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Insurance SAS 70: A Move Toward Action in Governance

In this era of heightened compliance and governance, an insurance organization’s ongoing assessment of its internal control structure and effectiveness is a critical business initiative. Many leaders within the insurance industry have concluded that setting the proper tone at the top is not sufficient to provide a strong level of assurance that governance is working effectively. To this end, more insurance organizations are turning to a service auditor report (SAS 70) review for the purpose of demonstrating the strength of, and management’s commitment to, quality internal processes and safeguards.

Tone at the top does not replace the inherent value that a SAS 70 can demonstrate to executive leadership and outside buyers of insurance services.

The SAS 70 report has its origins as an attest standard developed by the American Institute of Certified Public Accountants (AICPA), which has provided authoritative guidance on describing and testing the key internal controls that a service providing organization relies upon.

Over recent years, regulated organizations have demanded a SAS 70 from their insurance service providers to assist with regulatory compliance concerns such as Sarbanes-Oxley and to satisfy the needs of independent auditors. SAS 70 reviews are most needed for those insurance-related organizations that play a significant role in handling business transactions on behalf of another party. These include third party administrators (TPAs), claim handlers,insurance brokers, bill review/bill pay services, and managing general agents (MGAs). In the current economic environment, board members and insurance company management are requesting SAS 70 examinations to provide tangible evidence that their initiatives and controls are functioning as intended. A properly performed SAS 70 review will demonstrate that your organization has designed and achieved compliance with control activities that have been examined and opined upon by an independent accounting firm.

As insurance-related organizations look forward to improved economic conditions within the U.S. and abroad, there continues to be a growing level of attention to avoiding financial surprises and control breakdowns that stand to thwart business performance. According to the 2009 Global Integrity Survey: (1) fraud, (2) improper payments and (3) information security issues top the list of those areas most troubling to C-suite executives and their organizations. SAS 70 reviews have become an important metric surrounding insurance governance and the mitigation of such risks.

Although SAS 70 reports were historically used as a communication between audit firms, these reports are now playing an entirely new role in overall governance and are being requested by management, customers, prospective buyers and banking institutions to gain a better understanding of the control environment of companies that provide relevant insurance industry services. Third parties use a service auditor’s report as an independent verification that controls are designed appropriately, in place and operating effectively. Within many organizations, the need for a SAS 70 has been viewed as a competitive advantage over others within the industry that might not have the same level of attention to control-related matters. The competitive advantage of having a SAS 70 review is seen by many insiders as a way to dramatically enhance the marketability of your services (and the related sales growth); while at the same time satisfying board and executive-level leadership’s concern that relevant and meaningful actions are being taken to measure the organization’s risks. As with any SAS 70 report, it is important for insurance organizations to have a full understanding of the benefits and value of the report; and to work with a CPA firm that has deep experience with the proper
design and execution of SAS 70 reviews.

For more information on SAS 70 reviews, please contact Jerry Hufton, Partner, at 312-980-2961 or your Blackman Kallick representative.

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.