International insurance audits and governance

• Published date: 05 May 2015
• Pages: 152-168
• DOI: https://doi.org/10.1108/IJAIM-04-2014-0027
• Date: 05 May 2015
• Author: Gin Chong

International insurance audits

and governance

Gin Chong

College of Business, Prairie View A&M University, Prairie View,

Texas, USA

Abstract

Purpose – This paper aims to assess 12 audit procedures that deemed challenging to insurance audits.

Design/methodology/approach – This paper uses grounded theory as a framework for conducting

series of semi-structured interviews with six technical audit partners, two from Big Four and four from

non-Big Four. The interview agendas are drawn from the 12 audit approaches suggested by Practice

Notes 20 (The Audit of Insurance in the United Kingdom) issued by the Auditing Practices Board (UK).

Findings – Without an audit standard, practitioners will exercise excessive professional judgments

and deviate from audit approaches.

Research limitations/implications – Though the ndings are solely drawn from the insurance

sector rather than a wide spectrum of sectors, they have huge ramications to accounting and audit

professions, stakeholders and regulators.

Practical implications – This paper reveals differences in audit approaches between the theoretical

context and practical perspective.

Social implications – The paper showed that impact of audit failure leads to litigation, nancial

losses and loss of faith in audit quality and approaches.

Originality/value – This paper suggests a hybrid approach on the grounded theory, provides an

extensive overview of the sector’s audit approaches and issues and unravels an urgent need for a

concerted international auditing standard.

Keywords Grounded theory, Audit practice notes, Audit standards, Insurance, Audit

Paper type Research paper

1. Introduction

The insurance sector plays an important role in a country’s economy, social supports

and gross domestic product (GDP). However, the International Federation of

Accounting Confederation (IFAC) has yet to issue a standard to guide auditors in the

sector. Lack of a concerted audit standard is due to complexity of the sector’s accounting

and recording processes[1]. This paper lls the gap with feedbacks from six separate

semi-structured interviews with technical partners of two of the Big Four rms and four

non-Big Four audit rms in the People’s Republic of China. I select China due to its

economic advancements, eagerness to adopt the international auditing practices and

accessibility of data. I use semi-structured interviews to allow interviewees freely

express their views and suggestions, while not conne to a particular client, situation or

event, issue or work environment or questions that were raised in an survey instrument.

Freedom in expressions helps reveal issues that may otherwise not be apparent in the

literature and expectations. All the interviews were conducted in a conducive

environment and the results are reported on a collective, rather than on an individual

and identiable, basis. I initiate the process by calling each interviewee by telephone and

The current issue and full text archive of this journal is available on Emerald Insight at:

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IJAIM

23,2

152

Received 19 April 2014

Revised 15 May 2014

Accepted 15 May 2014

InternationalJournal of

Accounting& Information

Management

Vol.23 No. 2, 2015

pp.152-168

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-04-2014-0027

by making arrangements to meet them at a venue and on a date of mutual convenience.

Grounded theory allows one-on-one dialogues and observes interviewees’ body

language. The whole process is to ensure that both the interviewer and interviewees are

comfortable with the meeting atmosphere. I give a written assurance that I will not

reveal any condential details in this paper.

Though informal, I forward a list of 12 auditing issues drawn from Practice Note 20

(PN) two weeks prior to the interviews and remind them of the date and venue two days

prior to the meeting. These 12 issues are approaches on engagements, documentations,

fraud, legal requirements, planning of the audits, risk and materiality, external

conrmations, analytical review procedures, accounting estimates, related parties

transactions and subsequent events. In the letter, I emphasize that the list is meant to be

a guide and by no means a comprehensive list of issues. Practice Note 20 (PN) (2007)[2],

The Audit of Insurers in the United Kingdom (Auditing Practices Board) is the only

guide for auditors in the insurance sector.

Upon completion of each interview, I summarize key discussion points and conrm

with the interviewee to ensure no major omissions, misunderstandings and errors. I

transcribe the interviewing notes and send them to the interviewees for reviews and

changes. Findings from these interviews have greatly helped in understanding the audit

approaches and internal controls systems of the sector, and have revealed ramications

to stakeholders, in particular stockholders, regulators and audit profession.

2. The international markets

Market Research (2008) reports that China is the fastest-growing nation for the past

quarter of a century with an average annual GDP growth rate above 10 per cent. Though

the Chinese economy is the fourth largest in the world after the USA, Japan and

Germany, with a nominal GDP of US$3.42 trillion (23.26 trillion Yuan) in 2007, China

remains the world’s largest untapped insurance market. Driven by a variety of

demographic, economic and regulatory factors, and political stability, this growth will

continue at a solid pace for a foreseeable near future. By late 2004, China has fully

complied with World Trade Organization insurance-related accession provisions by

giving foreign rms greater market access. Though domestic providers are still

dominating the market, foreign insurers are gradually niching into the market share.

Challenges remain. These include a lack of local management talents, existence of

unsophisticated consumers, a poor distribution channel and a exible and

non-transparent regulatory approval process. The insurance sector remains vibrant in

China due to its aging population, high savings rate, poor social security systems and

increasing number of wealthy consumers with high purchasing power. Comparing this

with its regional peers, the Chinese market remains substantially smaller than Japan

and marginally smaller than South Korea. The 2008 Market Research Report reveals

that China remains the fastest-growing market in both absolute and relative terms, with

an annual increment in premium revenues by US$61.17 billion or equivalent to

approximately 169.63 per cent between 2002 and 2007.

In 1996, total insurance premium, that is life insurance and non-life insurance

combined, was US$12.84 billion (87.31 billion Yuan) and in 2007, it has increased to

US$97.23 billion (661.16 billion Yuan). Between 1996 and 2007, the Chinese insurance

sector experienced a compound annual growth rate of approximately 20.21 per cent.

Between 1996 and 2000, life segment has an increase of US$13.11 billion (89.15 billion

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International

insurance

audits and

governance