Md. Code Regs. 31.05.11.06

Current through Register Vol. 51, No. 24, December 2, 2024

Section 31.05.11.06 - Qualifications of Independent Certified Public Accountant

A. The Commissioner may 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 American Institute of Certified Public Accountants (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 chapter, the Commissioner shall recognize an independent certified public accountant as qualified as long as the accountant conforms to the standards of the profession, as contained in:

(1) The Code of Professional Ethics of the AICPA; and

(2) Either:

(a) The rules and regulations, code of ethics, and rules of professional conduct of the Maryland Board of Public Accountancy; or

(b) A 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 the Insurance Article, Title 9, Annotated Code of Maryland, the mediation or arbitration provisions shall operate at the option of the statutory successor.

D. Lead or Coordinating Audit Partner.

(1) The lead or coordinating audit partner having primary responsibility for the audit may not act in that capacity for more than 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 5 consecutive years.

(2) An insurer may make application to the Commissioner for relief from the rotation requirement in §D(1) of this regulation on the basis of unusual circumstances.

(3) The application for relief from the rotation requirement in §D(1) of this regulation shall be made at least 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.

(4) The insurer shall file, with its annual statement filing, the approval for relief from §D(1) of this regulation 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 may not recognize as a qualified independent certified public accountant, or 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. §§ 1961- 1968, or any dishonest conduct or practices under federal or state law;

(2) Has been found to have violated the insurance laws of Maryland with respect to any previous reports submitted under this regulation;

(3) Has demonstrated a pattern or practice of failing to detect or disclose material information in previous reports filed under the provisions of this chapter; or

(4) Has violated any provisions of Business Occupations and Professions Article, Title 2, Annotated Code of Maryland, or any rule of professional conduct established by the State Board of Public Accountancy.

F. Hearing to Determine Qualifications.

(1) The Commissioner may, as provided in Insurance Article, § 4-118, Annotated Code of Maryland, hold a hearing to determine whether an independent certified public accountant is qualified.

(2) After considering the evidence presented, the Commissioner may:

(a) Rule that the accountant is not qualified for purposes of expressing an opinion on the financial statements in the annual audited financial report made pursuant to this chapter; and

(b) Require the insurer to replace the accountant with another whose relationship with the insurer is qualified within the meaning of this chapter.

G. Accountants That Provide Non-Audit Services.

(1) The Commissioner may not recognize as a qualified independent certified public accountant, or 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;

(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) The actuarially oriented advisory services under §G(1)(d) of this regulation do not include an accountant assisting 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.

(3) The actuarially oriented advisory services under §G(1)(d) of this regulation do not include an accountant's actuary issuing an actuarial opinion or certification opinion on an insurer's reserves if the following conditions are 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.

(4) 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 accountants cannot function in the role of management, cannot audit their own work, and cannot serve in an advocacy role for the insurer.

H. Exemptions.

(1) Insurers having direct written and assumed premiums of less than $100,000,000 in any calendar year may request an exemption from §G(1) of this regulation.

(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 this chapter 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 §G(1) of this regulation or that do not conflict with §G(2) of this regulation, only if the activity is approved in advance by the audit committee, in accordance with §§J and K of this regulation.

J. All auditing services and non-audit services provided to an insurer by the qualified independent certified public accountant of the insurer shall be preapproved by the audit committee.

K. The preapproval requirement is waived with respect to non-audit services if:

(1) The insurer is a SOX compliant entity, or a direct or indirect wholly owned subsidiary of a SOX compliant entity; or

(2) All of the following conditions are met:

(a) The aggregate amount of all such non-audit services provided to the insurer constitutes not more than 5 percent 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;

(b) The services were not recognized by the insurer at the time of the engagement to be non-audit services; and

(c) 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.

L. Preapproval.

(1) The audit committee may delegate to one or more designated members of the audit committee the authority to grant the preapprovals required by §§J and K of this regulation.

(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.

M. Independent Certified Public Accountant Conflicts.

(1) Section M(2) of this regulation applies only to partners and senior managers involved in the audit.

(2) The Commissioner may 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 1-year period preceding the date that the most current statutory opinion is due.

(3) An insurer may make application to the Commissioner for relief from the requirement in §M(2) of this regulation, on the basis of unusual circumstances.

(4) The insurer shall file, with its annual statement filing, the approval for relief from §M(2) of this regulation, 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.

Md. Code Regs. 31.05.11.06