AUDITORS TRAINING ON UNCLAIMED FINANCIAL ASSETS Presentation by: CPA Evans Olonje. Uphold public interest

Transcription

1 AUDITORS TRAINING ON UNCLAIMED FINANCIAL ASSETS Presentation by: CPA Evans Olonje Uphold public interest

2 Insurance Sector in Kenya Introduction: Insurance industry in Kenya fall under the jurisdiction of IRA, a state corporation mandated to: Regulate Supervise Promote the development of insurance industry.

3 Who are the key players regulated by IRA? Insurance companies Re-Insurance companies Insurance brokers Insurance agents Motor assessors Insurance investigators Insurance surveyors Loss adjustors Claim settling agents Risk managers

4 What is an insurance contract? Are contracts between two parties, where one party, the insurer, agrees to compensate the other party, the policyholder, if it is adversely affected by uncertain future event.

5 Corporate Reporting in Insurance Industry Corporate reporting covers reports other than financial statements, in particular audit reports, but also assurance, internal audit and environmental reports. Corporate reporting simply put refers to presentation and disclosure aspects.

6 Corporate Reporting Frameworks in Insurance Industry Regulatory Frameworks Company Act 2015 Insurance Regulatory Act 2016 Finance Act UFAA Act 2011 Financial Frameworks IFRS ISA Guideline Requirements Prudential Guideline UFAA Regulation

7 Unclaimed Financial Assets under Insurance Industry: Background The UFA Act (No. 40 of 2011) provides a legislative framework for dealing with u.f.a, which are defined as; financial assets which include any income, dividend or interest. A financial asset is considered unclaimed when no claims have been made, no transactions have been performed or no instructions have been given with respect to the asset for a period of time. The Act provide for: How institutions should report and deal with UFA The establishment of Unclaimed Financial Asset Authority The establishment of Unclaimed Financial Assets Trust Fund

8 How to determine UFAs under Insurance 8 industry ASSET 1. Life or Endowment Insurance policy or annuity contract 2. Assets as a result of demutualization of an insurance company DURATION OF ABANDONMENT 2 years after the funds become due and payable 2 years after the date of the demutualization CONDITIONS Policy must have matured or terminated Surrender Value The funds remain unclaimed Owner has not communicated with the holder (bank/financial institution) or agent 3. Ownership interest 3 years Unclaimed dividend No communication with entity on interest/dividend Owner whereabouts not known

9 9 Major Issues in Audit of Insurance Company Presentation path: Unique features of Insurance companies Significant Audit Areas/Financial Statement Areas Key consideration and Major Audit/Accounting Issues

10 10 Unique Features of Insurance Companies Regulated by Insurance Regulatory Authority All products duly approved by IRA- Claims Benefits, Commission payments etc. Maintenance of Solvency Margin Ratio- similar to Capital Adequacy Ratio mandatory for banks IRA provides the following related to Financial Statements:

11 11 Unique Features of Insurance Companies (Contd) Format of Financial Statements Separate income statement for policyholder and shareholders. Recognition and measurement of principles of certain items of financial statements-investment, Premium, Commission, Free look cancelation, Benefits paid, etc. Applicability of Accounting Standards

12 12 Contd: Additional disclosures in financial statements Concept of mandatory appointment of joint Auditors and cooling period Role of appointed Actuary- product design, Actuarial Liability etc. Contents of Auditors reports have been prescribed Income tax calculation

13 13 Significant Audit Areas/Financial Statement Areas Premium & Reinsurance Commission Benefits/Claims/Surrender values Investments/Dividends Payroll

14 14 Key Consideration For Audit Of Insurance Company- General Audit approach is principally very similar to those of other sectors such as Banks, Mutual Finds, Manufacturing etc. Risk Based Audit Approach: Volume and size requires auditors to use a Risk based approach. This approach emphasizes on coverage of all major areas of risk based on objective assessment of risk factors, their significance, and materiality

15 15 Continued Use of in-house experts for comfort on Information Technology Systems, Tax positions, etc. taken by the Company Business and product understanding of their accounting. Understand issues existing in the insurance industry- Accounting, Taxation, etc. Monitoring of IRA website for circular/orders issued to company & peer companies.

16 Continued: 16 Coordination/Discussion among the joint Auditors; All the critical matters/observation/issues should be discussed between the auditors and there should be consensus on the issues/observations. Allocation of items of Trial balance between the joint Auditors Rotation of areas among auditors- may be 2 years

17 17 Commission Key Consideration Understand complete process from recruitment of agents till termination of agents vis-à-vis accounting entries. Ensure rates at which Commission/Brokerage is paid are duly approved in File & Use guidelines for respective products. Ensure that Commission is paid within the prescribed limits as set by IRA.

