Accounting news

The South African long-term insurance industry is currently believed to be at an important crossroads in its existence. The industry is haunted by concerns about high cost structures, a lack of transparency in disclosure to policyholders, unfulfilled expectations of policyholders and the proliferation of available investment vehicles in the market. These concerns are exerting pressure on the existing products and practices of South African long-term insurers.

The audits of these insurers are of a complex and high-risk nature as a result of the complexity of their operations and, in particular, the highly complex actuarial valuation process in respect of policy liabilities. The prevailing auditing standards in South Africa require auditors to include policy liabilities in the ambit of their audit opinions.

Recent investigations into failed long-term insurers and their audits, including those of local Fedsure Life, British Equitable Life Assurance Society and Australian HIH Insurance, demonstrate the high risk involved in the audits of long-term insurers.

Against this background, the broad focus of my research is various salient aspects of overall audit strategies for the audits of South African long-term insurers. As financial and other information of listed South African long-term insurers is readily available in the public domain (which is not the case with unlisted long-term insurers), the focus of the research to date has been on these companies and their audits.

The research commenced with a relatively wide objective and ambit, namely to identify areas in the financial statements of listed South African long-term insurers where inconsistencies in financial reporting exist as a result of, inter alia, a lack of sufficient, comprehensive and authoritative financial reporting guidance for these insurers at the time the research was conducted. As the auditor is required to express an opinion on these financial statements, the inconsistencies identified in this research are indicative of potential high risk areas for the auditor.

I then decided to narrow the scope of the research in order to focus only on the most complex areas of these audits exposed to a high level of the risk that the auditor might express an incorrect opinion on them. The overall objective was to provide solutions to auditors for addressing these areas in the form of suggested overall audit strategies, based on proper scientific research incorporating, inter alia, existing local and international guidance and existing best practices based on views and opinions of experienced auditors of South African long-term insurers.

As is evident from the titles of articles published from the research, overall audit strategies have been developed for a number of these complex and high risk areas on the basis of my research. These areas include the further identification of high risk areas for the auditor, the application of materiality in these audits, the incorporation of actuarial expertise in these audits, the application of the value chain concept in these audits, as well as resource allocation on these audits.

The research method employed in most of my research to date can be described as a qualitative empirical method, making use of a naturalistic research style. Empirical data was collected primarily by means of various questionnaires sent to experienced auditors of South African long-term insurers for completion. The scope of the research is such that experienced auditors of all of the Big Four auditing firms in South Africa participated in the research as respondents to the questionnaires.

Inaugural lecture as Professor of Auditing (14 May 2009)

“Die pad na ’n raamwerk vir die oudit van versekeringskontrakte en verdienste van Suid-Afrikaanse Langtermynversekeraars”