Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) The commissioner shall not recognize a person
or firm as a qualified independent certified public accountant if the person or
firm:
(1) Is not in good standing with the AICPA
and in all states in which the accountant is licensed to practice, or, for a
Canadian or British company, that is not a chartered accountant; or
(2) Has either directly or indirectly entered into
an agreement of indemnity or release from liability (collectively referred to as
indemnification) with respect to the audit of the insurer.
(b) Except as otherwise provided in these
regulations, the commissioner shall recognize an independent certified public
accountant as qualified as long as the independent certified public accountant
conforms to the standards of the independent certified public accountant's
profession, as contained in the Code of Professional Ethics of the AICPA and Rules
and Regulations and Code of Ethics and Rules of Professional Conduct of the
California Board of Public Accountancy, or similar code.
(c) A qualified independent certified public
accountant may enter into an agreement with an insurer to have disputes relating to
an audit resolved by mediation or arbitration. However, in the event of a
delinquency proceeding commenced against the insurer under any statute of the
California Insurance Code, the mediation or arbitration provisions shall operate at
the option of the statutory successor.
(d)
(1) The lead
(or coordinating) audit partner (having primary responsibility for the audit) may
not act in that capacity for more than five (5) consecutive years. The person shall
be disqualified from acting in that or a similar capacity for the same company or
its insurance subsidiaries or affiliates for a period of five (5) consecutive years.
An insurer may make application to the commissioner for relief from the above
rotation requirement on the basis of unusual circumstances. This application should
be made at least thirty (30) days before the end of the calendar year. The
commissioner may consider the following factors in determining if the relief should
be granted:
(A) Number of partners, expertise of
the partners or the number of insurance clients in the currently registered
firm;
(B) Premium volume of the insurer;
or
(C) Number of jurisdictions in which
the insurer transacts business.
(2) The insurer shall file, with its annual
statement filing, the approval for relief from Subsection (d)(1) with the states
that it is licensed in or doing business in and with the NAIC. If the nondomestic
state accepts electronic filing with the NAIC, the insurer shall file the approval
in an electronic format acceptable to the NAIC.
(e) The commissioner shall neither recognize as a
qualified independent certified public accountant, nor accept an annual audited
financial report, prepared in whole or in part by, a natural person who:
(1) Has been convicted of fraud, bribery, a
violation of the Racketeer Influenced and Corrupt Organizations Act,
18 U.S.C. Sections
1961 to
1968, or any dishonest conduct or
practices under federal or state law;
(2) Has been found to have violated the insurance
laws of this state with respect to any previous reports submitted under these
regulations; or
(3) Has demonstrated a
pattern or practice of failing to detect or disclose material information in
previous reports filed under the provisions of these
regulations.
(f) The
commissioner of insurance may hold a hearing to determine whether an independent
certified public accountant is qualified and, considering the evidence presented,
may rule that the accountant is not qualified for purposes of expressing the
accountant's opinion on the financial statements in the annual audited financial
report made pursuant to these regulations and require the insurer to replace the
accountant with another whose relationship with the insurer is qualified within the
meaning of these regulations.
(g)
(1) The commissioner shall not recognize as a
qualified independent certified public accountant, nor accept an annual audited
financial report, prepared in whole or in part by an accountant who provides to an
insurer, contemporaneously with the audit, the following non-audit services:
(A) Bookkeeping or other services related to the
accounting records or financial statements of the insurer;
(B) Financial information systems design and
implementation;
(C) Appraisal or
valuation services, fairness opinions, or contribution-in-kind reports;
(D) Actuarially-oriented advisory services
involving the determination of amounts recorded in the financial statements. The
accountant may assist an insurer in understanding the methods, assumptions and
inputs used in the determination of amounts recorded in the financial statement only
if it is reasonable to conclude that the services provided will not be subject to
audit procedures during an audit of the insurer's financial statements. An
accountant's actuary may also issue an actuarial opinion or certification
("opinion") on an insurer's reserves if the following conditions have been met:
(i) Neither the accountant nor the accountant's
actuary has performed any management functions or made any management
decisions;
(ii) The insurer has
competent personnel (or engages a third party actuary) to estimate the reserves for
which management takes responsibility; and
(iii) The accountant's actuary tests the
reasonableness of the reserves after the insurer's management has determined the
amount of the reserves;
(E)
Internal audit outsourcing services;
(F)
Management functions or human resources;
(G) Broker or dealer, investment adviser, or
investment banking services;
(H) Legal
services or expert services unrelated to the audit; or
(I) Any other services that the commissioner
determines, by regulation, are impermissible.
