casualty actuaries of the southeast ethics and professionalism in actuary and auditor relationships...

Casualty Actuaries of the Southeast

Ethics and Professionalism in

Actuary and Auditor RelationshipsApril 1, 2003

David K. Morgan, CPA


Why are Actuaries and Auditors alike?

•Both are highly skilled technical professionals

•Most people have a vague understanding of whatwe do , but know that they can’t do it themselves

•Most people really don’t understand the reportswe issue


The Auditors Ethical Framework

American Institute of Certified Public Accountants(AICPA) Code of Professional Conduct

•Applies to members of American Instituteof Certified Public Accountants.

•Establishes principles and rules.

State Board of Accountancy•Regulatory framework established by state law.•Generally adopts the AICPA Code of Professional Conduct.

Securities and Exchange Commission•Applies to auditors of public companies

•PCAOB and Sarbanes-Oxley


AICPA Code of Professional Conduct

Membership in the American Institute of Certified Public Accountantsis voluntary. By accepting membership, a certified public accountantassumes an obligation of self-discipline above and beyond the requirements of laws and regulations.

These Principles of the Code of Professional Conduct of the American Instituteof Certified Public Accounts express the profession’s recognition of its responsibilitiesto the public, to clients, and to colleagues. They guide members in the performance oftheir professional responsibilities and express the basic tenets of ethical and professionalconduct. The Principles call for an unswerving commitment to honorable behavior, even at the sacrifice of personal advantage.


Responsibilities - In carrying out their responsibilities as professionals, membersshould exercise sensitive professional and moral judgments in all their activities.

The Public Interest - Members should accept the obligation to act in a way thatwill serve the public interest, honor the public trust, and demonstrate commitmentto professionalism.

Integrity - To maintain and broaden public confidence, members should performall professional responsibilities with the highest sense of integrity.

Objectivity and Independence - A member should maintain objectivity and befree of conflicts of interest in discharging professional responsibilities. A memberin public practice should be independent in fact and appearance when providingauditing and other attestation services.

Principles


Due Care - A member should observe the profession’s technical and ethicalstandards, strive continually to improve competence and the quality of services,and discharge professional responsibility to the best of the member’s ability.

Scope and Nature of Services - A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided.

Principles (cont’d)


Ten in all. Three general standards, three standards of field work and four standards of reporting.

The three general standards are as follows:

•The first general standard is the audit is to be performed by a person or personshaving adequate technical training and proficiency as an auditor.

•The second general standard is in all matters relating to the assignment, anindependence in mental attitude is to be maintained by the auditor or auditors.

•The third general standard is due professional care is to be exercised in theplanning and performance of the audit and the preparation of the report.

Auditing Standards


The third standard of field work requires sufficient competent evidentialmatter to be obtained… to afford a reasonable basis for an opinion regarding the financial statements under audit.

•How does an auditor obtain this competent evidence when he does not havethe training or skills to understand the subject?

•Section 336 of the auditing standards provides guidance to the auditor who uses thework of a specialist in performing an audit in accordance with generally acceptedauditing standards.

•For purposes of this section, a specialist is a person (or firm) possessing specialskill or knowledge in a particular field other than accounting or auditing.

•Specialists to which this section applies include, but are not limited to, actuaries,appraisers, engineers, environmental consultants, and geologists.


•The guidance in this section is applicable when management engages or employsa specialist and the auditor uses that specialist’s work as evidential matter in performing substantive tests to evaluate material financial statement assertions.

•This guidance also applies to the auditor who engages a specialist and usesthat specialist’s work as evidential matter in performing substantive tests toevaluate material financial statement assertions.

Using the Work of a Specialist


Decision to Use the Work of A Specialist

•The auditor’s education and experience enable him or her to be knowledgeable about business matters in general, but the auditor is not expected to have the expertise of a person trained for or qualified to engage in the practice of another profession or occupation.

•During the audit, however, an auditor may encounter complex or subjective matterspotentially material to the financial statements. Such matters may require specialskill or knowledge and in the auditor’s judgement, require using the work of a specialistto obtain competent evidential matter.

•One example of using the work of a specialist could be the determination of amounts derived by using specialized techniques or methods such as actuarialdeterminations for insurance loss reserves.


How does the Auditor Decide which Specialist to Use?

•The auditor should consider the following to evaluate the professionalqualifications of the specialist in determining that the specialist possesses thenecessary skill or knowledge in the particular field:

•The professional certification, license, or other recognition of the competenceof the specialist in his or her field, as appropriate.

