23 CAR Part 12 — Annual Financial Reporting

Chapter I

Subchapter A

Subpart 1

23 CAR § 12-101 Purpose and scope {#sec-23-car-12-101 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-101}

23 CAR § 12-101. Purpose and scope.

(a) The purpose of this rule is to improve the State Insurance Department’s surveillance of the financial condition of insurers by requiring:

(1) An annual audit of financial statements reporting the financial position and the results of operations of insurers by independent certified public accountants;

(2) Communication of internal control related matters noted in an audit; and

(3) Management’s report of internal control over financial reporting.

(b)(1) Every insurer, as defined in 23 CAR § 12-102, shall be subject to this rule.

(2) Insurers having direct premiums written in this state of less than one million dollars ($1,000,000) in any calendar year and less than one thousand (1,000) policyholders or certificate holders of direct written policies nationwide at the end of the calendar year shall be exempt from this rule for such year, unless the Insurance Commissioner makes a specific finding that compliance is necessary for the Insurance Commissioner to carry out his or her regulatory responsibilities.

(3) However, insurers having a combined total of direct and assumed premiums pursuant to contracts and/or treaties of reinsurance of one million dollars ($1,000,000) or more will not be so exempt.

(c) Foreign or alien insurers filing the audited financial report in another state, pursuant to that state’s requirement for filing of audited financial reports, which has been found by the Insurance Commissioner to be substantially similar to the requirements herein, are exempt from 23 CAR §§ 12-103 – 12-112 if:

(1)(A) A copy of the audited financial report, communication of internal control related matters noted in an audit, and the accountant’s letter of qualifications that are filed with another state are filed with the Insurance Commissioner in accordance with the filing dates specified in 23 CAR §§ 12-103, 12-110, and 12-111, respectively.

(B) Canadian insurers may submit accountants’ reports as filed with the Office of the Superintendent of Financial Institutions, Canada; and

(2) When applicable, a copy of any notification of adverse financial condition report filed with another state is filed with the Insurance Commissioner within the time specified in 23 CAR § 12-109.

(d) Foreign or alien insurers required to file management’s report of internal control over financial reporting in another state are exempt from filing the report in this state provided the other state has substantially similar reporting requirements and the report is filed with the commissioner of the other state within the time specified.

(e) This rule shall not prohibit, preclude, or in any way limit the Insurance Commissioner from ordering, conducting, or performing examinations of insurers under the:

(1) Rules of the department;

(2) Provisions of the Arkansas Insurance Code; and

(3) Practices and procedures of the department.

History

• Codification Notes: Arkansas Insurance Code was enacted by Acts 1959, No. 148. Authority: Arkansas Code § 23-61-108

23 CAR § 12-102 Definitions {#sec-23-car-12-102 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-102}

23 CAR § 12-102. Definitions.

The terms and definitions contained herein are intended to provide guidance only as the terms are used within this rule:

(1)(A) “Accountant” or “independent certified public accountant” means an independent certified public accountant or accounting firm in good standing with the American Institute of Certified Public Accountants and in all states in which he or she is licensed to practice.

(B) With regard to Canadian and British companies, it means a Canadian-chartered or British-chartered accountant;

(2) An “affiliate” of, or person “affiliated” with a specific person, is a person that directly, or indirectly through one (1) or more intermediaries, controls, or is controlled by, or is under common control with, the person specified;

(3)(A) “Audit committee” means a committee, or equivalent body, established by the board of directors of an entity for the purpose of overseeing:

(i) The accounting and financial reporting processes of an insurer or group of insurers;

(ii) The internal audit function of an insurer or group of insurers, if applicable; and

(iii) External audits of financial statements of the insurer or group of insurers.

(B)(i) The audit committee of any entity that controls an insurer or a group of insurers may be deemed to be the audit committee for one (1) or more of these controlled insurers solely for the purposes of this rule at the election of the controlling person.

(ii) Refer to 23 CAR § 12-113(g) for exercising this election.

(C) If an audit committee is not designated by the insurer, the insurer’s entire board of directors shall constitute the audit committee;

(4) “Audited financial report” means and includes those items specified in 23 CAR § 12-104;

(5) “Commissioner” means the Insurance Commissioner;

(6) “Group of insurers” means:

(A) Those licensed insurers subject to the reporting requirements of the Insurance Holding Company Regulatory Act, Arkansas Code § 23-63-501 et seq.; or

(B) A set of insurers as identified by management for the purpose of assessing the effectiveness of internal control over financial reporting;

(7) “Indemnification” means an agreement of indemnity or a release from liability where the intent or effect is to shift or limit in any manner the potential liability of the person or firm for failure to adhere to applicable auditing or professional standards, whether or not resulting in part from knowledge of misrepresentations made by the insurer or its representatives;

(8) “Independent board member” has the same meaning as described in 23 CAR § 12-113(d);

(9)(A) “Insurer” means a licensed insurer as defined in Arkansas Code § 23-60-102(2) or an authorized insurer as defined in Arkansas Code § 23-60-102(11).

