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Unit 13: Audit of Banking and Insurance Company

Reciprocally, he also accepts risks ceded to him. Wider the spread, better it is for all. However, Notes
such transactions between insurers (and reinsurers) mostly take place by way of correspondence
and accounting entries only. While the Balance Sheet items refer to the ‘net’ balances as on a date,
the relative effect should have gone to the revenue. There are always some transactions pending
accounting for want of full information and especially when the number of transactions is huge,
there can be understandable differences in balances between entities having such transactions. If
periodical reconciliations take place and such pending items are accounted in the way they
should be, then there will be some excuse in hiding behind the concepts such as going concern
and consistency. But, in reality, such reconciliations never happen and balances are always
allowed to mount, with differences ever swelling, resulting in massive sums that should have
found their rightful places in the revenue accounts and in P&L accounts of the insurance companies
being held captive in “capital” accounts.

Example: A claim settled by company A on behalf of company B is debited to Company
B without charging it off to Revenue and because full details are not made available, even the
company B does not account it as Claim).
Though, every insurance company has such transactions with hundreds of their counterparts
across the globe and such problems are not unique to our country and our insurers alone,
certainly it is no excuse that “Due to /Due from Insurers” continues to be a perpetual legacy of
lethargy. However, in the matter of such non reconciliation of balances, charity does not begin
at home itself. There are always transactions of (a) claims settled -mostly Marine Cargo & Motor
TP claims- by one office of the company on behalf of the other and (b) expenses incurred on
behalf of another office. There are eternal issues of non-reconciliation between offices of the
same company and at any point of time, significant amounts stand wrongly ‘capitalized’ in these
accounts, commonly called as Inter Office Accounts.
Likewise, there is another item called as Agents’ balances, both in Current Assets and in Current
Liabilities. There is no official sanction in the Insurance Act or from IRDA that insurance companies
can have running balances with agents. In fact, no agent is authorized to collect any money on
behalf of the company. At best, there can be one month’s commission dues that may stand as credit
balances. Or there could be continuing aberrations of what has long since been prohibited viz.,
balances under Agents’ bank guarantees. But, the actual extents of such balances defy such
perceptions. Whether these balances are what they are really supposed to be or whether the head
of account is a convenient parking place for several Para-revenue items, pending (for ever?)
accounting as revenue etc. are but kept as closely guarded secrets, even from auditors, who will be
constantly pressurized to complete the audits in the time frame set by the managements. Yes, the
only ‘reconciliation’ appears to be in the attitude of the statutory auditors, as it is seen that they are
reporting this as non-chalantly as possible year after year. As many of the readers of the financials
do not realize the impact, no serious questions are asked from any quarters.

13.3.7 Other Issues

Some of the other important issues at the operational office level are verification of compliance
of Sec. 64VB of the Insurance Act, which deals with collection of premium prior to assumption of
risk, bank reconciliations, operation of Bank Guarantee Premium Control account, Cash Deposit
Premium Control account, refunds accounting, verification of fixed assets, cash, policy stamps
etc. The Audit programme will have to factor in all of the above issues for detailed scrutiny.

Investments & Reinsurance

Audit of the investment as well as reinsurance activities happen only at the Corporate Office
levels and here, the scope for auditors is well defined by the relevant Regulations of IRDA.

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