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Insurance industry bill introduced; accounting provisions criticized.

The Federal Insurance Solvency Act of 1992 (HR 4900), introduced by House Energy and Commerce Committee Chairman John Dingell (D-Mich.), for the first time would impose federal regulation on the insurance industry. The bill also includes auditing and accounting provisions that critics contend would erode private-sector control over standard setting.

Pointing to failures in the insurance industry in recent years--including seizures by state regulators of Mutual Benefit Life Insurance Co. and Executive Life Insurance Co.--Dingell said, "We intend to correct obvious deficiencies in solvency regulation before an industrywide crisis occurs."

But according to Tom Higgin-botham, American Institute of CPAs vice-president--government relations, the AICPA strongly opposes the accounting and auditing provision in HR 4900. "The bill would supplant, without justifiable cause, the current system of private-sector standard setting that has served the financial markets well for the past 50-plus years," said Higginbotham. He also termed the legislation "extremely objectionable" because it would establish a mechanism that non-CPAs could use to qualify to perform audits of insurers and reinsurers.

Under the proposal, a new Federal Insurance Solvency Commission (FISC), modeled after the Securities and Exchange Commission, would be required to establish, by regulation, accounting standards "to ensure accurate and informative reporting on the financial condition of federally certified insurers and reinsurers." The bill further stipulates that these standards be consistent with those set by the Financial Accounting Standards Board--"except to the extent that the Commission determines that different or additional standards are necessary for accurate and informative reporting."

Moreover, the measure would require federally certified insurers and reinsurers to undergo an audit by an independent CPA "or other independent person who is qualified." The FISC would establish the standards and procedures to be followed by independent accountants in complying with the bill's audit requirements. The FISC also would establish the standards by which a non-CPA could audit certified insurers and reinsurers.

Whistle-blowing provisions.

With respect to direct reporting, the bill mandates that if the outside auditor suspects "material misrepresentations of financial condition or illegal acts" or has "substantial doubt of the insurer's or reinsurer's ability to continue to operate as a going concern over the ensuring fiscal year," the auditor must notify the FISC as well as the company's chief executive officer and chairman of the board. The CEO and chairman then must correct the problem and notify the FISC that corrective action has been taken.

Finally, a liability safe harbor would allow an accountant who in good faith complied with the direct reporting requirement to "not be liable in any civil action attributable to such reporting."
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Copyright 1992, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Publication:Journal of Accountancy
Date:Jun 1, 1992
Previous Article:The Financial Accounting Standards Board.
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