(B) For purposes of this rule, an insurer shall also mean:

(i) Hospital and medical service corporations, as defined in Arkansas Code § 23-75-101; and

(ii) Health maintenance organizations, as defined in Arkansas Code § 23-76-102(7);

(10) “Internal audit function” means a person, or persons, that provides independent, objective, and reasonable assurance designed to add value and improve an organization’s operations and accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of:

(A) Risk management;

(B) Control; and

(C) Governance processes;

(11) “Internal control over financial reporting” means a process effectuated by an entity’s board of directors, management, and other personnel designed to provide reasonable assurance regarding the reliability of the financial statements, i.e., those items specified in 23 CAR § 12-104(b)(2) – (7) and includes those policies and procedures that:

(A) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets;

(B) Provide reasonable assurance that:

(i) Transactions are recorded as necessary to permit preparation of the financial statements, i.e., those items specified in 23 CAR § 12-104(b)(2) – (7); and

(ii) Receipts and expenditures are being made only in accordance with authorizations of management and directors; and

(C) Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of assets that could have a material effect on the financial statements, i.e., those items specified in 23 CAR § 12-104(b)(2) – (7);

(12) “SEC” means the United States Securities and Exchange Commission;

(13) “SOX compliant entity” means an entity that either is required to be compliant with, or voluntarily is compliant with, all of the following provisions of the Sarbanes-Oxley Act of 2002:

(A) The preapproval requirements of Section 201 (Section 10A(i) of the Securities Exchange Act of 1934);

(B) The audit committee independence requirements of Section 301 (Section 10A(m)(3) of the Securities Exchange Act of 1934); and

(C) The internal control over financial reporting requirements of SOX Section 404 (Item 308 of United States Securities and Exchange Commission Regulation S-K);

(14) “SOX Section 404” means Section 404 of the Sarbanes-Oxley Act of 2002 and the United States Securities and Exchange Commission’s rules and regulations promulgated thereunder;

(15) “SOX Section 404 report” means management’s report on “internal control over financial reporting” as defined by the United States Securities and Exchange Commission and the related attestation report of the independent certified public accountant as described in subdivision (1) of this section; and

(16)(A) “Workpapers” are the records kept by the independent certified public accountant of the procedures followed, the tests performed, the information obtained, and the conclusions reached pertinent to the accountant’s audit of the financial statements of an insurer.

(B) “Workpapers” may include audit planning documentation, work programs, analyses, memoranda, letters of confirmation and representation, abstracts of company documents and schedules, or commentaries prepared or obtained by the independent certified public accountant in the course of his or her audit of the financial statements of an insurer and which support the accountant’s opinion.

History

• Codification Notes: "SOX" refers to the Sarbanes-Oxley Act of 2002, which was enacted as Pub. L. No. 107-204.The Securities Exchange Act of 1934 was enacted as Pub. L. No. 73-291.Item 308 of United States Securities and Exchange Commission Regulation S-K is codified at 17 C.F.R. § 229.308. Authority: Arkansas Code § 23-61-108

23 CAR § 12-103 General requirements related to filing and extensions for filing of annual audited financial reports and audit committee appointment {#sec-23-car-12-103 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-103}

23 CAR § 12-103. General requirements related to filing and extensions for filing of annual audited financial reports and audit committee appointment.

(a)(1) All insurers shall have an annual audit performed by an independent certified public accountant and shall file an audited financial report with the Insurance Commissioner on or before June 1 for the year ended December 31 immediately preceding.

(2) The commissioner may require an insurer to file an audited financial report earlier than June 1 with ninety (90) days advance notice to the insurer.

(b)(1) Extensions of the June 1 filing date may be granted by the commissioner for periods of thirty (30) days upon a showing by the insurer and its independent certified public accountant of the reasons for requesting an extension and determination by the commissioner of good cause for an extension.

(2) The request for extension must be submitted in writing not less than ten (10) days prior to the due date in sufficient detail to permit the commissioner to make an informed decision with respect to the requested extension.

(3) The commissioner, in his or her sole discretion, will determine whether good cause exists for an extension and will notify the insurer of that decision in writing.

(c) If an extension is granted in accordance with the provisions in subsection (b) of this section, a similar extension of thirty (30) days is granted to the filing of management’s report of internal control over financial reporting.

(d)(1) Every insurer required to file an annual audited financial report pursuant to this rule shall designate a group of individuals as constituting its audit committee, as defined in 23 CAR § 12-102.

(2) The audit committee of an entity that controls an insurer may be deemed to be the insurer’s audit committee for purposes of this rule at the election of the controlling person.

23 CAR § 12-104 Contents of annual audited financial report {#sec-23-car-12-104 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-104}

23 CAR § 12-104. Contents of annual audited financial report.

(a) The annual audited financial report shall report the financial position of the insurer as of the end of the most recent calendar year and the results of its operations, cash flows, and changes in capital and surplus for the year then ended in conformity with statutory accounting practices prescribed, or otherwise permitted, by the insurance department of the state of domicile.

(b) The annual audited financial report shall include the following:

(1) Report of independent certified public accountant;

(2) Balance sheet reporting admitted assets, liabilities, capital, and surplus;

(3) Statement of operations;

(4) Statement of cash flow;

(5) Statement of changes in capital and surplus;

(6)(A) Notes to financial statements.

(B) These notes shall be those required by the appropriate National Association of Insurance Commissioners (NAIC) Annual Statement Instructions and the NAIC Accounting Practices and Procedures Manual.

(C) The notes shall include a reconciliation of differences, if any, between the audited statutory financial statements and the annual statement filed pursuant to Arkansas Code § 23-63-216 with a written description of the nature of these differences; and

(7)(A) The financial statements included in the audited financial report shall be:

(i) Prepared in a form and using language and groupings substantially the same as the relevant sections of the annual statement of the insurer filed with the Insurance Commissioner; and

(ii) Comparative, presenting the amounts as of December 31 of the current year and the amounts as of the immediately preceding December 31.

