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Subchapter C. Audit Coverages Required For Guaranty Associations 28 TAC §§31.201--31.207

The Texas Department of Insurance proposes new §§31.201--31.207 concerning the requirements for, and audit coverages applicable to, each guaranty association established under Insurance Code Articles 9.48, 21.28-C and 21.28-D. The sections are required by Insurance Code Article 21.28 §12(j) which directs the commissioner to adopt rules prescribing the audit coverage required for each guaranty association established under Insurance Code Articles 9.48, 21.28C and 21.28D. The sections are necessary to provide guidance to the guaranty associations on the types and scope of audits, as well as their frequency, and to enhance the oversight of the guaranty fund associations by the Commissioner of Insurance. Proposed §31.201 and §31.202 state the purpose and applicability of the subchapter. Proposed §31.203 requires competitive bidding for auditors and periodic rotation of auditors. Proposed §31.204 prescribes the nature of the audits to be performed. Proposed §31.205 provides for the scope and frequency of the audits. Proposed §31.206 contains the audit reporting requirements, and proposed §31.207 determines the manner of reimbursing audit costs.

Betty Patterson, CPA, AFE, Senior Associate Commissioner, Financial Program, has determined that, for the first five-year period the proposed sections will be in effect, there will be no fiscal implications for state or local government as a result of enforcing or administering these sections. There will be no effect on local employment or local economy.

Ms. Patterson also has determined that, for each year of the first five years the proposed sections are in effect, the public benefit anticipated as a result of enforcing the sections will be more effective audits and oversight of the guaranty associations. Because the proposed sections are required by Insurance Code Article 21.28, §12(j), any costs of compliance with the rule are a result of the statute, and not as a result of the enforcement or administration of the rule. The costs of audits required by the provisions of these proposed sections are to be assessed against the audited entity. However, any costs related to the audits will be nominal in relationship to the benefits to taxpayers because the performance of routine audits promotes effectiveness and efficiency, and also may result in further anticipated cost savings. Based on information furnished by the guaranty associations, the cost of financial audits performed recently have ranged from $2,500 to $13,000. The cost of the annual financial audit of the Title Insurance Guaranty Association was approximately $2,500. The cost of the annual financial audit of the Life, Accident, Health and Hospital Service Insurance Guaranty Association was approximately $9,500. The cost of the annual financial audit of the Property and Casualty Insurance Guaranty Association was approximately $13,000. Audits of receivership estates ranged from $9,000 to $13,000. The cost of other audits will vary. Generally, auditing firms charge from $75 an hour to $120 an hour for work performed, depending on the experience of the personnel performing the audit. The guaranty associations, which are not-for-profit entities, are not small or micro businesses, therefore, there is no requirement that a small business economic analysis be performed.

To be considered, written comments on the proposal must be submitted no later than 5:00 p.m. on December 31, 2001 to Lynda H. Nesenholtz, General Counsel and Chief Clerk, Mail Code 113-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. An additional copy of the comments must be simultaneously submitted to Betty Patterson, CPA, AFE, Senior Associate Commissioner, Financial Program, MC 305-2A, Texas Department of Insurance, P.O. Box 149104, Austin, Texas 78714-9104. A request for a public hearing on the proposal should be submitted separately to the Office of the Chief Clerk.

These sections are proposed under the Insurance Code Article 21.28 and §36.001. Article 21.28 §12(j) authorizes the commissioner to adopt rules related to the scope, frequency, reporting requirements and costs of audits for each guaranty association established under Articles 9.48, 21.28-C, or 21.28-D of the Insurance Code. Section 36.001 provides the commissioner with the authority to adopt rules for the conduct and execution of the duties and functions of the department only as authorized by statute.

The following are the articles of the Insurance Code that are affected by these sections: Articles 9.48, 21.28, 21.28-C, and 21.28-D.

§31.201. Purpose. The purpose of this subchapter is to prescribe the audit requirements for, and audit coverages applicable to, the Title Insurance Guaranty Association established under the Insurance Code Article 9.48; the Property and Casualty Insurance Guaranty Association established under the Insurance Code Article 21.28-C; and the Life, Accident, Health and Hospital Service Insurance Guaranty Association established under the Insurance Code Article 21.28-D.

§31.202. Applicability. The provisions of this subchapter apply to any guaranty association established under the Insurance Code, Articles 9.48, 21.28-C and 21.28-D.

§31.203. Qualification of Accountant. The independent certified public accountant for the financial audit required by §31.204(1) of this title (relating to the Nature of Audits) must be selected by a competitive process. An independent certified public accountant may not perform the financial audit required by §31.204(1) for more than seven consecutive years. An independent certified public accountant responsible for performing the financial audit for seven consecutive years may not perform the financial audit during the two years following the seventh year.

§31.204. Nature of Audits. Audits applicable to the guaranty associations subject to the provisions of this subchapter shall take the form of financial, performance or operational audits, and may include, but not be limited to, the types of audits which are described in paragraphs (1)-(5) of this section.

