“Preparation is the key to success.” These famous words, spoken by Alexander Graham Bell, are universally true in all areas of life. When it comes to your company’s annual statutory insurance audit, preparation and planning can go a long way to ensure the potential for problems or issues is minimized. If you have experienced a “rough” audit process, it’s likely many variables contributed to the experience such as poor communication, improperly set expectations, moving timeline and more. Whatever the reason, the goal is to ensure that these experiences are limited. After all, a lousy audit experience creates the opportunity for reflection to identify what issues occurred and to identify steps to be taken in the future to remediate such problems. While it’s impossible to plan for every potential issue which can arise, there are specific preparation steps to help ensure you’re as prepared as possible for the audit. To help clients, prospects and others, JLK Rosenberger has provided a list of tips, tools and actions steps from our insurance auditors to help make your next statutory insurance audit less challenging.
Tools Essential to the Audit
- Audit Document Request List (DRL) – This is a list generated by the auditor which highlights all the documents that must be provided for the audit work to be completed. While this list can be formidable (in the eyes of the insurance company), it’s important to compile and provide them to the auditor as soon as possible because most auditors will base their budget on the assumption this information will be delivered before the audit starts. This is important not only because of the need to maintain consistency with the project budget but also because audit work is scheduled based on information in requested documents. If the needed information is not available, it will disrupt the audit schedule and may disrupt the overall project timeline. It’s the responsibility of the auditor to deliver the DRL 30-60 days in advance of due dates to ensure you have enough time to compile the needed information.
- Internal Controls Documentation – A common mistake some insurance companies make is not to have a documented and updated internal controls policy. Ensuring that controls are updated and documented is critical to ensuring a timely and cost-efficient audit. It’s worth noting that an effective internal controls policy is one that is regularly reviewed, tested and updated to meet the changing risks for the business and not merely an exercise before the audit commencement.
Practical Audit Preparation Tips
- Project Champion – As with any project it’s important to have an internal project champion to serve as the liaison throughout the process. This individual will be involved in the audit from the initial planning process through fieldwork until the audit report is issued. We recommend that the champion be one of the most experienced members of the financial accounting staff with the organizational knowledge and relationships to ensure a timely and cost-effective audit conclusion.
- Regular Meetings – It’s essential to schedule a periodic internal financial department meeting and to assign responsibility to staff members to manage various tasks. It’s important to communicate the task requested, assign a due date and to ensure accountability when due dates are missed. We have found this process to be very useful when preparing documents on the DRL. Finally, be sure to keep an open channel of communication to help address issues which may arise and allow them to be resolved quickly.
- DRL File Names – While this may seem like a minor detail, the file naming of various documents on the DRL can help save a lot of time and avoid confusion. The auditor is receiving hundreds of documents related to your insurance company. Therefore, it’s important to use a logical naming structure for all provided documents. An example naming system would be any name that offers clues as to the content of the file without the auditor needing to open the file. For example, DRL Index #_Co Name_Audit Date_Clear File Description (for example…C1_XYZ Ins Co_123118_Bank Rec-Chase-Acct #12345). It’s amazing how far this simple step, when done consistently by all those providing audit support files to the auditor, goes to keep the audit on schedule.
- Transactional Review – Review any unusual accounting or tax transactions which occurred throughout the year that may create a difference of opinion on treatment. It’s imperative to discuss these items with the auditor well in advance of the year-end or quarter-end close. Examples relevant to insurance companies include uncommon reinsurance transaction or stipulations, unusual Schedule BA investments, claim reserving shortages or design anomalies, incorrect quality ratings of securities and late or back-dated line-of-credit procurements.
What can your insurance company do after the audit to improve timing and results?
The after-action review (AAR) meeting is the answer! AAR’s are designed to review the entire audit process and identify areas of strength and opportunity. It’s important for both your team and the audit firm to be candid during the process, but constructive, in identifying remedies and solutions. It’s best to conduct the AAR in person, but in situations where this is not possible, a teleconference would also work. Ensure the agenda is developed by the project champion and include all fieldwork personnel and client associates involved in the process. Finally, the AAR should not be viewed as the equivalent of the end-of-fieldwork exit conference as it’s a more focused version of these conferences.
The annual statutory audit can be a challenging and stressful time for many insurance companies. There is no reason to complicate the process by not preparing and finding ways to make it as smooth as possible.