(B) However, in the first year in which an insurer is required to file an audited financial report, the comparative data may be omitted.

23 CAR § 12-105 Designation of independent certified public accountant {#sec-23-car-12-105 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-105}

23 CAR § 12-105. Designation of independent certified public accountant.

(a)(1) Each insurer required by this rule to file an annual audited financial report must, within sixty (60) days after becoming subject to the requirement, register with the Insurance Commissioner in writing the name and address of the independent certified public accountant or accounting firm retained to conduct the annual audit set forth in this rule.

(2) Insurers not retaining an independent certified public accountant on the effective date of this rule shall register the name and address of their retained independent certified public accountant not less than six (6) months before the date when the first audited financial report is to be filed.

(b) The insurer shall obtain a letter from the accountant, and file a copy with the commissioner, simultaneously with the registration required in subsection (a) of this section, stating that the accountant is aware of the provisions of the insurance laws and rules of the insurance department of the state of domicile that relate to accounting and financial matters and affirming that the accountant will express his or her opinion on the financial statements in terms that conform to the statutory accounting practices prescribed or otherwise permitted by that insurance department, specifying such exceptions as he or she may believe are appropriate.

(c) If an accountant who was the accountant for the immediately preceding filed audited financial report is dismissed or resigns, the insurer shall:

(1) Notify the commissioner of this event within five (5) business days;

(2)(A) Furnish the commissioner with a separate letter within ten (10) business days of the above notification stating whether in the twenty-four (24) months preceding such event there were any disagreements with the former accountant on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure and which disagreements, if not resolved to the satisfaction of the former accountant, would have caused him or her to make reference to the subject matter of the disagreement in connection with his or her opinion.

(B) The disagreements required to be reported in response to this section include both those resolved to the former accountant’s satisfaction and those not resolved to the former accountant’s satisfaction.

(C) Disagreements contemplated by this section are those that occur at the decision-making level, i.e., between personnel of the insurer responsible for presentation of its financial statements and personnel of the accounting firm responsible for rendering its report;

(3) Make a written request of the former accountant to furnish a letter addressed to the insurer stating whether the accountant agrees with the statements contained in the insurer’s letter and, if not, stating the reasons for which he or she does not agree;

(4) Furnish the responsive letter from the former accountant to the commissioner together with its own; and

(5) Register with the commissioner in writing the name and address of the independent certified public accountant or accounting firm retained to replace the accountant who was dismissed or resigned within sixty (60) days of such replacement and comply with the requirements of subsection (b) of this section.

23 CAR § 12-106 Qualifications of independent certified public accountant {#sec-23-car-12-106 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-106}

23 CAR § 12-106. Qualifications of independent certified public accountant.

(a) The Insurance 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 this rule, the commissioner shall recognize an independent certified public accountant as qualified as long as he or she conforms to the:

(1) Standards of his or her profession, as contained in the Code of Professional Conduct of the AICPA; and

(2) Rules, code of ethics, and rules of professional conduct of the Arkansas State Board of Public Accountancy or similar code.

(c)(1) 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.

(2) However, in the event of a delinquency proceeding commenced against the insurer under Arkansas Code § 23-68-101 et seq., the mediation or arbitration provisions shall operate at the option of the statutory successor.

(d)(1)(A) 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.

(B) 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.

(C)(i) An insurer may make application to the commissioner for relief from the above rotation requirement based on unusual circumstances.

(ii) This application should be made at least thirty (30) days before the end of the calendar year.

(D) The commissioner may consider all relevant factors, including the following, in determining whether the relief should be granted:

(i) Number of partners, expertise of the partners, or the number of insurance clients in the currently registered firm;

(ii) Premium volume of the insurer; or

(iii) Number of jurisdictions in which the insurer transacts business.

(2)(A) If the commissioner grants relief under subdivision (d)(1) of this section, the insurer shall file the approval for relief with the states in which it is licensed or doing business and with the NAIC with its annual statement filing.

(B) If the nondomestic states accept 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 has:

(1) Been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §§ 1961 – 1968, or any dishonest conduct or practices under federal or state law;

(2) Been found to have violated the insurance laws of this state with respect to any previous reports submitted under this rule; or

(3) Demonstrated a pattern or practice of failing to detect or disclose material information in previous reports filed under the provisions of this rule.

(f)(1) The commissioner may, as provided in Arkansas Code §§ 23-61-303 – 23-61-305, hold a hearing to determine whether an independent certified public accountant is qualified based on the evidence presented.

(2) Following the hearing, the commissioner may:

(A) Rule that the accountant is not qualified for purposes of expressing his or her opinion on the financial statements in the annual audited financial report made pursuant to this rule; and

(B) Require the insurer to replace the accountant with another who is qualified within the meaning of this rule.

(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 nonaudit 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)(i) Actuarially-oriented advisory services involving the determination of amounts recorded in the financial statements.

(ii) 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.

(iii) 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:

(a) Neither the accountant nor the accountant’s actuary has performed any management functions or made any management decisions;

(b) The insurer has competent personnel, or engages a third party actuary, to estimate the reserves for which management takes responsibility; and

(c) 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 rule or otherwise, are impermissible.

