HAR §16-185-102. Definitions

As used in this chapter: "Accountant" or "independent certified public accountant" means a person or accounting firm licensed in good standing with the American Institute of Certified Public Accountants and in all states in which the accountant or independent certified public accountant is licensed to practice. For Canadian and British companies, these terms mean a Canadian- chartered or British-chartered accountant. An "affiliate" of, or person "affiliated" with a specific person, is one who directly or indirectly, through one or more intermediaries, controls or is controlled by, or is under common control with the person specified. "Audit committee" means a body established by the board of directors of an entity for the purpose of overseeing the accounting and financial reporting processes of an insurer or group of insurers, the internal audit function of an insurer or group of insurers, if applicable, and external audits of financial statements of the insurer or group of insurers. 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 or more of these controlled insurers solely for the purposes of this chapter at the election of the controlling person as discussed in sections 16-185-103(d) and 16-185- 113(g), Hawaii Administrative Rules. If an audit §16-185-102 185-4 committee is not designated by the insurer, the insurer's entire board of directors shall constitute the audit committee. "Audited financial report" means and includes those items specified in section 16-185-104, Hawaii Administrative Rules. "Commissioner" or "insurance commissioner" means the Hawai`i insurance commissioner, unless otherwise specified. "Division" or "insurance division" means the Hawai`i insurance division. "Group of insurers" means those licensed insurers included in the reporting requirements of Hawai`i Revised Statutes ("HRS"), chapter 431, article 11, or a set of insurers as identified by management, for the purpose of assessing the effectiveness of internal control over financial reporting. "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 knowing of other misrepresentations made by the insurer or its representatives. "Insurer" means a licensed entity as defined in section 431:1-202, HRS, and a risk retention captive insurance company as defined in section 431:19-101, HRS. "Internal audit function" means a person or persons that provide independent, objective, and reasonable assurance designed to add value and improvement to an organization's operations and accomplish its objectives by bringing a systematic and disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. "Internal control over financial reporting" means a process effected by an entity's board of directors, management, or other personnel designed to provide reasonable assurance regarding the reliability of the financial statements, i.e., those items specified in §16-185-102 185-5 section 16-185-104(2) through (7), Hawaii Administrative Rules, and includes those policies and procedures that: (1) Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (2) Provide reasonable assurance that transactions are recorded as necessary to permit preparation of the financial statements, i.e., those items specified in section 16-185-104(2) through (7), Hawaii Administrative Rules, and that receipts and expenditures are being made only in accordance with authorizations of management and directors; and (3) 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 section 16- 185-104(2) through (7), Hawaii Administrative Rules. "Material weakness" has the same meaning as defined by the Statement on Auditing Standard 115, Communication of Internal Control Related Matters Identified in an Audit, as amended or replaced. "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. "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. "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: §16-185-102 185-6 (1) The preapproval requirements of section 201 (section 10A(i) of the Securities Exchange Act of 1934); (2) The audit committee independence requirements of section 301 (section 10A(m)(3) of the Securities Exchange Act of 1934); and (3) The internal control over financial reporting requirements of section 404 (item 308 of United States Securities and Exchange Commission Regulation S-K). [Eff 2/04/10; am and comp 12/30/19] (Auth: HRS §431:2- 201) (Imp: HRS §§431:2-201, 431:3-302.5) §16-185-103 General requirements related to filing and extensions for filing of annual audited financial report and audit committee appointment. (a) All insurers required by this chapter to file an annual audit by an independent certified public accountant shall file an audited financial report with the commissioner on or before June 1 for the year ended December 31 immediately preceding. The commissioner may require an insurer to file an audited financial report earlier than June 1, with ninety days advance notice to the insurer. (b) Extensions of the June 1 filing date may be granted by the commissioner for thirty-day periods 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. The request for extension shall be submitted in writing not less than ten days prior to the due date and in sufficient detail to permit the commissioner to make an informed decision with respect to the requested extension. §16-185-104 185-7 (c) If an extension is granted in accordance with the provisions in subsection (b), a similar extension of thirty days is granted to the filing of management's report of internal control over financial reporting. (d) Every insurer required to file an annual audited financial report shall designate a group of individuals as constituting its audit committee, as defined in section 16-185-102, Hawaii Administrative Rules. [Eff 2/04/10; am and comp 12/30/19] (Auth: HRS §431:2-201) (Imp: HRS §§431:2-201, 431:3-302.5) §16-185-104 Contents of annual audited financial report. 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 division. The annual audited financial report shall include the following: (1) A report by an independent certified public accountant; (2) A balance sheet reporting admitted assets, liabilities, capital, and surplus; (3) A statement of operations; (4) A statement of cash flow; (5) A statement of changes in capital and surplus; (6) Notes to financial statements. These notes shall be those required by the appropriate National Association of Insurance Commissioners Annual Statement Instructions and the National Association of Insurance Commissioners Accounting Practices and Procedures Manual. The notes shall include a reconciliation of differences, if any, between the audited statutory financial §16-185-104 185-8 statements and the annual statement filed pursuant to section 431:3-302, HRS, and the annual statement filed pursuant to section 431:3-301, HRS, with a written description of the nature of these differences; and (7) The financial statements included in the audited financial report shall be 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 commissioner, and the financial statement shall be comparative, presenting the amounts as of December 31 of the current year and the amounts as of the immediately preceding December 31. In the first year in which an insurer is required to file an audited financial report, however, the comparative data may be omitted. [Eff 2/04/10; am and comp 12/30/19] (Auth: HRS §431:2-201) (Imp: HRS §§431:2-201, 431:3-301, 431:3-302.5) §16-185-105 Designation of independent certified public accountant. (a) Each insurer required by this chapter to file an annual audited financial report shall within sixty days after becoming subject to this requirement, register with the 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 chapter. Insurers not retaining an independent certified public