Page 280 - DCOM204_AUDITING_THEORY

Auditing Theory

Notes companies), policyholders, reinsurers who do business with the companies etc. consider the
published financials of the Insurance Companies as the symbol of the strength and more so
because such financials bear the attestation of the Chartered Accountants, who ‘audit’ the
companies.
The excitement among Chartered Accountants that is perceptible in late March and early April
in connection with Bank Audits, their eagerness to get acquainted with the latest on NPA
provisioning norms and their self-propelling attitude to attend the Bank Audit seminars in huge
numbers are all normally not very pronounced even among those who get the insurance audit
allotments. For some unfathomable reasons, the auditors do not display any enthusiasm in
acquiring the necessary domain expertise of this industry, the financial concepts of which are
riddled with unique and specialized concepts such as heavy influence of the bottom lines by
various estimations, statutory limitation on management expenses, relationship between the
capitalizations and risk bearing capacities, protection of policyholders’ interests vis-à-vis
expectations of stakeholders etc.

This lack of domain expertise sometimes leads to an auditor’s performing his role in lesser
dimension than he normally should. There are several areas in insurance accounting and finance,
both at the corporate level and operational level that need an auditor’s focused attention and
critical review. However, before embarking on the core area, let us briefly go over the
metamorphosis in the area of financial reporting and disclosure requirements of general
insurance companies.
13.3.2 Pre-IRDA Scenario

The provisions of the Insurance Act, 1938 were governing the formats, reporting and disclosure
requirements. Besides the financial statements in the pre-designed formats that were to be
published for the benefit of the stakeholders, returns were prescribed for submission to the
Controller of Insurance. On nationalization of the general insurance industry, the de jure
supervisory authority continued to be the Controller of Insurance but the de facto supervisory
authority was the General Insurance Corporation of India. In fact, GIC’s roles were multi fold. It
was the holding company, the first reinsurer, industry’s policy maker, supervisor, de facto
regulator et al.

13.3.3 Post-IRDA Scenario

Came 1999, the IRDA was born. Insurance Act was suitably amended to give IRDA the powers to
regulate the industry that was soon to be thrown open to private players. Among the many
supplementary regulations that were issued covering many aspects of functioning, the IRDA
(Preparation of Financial Statements and Auditor’s Report of Insurance Companies) Regulations,
2000 subsequently replaced by Version 2002, was the one to govern the reporting and disclosure
aspects of financials of the insurance companies Premium accounting Now, to see how the
financials get affected by the changes of (a) and (b) above and how the auditors so far have dealt
with them can be seen below:
For time immemorial, the premium accounting was done after providing the Unexpired Risks
Reserve at ad-hoc percentages indicated in the Solvency Margin requirements {Sec. 64V(1)(ii)(b)},
which were 40% for Fire, Marine Cargo & Misc and 100% for Marine Hull of “Net Premium”.
[However, as the Income Tax Act & Rules, allowed insurers to provide up to 50% for Fire & Misc
and 100% for Marine, many insurers (and, after nationalization, all PSU insurers) took advantage
of the same and so provided]. Essentially, this meant that the companies recognized the revenue,
by making adjustments for URR in their Net Premium Income (Premium less reinsurances),
calling this as Net Earned Premium Income.

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