(2)(A) In general, the principles of independence with respect to services provided by the qualified independent certified public accountant are largely predicated on three (3) basic principles, violations of which would impair the accountant’s independence.

(B) The principles are that the accountant cannot:

(i) Function in the role of management;

(ii) Audit his or her own work; and

(iii) Serve in an advocacy role for the insurer.

(h)(1) Insurers having direct written and assumed premiums of less than one hundred million dollars ($100,000,000) in any calendar year may request an exemption from the provisions of subdivision (g)(1) of this section.

(2) The insurer shall file with the commissioner a written statement discussing the reasons why the insurer should be exempt from these provisions.

(3) If the commissioner finds, upon review of this statement, that compliance with those provisions 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 nonaudit services, including tax services, that are not described in subdivision (g)(1) of this section or that do not conflict with subdivision (g)(2) of this section, only if the activity is approved in advance by the audit committee in accordance with subsection (j) of this section.

(j)(1) All auditing services and nonaudit services provided to an insurer by the qualified independent certified public accountant of the insurer shall be preapproved by the audit committee.

(2) The preapproval requirement is waived with respect to nonaudit services if the insurer is a SOX compliant entity or a direct or indirect wholly-owned subsidiary of a SOX compliant entity or the:

(A) Aggregate amount of all such nonaudit 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 nonaudit services are provided;

(B) Services were not recognized by the insurer at the time of the engagement to be nonaudit services; and

(C) 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 (1) 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)(1) The audit committee may delegate to one (1) or more designated members of the audit committee the authority to grant the preapprovals required by subsection (j) of this section.

(2) 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)(A) 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.

(B) This subsection shall only apply to partners and senior managers involved in the audit.

(C) An insurer may make application to the commissioner for relief from the above requirement based on unusual circumstances.

(2)(A) The insurer shall file, with its annual statement filing, the approval for relief from subdivision (l)(1) of this section with the states in which it is licensed or doing business and the NAIC.

(B) If the nondomestic states accept electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC.

History

• Codification Notes: "AICPA" means American Institute of Certified Public Accountants."NAIC" means National Association of Insurance Commissioners. Authority: Arkansas Code § 23-61-108

23 CAR § 12-107 Consolidated or combined audits {#sec-23-car-12-107 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-107}

23 CAR § 12-107. Consolidated or combined audits.

(a) An insurer may make written application to the Insurance Commissioner for approval to file audited consolidated or combined financial statements in lieu of separate annual audited financial statements if the insurer is part of a group of insurance companies that utilizes a pooling or one hundred percent (100%) reinsurance agreement that affects the solvency and integrity of the insurer’s reserves and the insurer cedes all of its direct and assumed business to the pool.

(b) In such cases, a columnar consolidating or combining worksheet shall be filed with the report as follows:

(1) Amounts shown on the consolidated or combined audited financial report shall be shown on the worksheet;

(2) Amounts for each insurer subject to this section shall be stated separately;

(3) Noninsurance operations may be shown on the worksheet on a combined or individual basis;

(4) Explanations of consolidating and eliminating entries shall be included; and

(5) A reconciliation shall be included of any differences between the amounts shown in the individual insurer columns of the worksheet and comparable amounts shown on the annual statements of the insurers.

23 CAR § 12-108 Scope of audit and report of independent certified public accountant {#sec-23-car-12-108 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-108}

23 CAR § 12-108. Scope of audit and report of independent certified public accountant.

(a)(1) Financial statements furnished pursuant to 23 CAR § 12-104 shall be examined by the independent certified public accountant.

(2) The audit of the insurer’s financial statements shall be conducted in accordance with generally accepted auditing standards.

(b)(1) In accordance with AU Section 319 of the Professional Standards of the AICPA, Consideration of Internal Control in a Financial Statement Audit, the independent certified public accountant should obtain an understanding of internal control sufficient to plan the audit.

(2) To the extent required by AU 319, those insurers filing a management’s report of internal control over financial reporting pursuant to 23 CAR § 12-116, the independent certified public accountant should consider, as that term is defined in Statement on Auditing Standards No. 102, Defining Professional Requirements in Statements on Auditing Standards or its replacement, the most recently available report in planning and performing the audit of the statutory financial statements.

(c) Consideration shall be given to the procedures illustrated in the Financial Condition Examiners Handbook promulgated by the NAIC as the independent certified public accountant deems necessary.

History

• Codification Notes: "AICPA" means American Institute of Certified Public Accountants."NAIC" means National Association of Insurance Commissioners. Authority: Arkansas Code § 23-61-108

23 CAR § 12-109 Notification of adverse financial condition {#sec-23-car-12-109 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-109}

23 CAR § 12-109. Notification of adverse financial condition.

(a) An insurer that is required to furnish the annual audited financial report shall also require the independent certified public accountant to report, in writing, within five (5) business days to the board of directors or its audit committee any determination by the independent certified public accountant that the insurer:

(1) Has materially misstated its financial condition as reported to the Insurance Commissioner as of the balance sheet date currently under audit; or

(2) Does not meet the minimum capital and surplus requirement of the Arkansas Insurance Code as of that date.

(b)(1) An insurer that has received a report pursuant to this section shall:

(A) Forward a copy of the report to the commissioner within five (5) business days of receipt of the report; and

(B) Provide the independent certified public accountant making the report with evidence of the report being furnished to the commissioner.

