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Unit 12: Special Features of Audit

9. The auditors of the State Bank of India are to be appointed by the …………………………….. Notes
in consultation with the Central Government.
10. Internal control evaluation is an important element of……………………………. .

12.4 Audit of Insurance Companies

General Insurance sector is next only to the banking industry in terms of importance among the
economic barometers of the nation. While the banking industry is creating assets and consequently
national wealth, the insurance industry is ‘protecting’ such wealth to the tune of several millions
of rupees. The industry is also very unique in the sense that it thrives in selling promises and
marketing uncertainties and making good money in the process, cycling such money back in to
the nation building process. Cash-rich, again next only to banking, it is also the only industry
that is global, both by design and default, in its reach and perspectives and hence its numbers are
also massive.
The industry, which was opened up for private sector participation with a defined limit of
foreign equity, after three decades of public sector monopoly, is in the process of rediscovering
itself. It has become the cynosure of all discerning eyes, with more than a dozen private companies
sponsored by the top industrial empires of the country teaming up with some of the best
international names, have sprung in the horizon to increase the size of the cake several fold and
then to take their due slices of it.

12.4.1 Audit of Accounts

The various stakeholders in the general insurance companies such as the Government (as the
owners of the PSU companies), Indian shareholders and the JV partners (in case of private
companies), policyholders, re-insurers 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.
Under section 12 of the Insurance Act, 1938, the financial statements of every insurer are required
to be audited annually by an auditor. Section 2(4) of the Insurance Act, 1938 defines the term
‘auditor’ as a person qualified under the Chartered Accountants Act, 1949 to act as an auditor of
a company. The auditor, for audit of financial statements, has the powers to exercise the rights

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