18 18 Continued Understand Company s commission policy towards terminated agents, employees earlier working as agents and vice-versa for payment of first year and renewal premium. Review various other payments made to brokers/agents and assess the compliance under Part VII of Revised IRA Act 2015

19 19 Benefits/Claims paid/payable Key Consideration Review the Claims settlement terms agreed upon by the Company in File & Use guidelines. Understand the nature of claims and process thereof Death, Maturity, Money-back, Surrender (including partial surrender). Review the process of receipt of claims intimation to its final payment. Understand the Company s policy for investigation of claims. Verify the calculation of surrender charges and the same should be in line with File & Use.

20 20 Continued: Verify adherence to cut off procedures by Company for Claims and Surrender intimation received on last day, its status in policy admin system and its related impact on the Actuarial Liabilities. Understand the Internal control over the follow up process for payments towards Policies matured/terminated, etc. Review the basis of provision towards cases under litigation and amounts disclosed as contingent liabilities. Ensure that actuarial reserves carried in the books and payments made, if any are to be adjusted against provisions to be made. Perform data analytics between various systems of the Company and current status of Policies

21 21 Benefits paid- Audit/Accounting Issues Whether the Company has built sufficient controls to restrict pile-up of Unclaimed amount by Policyholders? A steep increase in the unclaimed amount has become a cause of concern for the insurance companies. (Whether insurance companies are liable for interest payment on such dues as they are earning returns on the same, is a matter of debate.) Whether Cheques issued dated March 31 but not dispatched to policyholder, can be accounted in that period? (To disclose lower liability) Whether litigations with Policyholders can be considered for contingent liabilities disclosure?

22 22 Continued: Whether provision has been made for all the claims intimated at the end of the year Company and whether corresponding update has been made in the System? Whether any adjustment is required in the financial statements for Cheques issued prior to reporting period but converted to stale before sign off the financial statement? Whether Death claims can be repudiated on nonreceipt of mandatory documents by Insurance Companies?

23 Presentation 23 Dilemma element: Sanlam Group & Company SFP As at 31 December 2016 (Extract) LIABILITIES: Kshs.000 Kshs.000 Insurance payables Nt , ,273 Payables/other charges(31) 481, ,732

24 24 Disclosure Notes to the Group Financial Statements Note. 30. Insurance Payables Kshs.000 Kshs.000 Outstanding claims 441, ,412 Payables arising out of direct insurance 245, Payables arising out of reinsurance operations 115,243 45,342

25 25 Disclosure Notes to the Group Financial Statements Note. 31. Payables and Other Charges Kshs.000 Kshs.000 Amounts due to related parties - 23,033 Unclaimed dividends - 31,322 Stale cheques 39,075 58,560 Deposits received from sale of plots 3,200 11,400

26 26 Continuation; Accruals 138, ,639 Other payables 300, ,778

27 Key Focus: 27 Note 30. Insurance Payable Focus would be on the aging analysis, i.e. Claims outstanding period Note 31. Payables and Other Charges Stale cheques Accruals Other payables Emphasis to be placed on detailed composition of accruals and other payables since the values are of significant figures

28 28 CASE STUDY QUESTION (based on financial statement extracts} The Approach: Group and Company Statement of Financial Position (SANLAM dumified as SALT INSURANCE CO.), period will be 2016, 2015, 2014, 2013, i.e. information from LIABILITIES SECTION EXTRACT Group and Company Statement of Cash Flows. FINANCING ACTIVITY SECTION EXTRACT, to test on dividend movements

29 29 Question: 1. Audit Approach on the Unclaimed Financial Assets 2. How to identify the UFA 3. Reporting on the UFA

30 30 Solution Approach Step 1: Pre-Engagement Terms of engagement(this will highlight more on terms and reporting scope) Step 2: Planning for the Audit Understanding the Entity( ICS, I.T systems, Experts engagements) Risk assessment Engagement of audit staff(allocation of roles based on competency)

31 31 Continued: Step 3: Execution/Actual audit work Profile key areas of focus Testing the design and controls Additional audit procedures (Substantive tests) Identify and classify the Unclaimed Financial Assets Step 4: Reporting This will be defined from the terms of engagements, i.e. Audit report on full Audit ISA 700 /701 Agreed upon procedure Reporting Financial Information Report ISRS 4400

32 Kikomo Asante!