(2) If the independent certified public accountant fails to receive the evidence within the required five (5) business days, the independent certified public accountant shall furnish to the commissioner a copy of its report within the next five (5) business days.

(c) No independent certified public accountant shall be liable in any manner to any person for any statement made in connection with subsections (a) and (b) of this section if the statement is made in good faith in compliance with subsections (a) and (b) of this section.

(d) If the accountant, subsequent to the date of the audited financial report filed pursuant to this rule, becomes aware of facts that might have affected his or her report, it is the obligation of the accountant to take such action as prescribed in Volume 1, Section AU 561 of the Professional Standards of the AICPA.

History

• Codification Notes: "AICPA" means American Institute of Certified Public Accountants. Authority: Arkansas Code § 23-61-108

23 CAR § 12-110 Communication of internal control related matters noted in an audit {#sec-23-car-12-110 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-110}

23 CAR § 12-110. Communication of internal control related matters noted in an audit.

(a)(1) In addition to the annual audited financial report, each insurer shall furnish the Insurance Commissioner with a written communication as to any unremediated material weaknesses in its internal control over financial reporting noted during the audit.

(2) Such communication shall be prepared by the accountant within sixty (60) days after the filing of the annual audited financial report, and shall contain a description of any unremediated material weakness, as the term material weakness is defined by Statement on Auditing Standard 60, Communication of Internal Control Related Matters Noted in an Audit, or its replacement, as of December 31 immediately preceding, so as to coincide with the audited financial report discussed in 23 CAR § 12-103(a), in the insurer’s internal control over financial reporting noted by the accountant during the course of their audit of the financial statements.

(3) If no unremediated material weaknesses were noted, the communication should so state.

(b) The insurer is required to provide a description of remedial actions taken or proposed to correct unremediated material weaknesses, if the actions are not described in the accountant’s communication.

23 CAR § 12-111 Accountant’s letter of qualifications {#sec-23-car-12-111 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-111}

23 CAR § 12-111. Accountant’s letter of qualifications.

The accountant shall furnish the insurer in connection with, and for inclusion in, the filing of the annual audited financial report, a letter stating the following:

(1) The accountant is independent with respect to the insurer and conforms to the standards of his or her profession as contained in the Code of Professional Conduct and pronouncements of the AICPA and the Code of Professional Conduct of the Arkansas State Board of Public Accountancy or similar code;

(2)(A) The accountant’s background and experience in general, and the experience in audits of insurers of the staff assigned to the engagement and whether each is an independent certified public accountant.

(B) Nothing within this rule shall be construed as prohibiting the accountant from utilizing such staff as he or she deems appropriate where use is consistent with the standards prescribed by generally accepted auditing standards;

(3) The accountant understands the annual audited financial report and his or her opinion thereon will be filed in compliance with this rule and that the Insurance Commissioner will be relying on this information in the monitoring and regulation of the financial position of insurers;

(4) The accountant consents to the requirements of 23 CAR § 12-112 and that the accountant consents and agrees to make available for review by the commissioner, or the commissioner’s designee or appointed agent, the workpapers as defined in 23 CAR § 12-102;

(5) The accountant is properly licensed by an appropriate state licensing authority and is a member in good standing in the AICPA; and

(6) The accountant is in compliance with the requirements of 23 CAR § 12-106.

History

• Codification Notes: "AICPA" means American Institute of Certified Public Accountants. Authority: Arkansas Code § 23-61-108

23 CAR § 12-112 Availability and maintenance of independent certified public accountants’ workpapers {#sec-23-car-12-112 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-112}

23 CAR § 12-112. Availability and maintenance of independent certified public accountants’ workpapers.

(a)(1) Every insurer required to file an audited financial report pursuant to this rule shall require the accountant to make available for review by State Insurance Department examiners all workpapers prepared in the conduct of the accountant’s audit and any communications related to the audit between the accountant and the insurer available for review by the department’s examiners at:

(A) The offices of the insurer;

(B) The department; or

(C) Any other reasonable place designated by the Insurance Commissioner.

(2) The insurer shall require that the accountant retain the audit workpapers and communications until the department has filed a report of examination covering the period of the audit but no longer than seven (7) years from the date of the audit report.

(b)(1) In the conduct of the aforementioned periodic review by the department’s examiners, it shall be agreed that photocopies of pertinent audit workpapers may be made and retained by the department.

(2) Such reviews by the department’s examiners shall be considered investigations and all working papers and communications obtained during the course of such investigations shall be afforded the same confidentiality as other examination workpapers generated by the department.

23 CAR § 12-113 Requirements for audit committees {#sec-23-car-12-113 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-113}

23 CAR § 12-113. Requirements for audit committees.

(a) This section shall not apply to:

(1) Foreign or alien insurers licensed in this state; or

(2) An insurer that is a SOX compliant entity or a direct or indirect wholly-owned subsidiary of a SOX compliant entity.

(b)(1) The audit committee shall be directly responsible for the appointment, compensation, and oversight of the work of any accountant, including resolution of disagreements between management and the accountant regarding financial reporting, for the purpose of preparing or issuing the audited financial report or related work pursuant to this rule.

(2) Each accountant shall report directly to the audit committee.

(c) The audit committee of an insurer or group of insurers shall be responsible for overseeing the insurer’s internal audit function and granting the person or persons performing the function suitable authority and resources to fulfill their responsibilities if required by 23 CAR § 12-114.