(2) In general, the principles of independence
with respect to services provided by the qualified independent certified public
accountant are largely predicated on three basic principles, violations of which
would impair the accountant's independence. The principles are that the accountant
cannot function in the role of management, cannot audit the accountant's own work,
and cannot serve in an advocacy role for the insurer.
(h) Insurers having direct written and assumed
premiums of less than $100,000,000 in any calendar year may request an exemption
from Subsection (g)(1). The insurer shall file with the commissioner a written
statement discussing the reasons why the insurer should be exempt from these
provisions. If the commissioner finds, upon review of this statement, that
compliance with these regulations would constitute a financial or organizational
hardship upon the insurer, an exemption may be granted.
(i) A qualified independent certified public
accountant who performs the audit may engage in other non-audit services, including
tax services, that are not described in Subsection (g)(1) or that do not conflict
with Subsection (g)(2), only if the activity is approved in advance by the Audit
Committee, in accordance with Subsection (j).
(j) All auditing services and non-audit services
provided to an insurer by the qualified independent certified public accountant of
the insurer shall be pre-approved by the Audit Committee. The pre-approval
requirement is waived with respect to non-audit services if the insurer is a SOX
Compliant Entity or a direct or indirect wholly-owned subsidiary of a SOX Compliant
entity or:
(1) The aggregate amount of all such
non-audit services provided to the insurer constitutes not more than five percent
(5%) of the total amount of fees paid by the insurer to its qualified independent
certified public accountant during the fiscal year in which the non-audit services
are provided;
(2) The services were not
recognized by the insurer at the time of the engagement to be non-audit services;
and
(3) The services are promptly
brought to the attention of the Audit Committee and approved prior to the completion
of the audit by the Audit Committee or by one or more members of the Audit Committee
who are the members of the board of directors to whom authority to grant such
approvals has been delegated by the Audit Committee.
(k) The Audit Committee may delegate to one or
more designated members of the Audit Committee the authority to grant the
pre-approvals required by Subjection (j). The decisions of any member to whom this
authority is delegated shall be presented to the full Audit Committee at each of its
scheduled meetings.
(l)
(1) The commissioner shall not recognize an
independent certified public accountant as qualified for a particular insurer if a
member of the board, president, chief executive officer, controller, chief financial
officer, chief accounting officer, or any person serving in an equivalent position
for that insurer, was employed by the independent certified public accountant and
participated in the audit of that insurer during the one-year period preceding the
date that the most current statutory opinion is due. This section shall only apply
to partners and senior managers involved in the audit. An insurer may make
application to the commissioner for relief from the above requirement on the basis
of unusual circumstances.
(2) The
insurer shall file, with its annual statement filing, the approval for relief from
Subsection (l)1 with the states that it is licensed in or doing
business in and the NAIC. If the nondomestic state accepts electronic filing with
the NAIC, the insurer shall file the approval in an electronic format acceptable to
the NAIC.
1. New section
filed 12-7-2009; operative 1-1-2010 pursuant to Government Code section
11343.4
(Register 2009, No. 50).
2. Change without regulatory effect amending
subsections (b), (f) and (g)(2) filed 7-14-2021 pursuant to section
100, title 1, California Code of
Regulations (Register 2021, No. 29). Filing deadline specified in Government Code
section
11349.3(a)
extended 60 calendar days pursuant to Executive Order
N-40-20.
Note: Authority cited: Section
900.2, Insurance
Code. Reference: Section
900.2, Insurance
Code.