•The reputation and standing of the specialist in the views of peers and others familiar with the specialist’s capability or performance.

•The specialist’s experience in the type of work under consideration.


The auditor should obtain an understanding of the nature of the work performedor to be performed by the specialist. This understanding should cover the following:

•The objects and scope of the specialist’s work.

•The specialist’s relationship to the client.

•The methods or assumptions used.

•A comparison of the methods or assumptions used with those used in thepreceding period.

•The appropriateness of using the specialist’s work for the intended purpose.

•The form and content of the specialist’s findings.

Understanding the Work of the Specialist


•The auditor should evaluate the relationship of the specialist to the client, includingcircumstances that might impair the specialist’s objectivity.

•When a specialist does not have a relationship with the client, the specialist’s workusually will provide the auditor with greater assurance of reliability.

Understanding the Work of the Specialist

•Such circumstances include situations in which the client has the ability - through employment, ownership, contractual right, family relationship, or otherwise - to directly or indirectly control or significantly influence the specialist.

•However, the work of a specialist who has a relationship with the client may be acceptable under certain circumstances.

•If the specialist has a relationship with the client, the auditor should assess the risk that the specialist’s objectivity might be impaired.

•If the auditor believes the relationship might impair the specialist’s objectivity, the auditor should perform additional procedures with respect to some or all of the specialist’s assumptions, methods, or findings to determine that the findings are not unreasonable or should engage another specialist for that purpose.


Using the Findings of the Specialist

•The appropriateness and reasonableness of methods and assumptions used andtheir application are the responsibility of the specialist.

•The auditor should (a) obtain an understanding of the methods and assumptionsused by the specialist, (b) make appropriate tests of data provided to the specialist,taking into account the auditor’s assessment of control risk, and (c) evaluate whetherthe specialist’s findings support the related assertions in the financial statements.

•Ordinarily, the auditor would use the work of the specialist unless the auditor’sprocedures lead him or her to believe the findings are unreasonable in thecircumstances.

•If the auditor believes the findings are unreasonable, he or she should apply additional procedures, which may include obtaining the opinion of anotherspecialist.


Effect of the Specialist’s Work on the Auditor’s Report

•If the auditor determines that the specialist’s findings support the related assertionsin the financial statements, he reasonably may conclude that sufficient competentevidential matter has been obtained.

•If there is a material difference between the specialist’s findings and the assertionsin the financial statements, he should apply additional procedures.

•If after applying any additional procedures that might be appropriate, the auditoris unable to resolve the matter, the auditor should obtain the opinion of anotherspecialist, unless it appears to the auditor that the matter cannot be resolved.


•A matter that has not been resolved ordinarily will cause the auditor to concludethat he or she should qualify the opinion or disclaim an opinion because the inability to obtain sufficient competent evidential matter as to an assertion ofmaterial significance in the financial statements constitutes a scope limitation.

•The auditor may conclude after performing additional procedures, includingpossibly obtaining the opinion of another specialist, that the assertions in thefinancial statements are not in conformity with GAAP. In that event, the auditor should express a qualified or adverse opinion.

Effect of the Specialist’s Work on the Auditor’s Report


Reference to the Specialist in the Auditor’s Report

•Generally, the auditor should not refer to the work or findings of the specialistin his report. Such a reference might be misunderstood to be a qualification ofthe auditor’s opinion or a division of responsibility, neither of which is intended.

•The auditor may, as a result of the report or findings of the specialist, decide toadd explanatory language to his or her standard report or depart from an unqualifiedopinion. Reference to and identification of the specialist may be made in the auditor’s report if the auditor believes such reference will facilitate an understanding of the reason for the explanatory paragraph or the departure from the unqualifiedopinion.


Story of Three Wise Men

•Engineer

•Actuary

•Auditor


Where is the Ethical Line?

•Whose job is it to make sure that the assumptions used are appropriate?

•What if you know the data being used is not complete or not correct?

•How do you know when to walk away from an engagement?

•If you have terminated a client relationship due to questions about theintegrity of management, what are your obligations to inform the auditors?

•In the new world of Sarbanes-Oxley, might you have civil or criminal liabilityif you do not blow the whistle on improprieties?


Questions ?

casualty actuaries of the southeast ethics and professionalism in actuary and auditor relationships...

Documents

public accounts

public confidence

public trust

professional responsibility

memberin public practice

principlescasualty actuaries

cpacasualty actuaries

general standards