(d) Each member of the audit committee shall be a member of the board of directors of the insurer or a member of the board of directors of an entity elected pursuant to 23 CAR § 12-113(g) and § 12-102(3).

(e)(1) In order to be considered independent for purposes of this section, a member of the audit committee may not, other than in his or her capacity as a member of the audit committee, the board of directors, or any other board committee, accept any consulting, advisory, or other compensatory fee from the entity or be an affiliated person of the entity or any subsidiary thereof.

(2) However, if the law requires board participation by otherwise nonindependent members, that law shall prevail and such members may participate in the audit committee and be designated as independent for audit committee purposes, unless they are an officer or employee of the insurer or one (1) of its affiliates.

(f)(1) If a member of the audit committee ceases to be independent for reasons outside the member’s reasonable control, that person, with notice by the responsible entity to the Insurance Commissioner, may remain an audit committee member of the responsible entity until the earlier of:

(A) The next annual meeting of the responsible entity; or

(B) One (1) year from the occurrence of the event that caused the member to no longer be independent.

(2) The responsible entity is the entity whose board of directors established the audit committee.

(g)(1) To exercise the election of the controlling person to designate the audit committee for purposes of this rule, the ultimate controlling person shall provide written notice to the commissioners of the domiciliary states of the affected insurers.

(2) Notification shall be timely made prior to the issuance of the statutory audit report and include a description of the basis for the election.

(3)(A) The election can be changed through notice to the Insurance Commissioner by the insurer, which shall include a description of the basis for the change.

(B) The election shall remain in effect until rescinded.

(h)(1) The audit committee shall require the accountant that performs an audit required by this rule to timely report to the audit committee in accordance with the requirements of SAS 61, Communication with Audit Committees, or its replacement, including:

(A) All significant accounting policies and material permitted practices;

(B) All material alternative treatments of financial information within statutory accounting principles that have been discussed with management officials of the insurer, ramifications of the use of the alternative disclosures and treatments, and the treatment preferred by the accountant; and

(C) Other material written communications between the accountant and the management of the insurer, such as any management letter or schedule of unadjusted differences.

(2) If an insurer is a member of an insurance holding company system, the reports required by 23 CAR § 12-106(g)(1) may be provided to the audit committee on an aggregate basis for insurers in the holding company system, provided that any substantial differences among insurers in the system are identified to the audit committee.

(i) The proportion of independent audit committee members shall meet or exceed the following criteria based on prior calendar year direct written and assumed premiums, which shall be the combined total of direct premiums and assumed premiums from nonaffiliates for the reporting entities:

(1) An insurer with prior calendar year direct written and assumed premiums of up to three hundred million dollars ($300,000,000) is not subject to minimum requirements;

(2) A majority, fifty percent (50%) or more, of the members shall be independent with regard to an insurer with prior calendar year direct written and assumed premiums of between three hundred million dollars ($300,000,000) and five hundred million dollars ($500,000,000);

(3) All insurers with less than five hundred million dollars ($500,000,000) in prior year direct written and assumed premiums are encouraged to structure their audit committees with at least a supermajority, seventy-five percent (75%) or more, of independent audit committee members; and

(4) A supermajority of the members, seventy-five percent (75%) or more, shall be independent with regard to an insurer with prior calendar year direct written and assumed premiums in excess of five hundred million dollars ($500,000,000).

(j) The commissioner has authority afforded by state law to require the entity’s board to enact improvements to the independence of the audit committee membership if the insurer:

(1) Is in a RBC action level event;

(2) Meets one (1) or more of the standards of an insurer deemed to be in hazardous financial condition; or

(3) Otherwise exhibits qualities of a troubled insurer.

(k)(1) Excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program, an insurer with direct written and assumed premium of less than five hundred million dollars ($500,000,000) may make application to the commissioner for a waiver from the requirements of this section based upon hardship.

(2) If the waiver is approved, the insurer shall file, with its annual statement filing, the approval for relief from this section with the states in which it is licensed or doing business and the NAIC.

(3) If the nondomestic states accept electronic filing with the NAIC, the insurer shall file the approval in an electronic format acceptable to the NAIC.

History

• Codification Notes: "RBC" means risk-based capital."NAIC" means National Association of Insurance Commissioners. Authority: Arkansas Code § 23-61-108

23 CAR § 12-114 Internal audit function requirements {#sec-23-car-12-114 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-114}

23 CAR § 12-114. Internal audit function requirements.

(a) Exemption. An insurer is exempt from the requirements of this section if:

(1) The insurer has annual direct written and unaffiliated assumed premium, including international direct and assumed premium but excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program, less than five hundred million dollars ($500,000,000); and

(2) If the insurer is a member of a group of insurers, the group has annual direct written and unaffiliated assumed premium including international direct and assumed premium, but excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program, less than one billion dollars ($1,000,000,000).

(b) Function.

(1) The insurer or group of insurers shall establish an internal audit function providing independent, objective, and reasonable assurance to the audit committee and insurer management regarding the insurer’s:

(A) Governance;

(B) Risk management; and

(C) Internal controls.

(2) This assurance shall be provided by:

(A) Performing general and specific:

(i) Audits;

(ii) Reviews; and

(iii) Tests; and

(B) Employing other techniques deemed necessary to:

(i) Protect assets;

(ii) Evaluate control effectiveness and efficiency; and

(iii) Evaluate compliance with policies and regulations.

(c) Independence.

(1) In order to ensure that internal auditors remain objective, the internal audit function must be organizationally independent.