(1) Financial audits. The financial audit shall be undertaken annually by an independent certified public accountant to determine whether the financial statements of the audited entity present fairly the financial position and the results of financial operations in accordance with generally accepted accounting principles. The financial audits shall be conducted in accordance with generally accepted auditing standards.

(2) Compliance audit. A compliance audit may be undertaken to determine whether the following objectives are being met:

(A) the audited entity has obligated, expended, received, and used funds in accordance with the purpose for which those funds have been authorized by law;

(B) the audited entity has obligated, expended, received, and used funds in accordance with any limitations, restrictions, conditions, or mandatory directions imposed by law on those obligations, expenditures, receipts, or uses;

(C) the audited entity has maintained its books, records, and accounts in a manner which accurately reflects its financial and fiscal operations relating to the obligation, receipt, expenditure, and use of funds including, but not limited to, funds collected for a public purpose;

(D) the audited entity has collected all revenues and receipts in accordance with the applicable laws and regulations of this state; and

(E) the audited entity has properly and legally handled or administered any money, negotiable securities, or similar assets received in accordance with the entity's governing statute.

(3) Economy and efficiency audit. An economy and efficiency audit may be undertaken to determine whether the objectives set out in subparagraphs (A) and (B) of this paragraph are being met and such audit shall make the identifications set out in subparagraph (C) of this paragraph, as follows:

(A) the audited entity is managing or utilizing its resources, including funds, personnel, contractors and subcontractors, consultants, procurement of professional services, property, equipment, and space, in an economical and efficient manner;

(B) the audited entity has presented financial, program, and statistical reports in a fair manner, and such reports contain useful data; and

(C) the causes of inefficiencies or uneconomical practices, including inadequacies in management information systems, internal and administrative policies and procedures, purchasing, procurement and contracting practices, organizational structure, use of personnel, contractors, equipment and other resources, have been identified.

(4) Effectiveness audit. An effectiveness audit may be undertaken to determine whether the following objectives are being met:

(A) the audited entity is attaining program objectives established pursuant to statutes and regulations, or by program criteria or program evaluation standards applicable to it, in an efficient and effective manner;

(B) the audited entity is contributing to achievement of those benefits intended by program design in an efficient and effective manner;

(C) the audited entity is discharging its duties and responsibilities under statutes and regulations or according to program performance criteria or program evaluation standards applicable to it in an efficient and effective manner; and

(D) the audited entity is performing its duties and responsibilities in connection with a program which does not duplicate, overlap, or conflict with the duties, functions, and responsibilities of another entity with respect to the same program, or with another program designed and intended to be applied to the same persons served by the audited entity.

(5) Other audits. Nothing in these sections shall preclude the commissioner from ordering any entity subject to the provisions of this subchapter to submit to a special audit upon a determination that facts and circumstances warrant such audit.

§31.205. Scope and Frequency of Audits.

(a) Annual audit required. Each guaranty association subject to the provisions of this subchapter shall undergo an annual financial audit at the end of each calendar year as required by §31.204(1) of this title (relating to Nature of Audits).

(b) Audit plan. The boards of directors of each guaranty association subject to the provisions of this subchapter shall annually adopt an audit plan. In developing the plan, the boards shall consider utilizing the audits described in §31.204(2) - (4). The plan may be modified at the discretion of the boards. The plan and any modifications of the plan shall be filed with the commissioner.

(c) Commissioner may order audit. No provision of this subchapter prohibits or precludes the commissioner from ordering any entity subject to the provisions of this subchapter to submit to one or more of the types of audits, as set out in §31.204 at a frequency determined by the commissioner, based upon facts and circumstances.

§31.206. Audit Reporting Requirements.

(a) Report required. A written report shall be prepared in connection with any audit authorized or required pursuant to this subchapter.

(b) Contents of report. The written report must include a management letter containing the following items, as applicable:

(1) the criteria selected to measure effectiveness and efficiency;

(2) internal controls;

(3) compliance with state or federal laws;

(4) conditions found by auditors and the effects of such conditions; and

(5) any recommendations for improving operations or program effectiveness.

(c) The report also must include an opinion on fair presentation of financial statements when included as part of the scope of the audit.

(d) Supplemental items to be reported. The auditing entity's report should also include, to the extent necessary, each of the following items:

(1) an analysis of the overall performance of the entity being audited;

(2) an analysis of the audited entity's financial operations and condition; and

(3) an analysis of receipts and expenditures made by each audited entity.

(e) Filing requirements for audits. Copies of the auditing entity's report shall be filed with the Commissioner of Insurance no later than 30 days after the audits are presented to the board of directors of the audited guaranty association. Any response to the report by the board of directors must be simultaneously submitted to the commissioner.

(f) This subchapter shall not apply to audits made by the Office of the State Auditor.

§31.207. Cost of Audits. The cost of audits required by this subchapter shall be paid by the audited entity.



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