Question & AnswerQ&A (IC CIRCULAR LETTER NO. 1-2005)
The purpose is to strengthen the regulatory framework of the Insurance Commission and enhance confidence in the audited financial statements of insurance-related entities by adopting rules on the accreditation and reporting requirements of external auditors.
The Circular applies to all insurance/reinsurance companies, professional reinsurers, insurance and reinsurance brokers, insurance agents, mutual benefit associations, and trusts for charitable uses, including their external auditors and auditing firms.
An External Auditor is an independent Certified Public Accountant (CPA) whose role is mainly to express an opinion on the financial statements. This can be a single practitioner or a signing partner in an auditing firm.
Fraud includes manipulation, falsification or alteration of records, misappropriation of assets, suppression or omission of transactions from records, recording transactions without substance, and misapplication of accounting policies.
The accreditation expires or is automatically delisted after three (3) years from the date of approval unless renewed before the expiry date.
The external auditor must be duly registered with the Professional Regulation Commission (PRC)/Board of Accountancy (BOA), comply with the Code of Professional Ethics for CPAs, and conduct audits in accordance with Philippine Standards on Auditing (PSA). They must also have at least five (5) years experience in regular audits, with two (2) years in the insurance field or equivalent training.
Prohibited services include bookkeeping, information systems design, appraisal, actuarial services, internal audit outsourcing, management functions, insurance underwriting, investment dealing/advising, and any other services declared impermissible by the Commission.
Failure to disclose such findings may lead to suspension or delisting of the auditor’s accreditation after due notice and hearing by the Insurance Commission.
Fines for first offenses are P100,000 for auditing firms and P50,000 for external auditors; second offenses result in fines of P200,000 and P100,000 respectively; and third offenses involve P400,000 and P200,000 respectively. Other administrative or criminal sanctions may also apply.
An external auditor must report to the Commission within 30 business days any material findings on fraud or errors, under-reserving of IBNR losses causing capital deficiency, or inadequate assets relative to liabilities. The auditor must also submit findings to the client’s management and internal audit committee.