(2) Specifically, the internal audit function will not defer ultimate judgment on audit matters to others, and shall appoint an individual to head the internal audit function who will have direct and unrestricted access to the board of directors.

(3) Organizational independence does not preclude dual-reporting relationships.

(d) Reporting. The head of the internal audit function shall report to the audit committee regularly, but no less than annually, on:

(1) The periodic audit plan;

(2) Factors that may adversely impact the internal audit function’s independence or effectiveness;

(3) Material findings from completed audits; and

(4) The appropriateness of corrective actions implemented by management as a result of audit findings.

(e) Additional requirements. If an insurer is a member of an insurance holding company system or included in a group of insurers, the insurer may satisfy the internal audit function requirements set forth in this section at:

(1) The ultimate controlling parent level;

(2) An intermediate holding company level; or

(3) The individual legal entity level.

23 CAR § 12-115 Conduct of insurer in connection with the preparation of required reports and documents {#sec-23-car-12-115 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-115}

23 CAR § 12-115. Conduct of insurer in connection with the preparation of required reports and documents.

(a) No director or officer of an insurer shall, directly or indirectly:

(1) Make or cause to be made a materially false or misleading statement to an accountant in connection with any audit, review, or communication required under this rule; or

(2) Omit to state, or cause another person to omit to state, any material fact necessary in order to make statements made, in light of the circumstances under which the statements were made, not misleading to an accountant in connection with any audit, review, or communication required under this rule.

(b) No officer or director of an insurer, or any other person acting under the direction thereof, shall directly or indirectly take any action to coerce, manipulate, mislead, or fraudulently influence any accountant engaged in the performance of an audit pursuant to this rule if that person knew or should have known that the action, if successful, could result in rendering the insurer’s financial statements materially misleading.

(c) For purposes of subsection (b) of this section, actions that “if successful, could result in rendering the insurer’s financial statements materially misleading” include, but are not limited to, actions taken at any time with respect to the professional engagement period to coerce, manipulate, mislead or fraudulently influence an accountant:

(1) To issue or reissue a report on an insurer’s financial statements that is not warranted under the circumstances due to material violations of statutory accounting principles prescribed by:

(A) The Insurance Commissioner;

(B) Generally accepted auditing standards; or

(C) Other professional or regulatory standards;

(2) Not to perform audit, review, or other procedures required by generally accepted auditing standards or other professional standards;

(3) Not to withdraw an issued report; or

(4) Not to communicate matters to an insurer’s audit committee.

23 CAR § 12-116 Management’s report of internal control over financial reporting {#sec-23-car-12-116 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-116}

23 CAR § 12-116. Management’s report of internal control over financial reporting.

(a)(1) Every insurer required to file an audited financial report pursuant to this rule that has annual direct written and assumed premiums, excluding premiums reinsured with the Federal Crop Insurance Corporation and the National Flood Insurance Program, of five hundred million dollars ($500,000,000) or more shall prepare a report of the insurer’s or group of insurers’ internal control over financial reporting, as these terms are defined in 23 CAR § 12-102.

(2) The report shall be filed with the Insurance Commissioner along with the communication of internal control related matters noted in an audit described under 23 CAR § 12-210.

(3) Management’s report of internal control over financial reporting shall be as of December 31 immediately preceding.

(b) Notwithstanding the premium threshold in subsection (a) of this section, the commissioner may require an insurer to file management’s report of internal control over financial reporting if the insurer is:

(1) In any RBC level event; or

(2) Meets any one (1) or more of the standards of an insurer deemed to be in a hazardous financial condition as defined in Arkansas Code § 23-68-102 and 23 CAR pt. 19.

(c)(1) An insurer or a group of insurers that is directly subject to SOX Section 404, part of a holding company system whose parent is directly subject to SOX Section 404, not directly subject to SOX Section 404 but is a SOX compliant entity, or a member of a holding company system whose parent is not directly subject to SOX Section 404 but is a SOX compliant entity may file its or its parent’s SOX Section 404 report and an addendum in satisfaction of this section’s requirement provided that those internal controls of the insurer or group of insurers having a material impact on the preparation of the insurer’s or group of insurers’ audited statutory financial statements, those items included in 23 CAR § 12-104(b)(2) – (7), were included in the scope of the SOX Section 404 report.

(2) The addendum shall be a positive statement by management that there are no material processes with respect to the preparation of the insurer’s or group of insurers’ audited statutory financial statements, those items included in 23 CAR § 12-104(b)(2) – (7), excluded from the SOX Section 404 report.

(3) If there are internal controls of the insurer or group of insurers that have a material impact on the preparation of the insurer’s or group of insurers’ audited statutory financial statements and those internal controls were not included in the scope of the SOX Section 404 report, the insurer or group of insurers may either file:

(A) A report required under this section; or

(B) The SOX Section 404 report and a report required under this section for those internal controls that have a material impact on the preparation of the insurer’s or group of insurers’ audited statutory financial statements not covered by the SOX Section 404 report.

(d) Management’s report of internal control over financial reporting shall include:

(1) A statement that management is responsible for establishing and maintaining adequate internal control over financial reporting;

(2) A statement that management has established internal control over financial reporting and an assertion, to the best of management’s knowledge and belief, after diligent inquiry, as to whether its internal control over financial reporting is effective to provide reasonable assurance regarding the reliability of financial statements in accordance with statutory accounting principles;

(3) A statement that briefly describes the approach or processes by which management evaluated the effectiveness of its internal control over financial reporting;

(4) A statement that briefly describes the scope of work that is included and whether any internal controls were excluded;

(5)(A) Disclosure of any unremediated material weaknesses in the internal control over financial reporting identified by management as of December 31 immediately preceding.

