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Casualty Actuaries of the Southeast

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					            Casualty Actuaries of the
                   Southeast
                   Ethics and Professionalism in
                 Actuary and Auditor Relationships
                            April 1, 2003




David K. Morgan, CPA
Casualty Actuaries of the Southeast




                Why are Actuaries and Auditors alike?

                      •Both are highly skilled technical professionals

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

                       •Most people really don’t understand the reports
                       we issue
Casualty Actuaries of the Southeast


                  The Auditors Ethical Framework
                   American Institute of Certified Public Accountants
                   (AICPA) Code of Professional Conduct
                         •Applies to members of American Institute
                         of 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
Casualty Actuaries of the Southeast




                 AICPA Code of Professional Conduct

        Membership in the American Institute of Certified Public Accountants
        is voluntary. By accepting membership, a certified public accountant
        assumes 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 Institute
       of Certified Public Accounts express the profession’s recognition of its responsibilities
       to the public, to clients, and to colleagues. They guide members in the performance of
       their professional responsibilities and express the basic tenets of ethical and professional
       conduct. The Principles call for an unswerving commitment to honorable behavior,
       even at the sacrifice of personal advantage.
Casualty Actuaries of the Southeast

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

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

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

       Objectivity and Independence - A member should maintain objectivity and be
       free of conflicts of interest in discharging professional responsibilities. A member
       in public practice should be independent in fact and appearance when providing
       auditing and other attestation services.
Casualty Actuaries of the Southeast

                                         Principles (cont’d)



      Due Care - A member should observe the profession’s technical and ethical
      standards, 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.
Casualty Actuaries of the Southeast

                                      Auditing Standards
     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 persons
         having adequate technical training and proficiency as an auditor.

         •The second general standard is in all matters relating to the assignment, an
         independence 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 the
         planning and performance of the audit and the preparation of the report.
Casualty Actuaries of the Southeast

          The third standard of field work requires sufficient competent evidential
          matter 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 have
         the training or skills to understand the subject?
          •Section 336 of the auditing standards provides guidance to the auditor who uses the
          work of a specialist in performing an audit in accordance with generally accepted
          auditing standards.
          •For purposes of this section, a specialist is a person (or firm) possessing special
          skill 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.
Casualty Actuaries of the Southeast




                             Using the Work of a Specialist


          •The guidance in this section is applicable when management engages or employs
          a 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 uses
           that specialist’s work as evidential matter in performing substantive tests to
           evaluate material financial statement assertions.
Casualty Actuaries of the Southeast



               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 matters
       potentially material to the financial statements. Such matters may require special
       skill or knowledge and in the auditor’s judgement, require using the work of a specialist
       to 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 actuarial
       determinations for insurance loss reserves.
Casualty Actuaries of the Southeast



        How does the Auditor Decide which Specialist to Use?

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


         •The professional certification, license, or other recognition of the competence
         of 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.
Casualty Actuaries of the Southeast



                     Understanding the Work of the Specialist

    The auditor should obtain an understanding of the nature of the work performed
    or 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 the
       preceding period.

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

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


                         Understanding the Work of the Specialist
    •The auditor should evaluate the relationship of the specialist to the client, including
    circumstances that might impair the specialist’s objectivity.
    •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.
   •When a specialist does not have a relationship with the client, the specialist’s work
   usually will provide the auditor with greater assurance of reliability.
    •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.
Casualty Actuaries of the Southeast



                     Using the Findings of the Specialist

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

      •The auditor should (a) obtain an understanding of the methods and assumptions
      used 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 whether
      the specialist’s findings support the related assertions in the financial statements.

      •Ordinarily, the auditor would use the work of the specialist unless the auditor’s
      procedures lead him or her to believe the findings are unreasonable in the
      circumstances.
      •If the auditor believes the findings are unreasonable, he or she should apply
      additional procedures, which may include obtaining the opinion of another
      specialist.
Casualty Actuaries of the Southeast




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


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

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

        •If after applying any additional procedures that might be appropriate, the auditor
        is unable to resolve the matter, the auditor should obtain the opinion of another
        specialist, unless it appears to the auditor that the matter cannot be resolved.
Casualty Actuaries of the Southeast


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


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


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



          Reference to the Specialist in the Auditor’s Report


       •Generally, the auditor should not refer to the work or findings of the specialist
       in his report. Such a reference might be misunderstood to be a qualification of
       the 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 to
       add explanatory language to his or her standard report or depart from an unqualified
       opinion. 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 unqualified
       opinion.
Casualty Actuaries of the Southeast



                        Story of Three Wise Men


                •Engineer

                •Actuary

                 •Auditor
Casualty Actuaries of the Southeast



                             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 the
      integrity of management, what are your obligations to inform the auditors?

      •In the new world of Sarbanes-Oxley, might you have civil or criminal liability
      if you do not blow the whistle on improprieties?
Casualty Actuaries of the Southeast




                                      Questions ?
Casualty Actuaries of the Southeast

				
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