, investment, and holding company provisions of the Insurance Code or the Texas Administrative Code noted during the audit;

(B) a schedule and explanation of material nonadmitted assets;

(C) any and all items required by the NAIC Annual Statement Instructions and the NAIC Accounting Practices and Procedures Manual under § 7.68 and § 7.18 of this title; and

(D) a reconciliation of any differences between the audited statutory financial statements and the Annual Statement filed with TDI, with a written description of the nature of the differences.

(g) Contents of work papers.

(1) For those items subjected to detailed tests by the accountant during the course of the audit, the work papers must contain a notation of whether any material exceptions exist for each of the items set out in subparagraphs (A) and (B) of this paragraph.

(A) For invested assets:

(i) compliance as an authorized investment has been determined and does not exceed statutory limitations;

(ii) ownership and possession have been verified; and

(iii) securities are valued in accord with the instructions of the NAIC Investment Analysis Office's Purposes and Procedures Manual and § 7.18 of this title.

(B) For assets other than invested assets:

(i) the assets are admitted in accord with the appropriate provision of the Insurance Code or Texas Administrative Code; and

(ii) the assets are valued in accord with the Texas Administrative Code and § 7.18 of this title.

(2) If the regulated entity subject to the audit has any material reinsurance agreement or agreements, the work papers must contain an outline addressing the items set out in subparagraphs (A) - (E) of this paragraph as follows:

(A) a summary of the insurer's overall reinsurance program;

(B) an explanation of relevant provisions by which liabilities are transferred to the reinsurer and any contingency provisions by which the reinsurer can cause the ceding insurer to reassume liabilities previously transferred to the reinsurer;

(C) an explanation about assets held in trust, depositories, or letters of credit by which any reserve liabilities are collateralized;

(D) a verification of any material reinsurance balance ceded or assumed; and

(E) an explanation of amounts recoverable from unlicensed reinsurers that are not collateralized, or disputed reinsurance recoverables.

(3) The work papers of any audited entity must contain:

(A) any letters from the accountant to management commenting on or explaining internal management operating procedures;

(B) computer-generated work papers;

(C) audit program;

(D) reports prepared by outside consultants;

(E) for policy liabilities, a note that reserves are established in accord with policy and statutory provisions, and that required payments were made under any contract provisions;

(F) for all other liabilities, a note that all material liabilities of the company have been properly recorded; and

(G) internal control work papers.

(4) The work papers of any audited entity must contain a notation that the accountant has determined that the entity has:

(A) met the filing requirements in Insurance Code Chapter 823 and the Texas Administrative Code, including the requirements that all shareholder dividends have been reported to TDI within two business days after declaration and at least 10 days prior to payment as required under Insurance Code § 823.053; and that all other dividends have been declared and paid in accord with the applicable provisions of the Insurance Code and the Texas Administrative Code, including Chapter 403, Chapter 1112, §841.253, and §884.253; and

(B) maintained unencumbered assets in an amount at least equal to reserve liabilities as required under Insurance Code Chapter 422.

(h) Accessibility of work papers. The accountant must provide all work papers to the examiner, whether during or after the preparation of the audited financial report. The examiner may obtain, if necessary, photocopies of work papers, as provided by Insurance Code § 401.020(c), so as not to burden the accountant if a statutory examination is occurring at the same time as an annual audit. Information obtained under this section is subject to the confidentiality standards imposed by Insurance Code §§ 401.020(c), 401.057, 401.105, 401.106, and 823.011.

(i) Sanction. Failure to comply with this section may result in the commissioner initiating action under Insurance Code § 401.012 and Chapter 82.

Notes

28 Tex. Admin. Code § 7.85

The provisions of this §7.85 adopted to be effective July 13, 1995, 20 TexReg 4689; amended to be effective January 1, 2001, 25 TexReg 12806; amended to be effective February 26, 2006, 31 TexReg 1036; amended by Texas Register, Volume 39, Number 48, November 28, 2014, TexReg 9358, eff. 12/2/2014