(B) Management is not permitted to conclude that the internal control over financial reporting is effective to provide reasonable assurance regarding the reliability of financial statements in accordance with statutory accounting principles if there are one (1) or more unremediated material weaknesses in its internal control over financial reporting;

(6) A statement regarding the inherent limitations of internal control systems; and

(7) Signatures of the chief executive officer and the chief financial officer, or equivalent position.

(e)(1) Management shall document and make available upon financial condition examination the basis upon which its assertions, required in subsection (d) of this section, are made.

(2) Management may base its assertions, in part, upon its review, monitoring, and testing of internal controls undertaken in the normal course of its activities.

(3) Management shall have discretion as to the nature of the internal control framework used, and the nature and extent of documentation, in order to make its assertion in a cost effective manner and, as such, may incorporate or reference existing documentation.

(f) Management’s report on internal control over financial reporting, required by subsection (a) of this section, and any documentation provided in support thereof during the course of a financial condition examination, shall be kept confidential by the State Insurance Department.

23 CAR § 12-117 Exemptions and effective dates {#sec-23-car-12-117 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-117}

23 CAR § 12-117. Exemptions and effective dates.

(a)(1) Upon written application of any insurer, the Insurance Commissioner may grant an exemption from compliance with any and all provisions of this rule if the commissioner finds, upon review of the application, that compliance with this rule would constitute a financial or organizational hardship upon the insurer.

(2) An exemption may be granted at any time and from time to time for a specified period or periods.

(3)(A) Within ten (10) days from a denial of an insurer’s written request for an exemption from this rule, the insurer may request in writing a hearing on its application for an exemption.

(B) The hearing shall be held in accordance with the Arkansas Administrative Procedure Act, Arkansas Code § 25-15-201 et seq., and Arkansas Code §§ 23-61-303 – 23-61-305.

(b) Domestic insurers retaining a certified public accountant on the effective date of this rule who qualifies as independent shall comply with this rule for the year ending December 31, 2010, and each year thereafter unless the commissioner permits otherwise.

(c) Domestic insurers not retaining a certified public accountant on the effective date of this rule who qualifies as independent may meet the following schedule for compliance unless the commissioner permits otherwise:

(1) As of December 31, 2010, file with the commissioner an audited financial report; and

(2) For the year ending December 31, 2010, and each year thereafter, such insurers shall file with the commissioner all reports and communication required by this rule.

(d) Foreign insurers shall comply with this rule for the year ending December 31, 2010, and each year thereafter, unless the commissioner permits otherwise.

(e) The requirements of 23 CAR § 12-106(d) shall be in effect for audits of the year beginning January 1, 2010, and thereafter.

(f)(1) The requirements of 23 CAR § 12-113 are to be in effect January 1, 2010.

(2) An insurer or group of insurers that is not required to have independent audit committee members or only a majority of independent audit committee members, as opposed to a supermajority, because the total written and assumed premium is below the threshold and subsequently becomes subject to one (1) of the independence requirements due to changes in premium shall have one (1) year following the year the threshold is exceeded, but not earlier than January 1, 2010, to comply with the independence requirements.

(3) Likewise, an insurer that becomes subject to one (1) of the independence requirements as a result of a business combination shall have one (1) calendar year following the date of acquisition or combination to comply with the independence requirements.

(g)(1) The requirements of 23 CAR § 12-116 are effective beginning with the reporting period ending December 31, 2010, and each year thereafter.

(2) An insurer or group of insurers that is not required to file a report because the total written premium is below the threshold and subsequently becomes subject to the reporting requirements shall have two (2) years following the year the threshold is exceeded, but not earlier than December 31, 2010, to file a report.

(3) Likewise, an insurer acquired in a business combination shall have two (2) calendar years following the date of acquisition or combination to comply with the reporting requirements.

(h)(1) The requirements of 23 CAR § 12-114 are to be in effect January 1, 2020, and thereafter.

(2) If an insurer or group of insurers that is exempt from the requirements in 23 CAR § 12-114 no longer qualifies for that exemption, it shall have one (1) year after the year the threshold is exceeded to comply with the requirements of this article.

23 CAR § 12-118 Canadian and British companies {#sec-23-car-12-118 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-118}

23 CAR § 12-118. Canadian and British companies.

(a) In the case of Canadian and British insurers, the annual audited financial report shall be defined as the annual statement of total business on the form filed by such companies with their supervisory authority duly audited by an independent chartered accountant.

(b) For such insurers, the letter required in 23 CAR § 12-105(b) shall state that the accountant is aware of the requirements relating to the annual audited financial report filed with the Insurance Commissioner pursuant to 23 CAR § 12-103 and shall affirm that the opinion expressed is in conformity with those requirements.

23 CAR § 12-119 Severability provision {#sec-23-car-12-119 omnilex-key=us-ar-regs-official--title-23-part-12--23 CAR § 12-119}

23 CAR § 12-119. Severability provision.

If any section or portion of a section of this rule or its applicability to any person or circumstance is held invalid by a court, the remainder of the rule or the applicability of the provision to other persons or circumstances shall not be affected.