accountant on the effective date of this chapter shall register the name and address of their retained independent certified public accountant not less than six 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 stating that the accountant is aware of the provisions §16-185-105 185-9 of the statutes and the rules of the Hawai`i insurance division or 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 of their conformity to the statutory accounting practices prescribed or otherwise permitted by the Hawai`i insurance division or that insurance department, specifying such exceptions as he or she may believe 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) Within five business days notify the commissioner of this event; (2) Furnish the commissioner with a separate letter, within ten business days of the notification, stating whether in the twenty- four 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, 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; (3) Report disagreements required to be reported in response to this subsection including both those resolved to the former accountant's satisfaction and those not resolved to the former accountant's satisfaction. 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; and (4) In writing, request the former accountant to furnish a letter addressed to the insurer §16-185-105 185-10 stating whether the accountant agrees with the statements contained in the insurer's letter and, if not, stating the reasons why that accountant does not agree. The insurer shall furnish to the commissioner copies of its request within five business days of sending the request and the responsive letter from the former accountant within five business days after its receipt. [Eff 2/04/10; comp 12/30/19] Auth: HRS §431:2- 201) (Imp: HRS §§431:2-201, 431:3-302.5) §16-185-106 Qualifications of independent certified public accountant. (a) The 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 American Institute of Certified Public Accountants 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 that person conforms to the standards of the accounting profession, as contained in the Code of Professional Ethics of the American Institute of Certified Public Accountants, chapter 466, HRS, chapter 16-71, Hawaii Administrative Rules, and the Hawai`i Board of Public Accountancy, or similar statutes, rules, and code of conduct regulating the §16-185-106 185-11 practice of accountancy in the state in which the accountant is licensed to practice. (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 article 15, chapter 431, HRS, the mediation or arbitration provisions shall operate at the option of the insurer's statutory successor. (d) (1) The lead or coordinating audit partner having primary responsibility for the audit may not act in that capacity for more than five consecutive years. Thereafter, that partner 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 consecutive years. An insurer may make application to the commissioner for relief from the above rotation requirement on the basis of unusual circumstances. This application should be made at least thirty 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; and (2) The insurer shall file, with its annual statement filing, the approval for relief from subsection (d)(1) with the states in which it is licensed in or doing business in and with the National Association of Insurance Commissioners. If the nondomestic state accepts electronic filing with the National Association of Insurance Commissioners, the insurer shall file the §16-185-106 185-12 approval in an electronic format acceptable to the National Association of Insurance Commissioners. (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: (1) Has been convicted of fraud, bribery, a violation of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. sections 1961 to 1968, or any dishonest conduct or practices under federal or state law; (2) Has been found to have violated the insurance laws of this state; or (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. (f) Subject to sections 431:2-308 and 431:3- 302.5, HRS, the commissioner may hold a hearing to determine whether an independent certified public accountant is qualified and, considering the evidence presented, may 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 chapter and require the insurer to replace the accountant with another whose relationship with the insurer is qualified within the meaning of this chapter. (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 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; §16-185-106 185-13 (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. 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. An accountant's actuary may also issue an actuarial opinion or certification on an insurer's reserves if the following conditions have been met: (i) Neither the accountant nor the accountant's actuary has performed any management functions or made any management decisions; (ii) The insurer has competent personnel or engages a third-party actuary to estimate the reserves for which management takes responsibility; and (iii) 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 §16-185-106 185-14 (I) Any other services that the commissioner determines, by regulation, are impermissible. (2) 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 the accountant: (A) Cannot function in the role of management; (B) Cannot audit his or her own work; and (C) Cannot serve in an advocacy role for the insurer. (h) Insurers having direct written and assumed premiums of less than $100,000,000 in any calendar year may request an exemption from subsection (g). The insurer shall file with the commissioner a written statement discussing the reasons why the insurer should be exempt from these provisions. If the commissioner finds, upon review of this statement, that compliance with subsection (g) 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 or that do not conflict with subsection (g), only if the activity is approved in advance by the audit committee, in accordance with subsection (j). (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. The preapproval requirement is waived with respect to non-audit services if the insurer is a SOX compliant entity or a direct or indirect wholly-owned subsidiary of a SOX compliant entity or: §16-185-106 185-15 (1) The aggregate amount of all such non-audit services provided to the insurer constitutes not more than five per cent 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; (2) The services were not recognized by the insurer at the time of the engagement to be non-audit services; and (3) 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. (k) The audit committee may delegate to one or more designated members of the audit committee the authority to grant the preapprovals required by subsection (j). 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) 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. This paragraph shall only apply to partners and senior managers involved in the audit. An insurer may make application to the commissioner for relief §16-185-106 185-16 from the above requirement on the basis of unusual circumstances. (2) The insurer shall file, with its annual statement filing, the approval for relief from subsection (l)(1) with the states that it is licensed in or doing business in and the National Association of Insurance Commissioners. If the nondomestic state accepts electronic filing with the National Association of Insurance Commissioners, the insurer shall file the approval in an electronic format acceptable to the National Association of Insurance Commissioners. [Eff 2/04/10; am and comp 12/30/19] (Auth: HRS §431:2-201) (Imp: HRS §§431:2-201, 431:2-308, 431:3-302.5)