Auditing Firm is Accused of Negligence Following Health Insurance Company Bankruptcy

This is a professional negligence case against a large auditing firm. The defendant firm was performing the audits for a regional medical insurance firm in southern Texas. According to the relevant laws, insurance companies are required to maintain a certain amount of liquidity. It was alleged that the auditing firm was approving transactions off of the balance sheet that made non-cash assets look like cash. As a result of this, an eventual investigation into the insurance company’s financials led the firm, which had 50,000+ members, to fold within a month.

Question(s) For Expert Witness

1. How long have you worked in the accounting audit industry, and in what capacity?

2. What experience do you have with statutory accounting principles as they relate to insurance company accounting?

3. Is it below the standard of care for an auditor to allow off-balance sheet, non-cash transactions that lead to a violation of solvency rules, as described in this case?

Expert Witness Response E-110899

I am a licensed CPA in the states of Florida, New York, Colorado and Maryland. I have performed services worldwide. I have been practicing as a Partner in small- to medium-sized CPA firms since 1986, primarily in the "attest" areas with minor involvement in tax preparation and review. Additionally, I have expertise in the insurance industry from the "audit" side, and I spent approximately 12 years in high level finance positions with insurance companies in the life, P&C, and healthcare industries. I have been the Audit Partner responsible for all audit work for 3 CPA firms dating back to the mid-1980's. I have audited more than 20 insurance companies and have performed several healthcare engagements, including audits. I have taught hundreds of seminars on SAP, as well as each and every component of a SAP Annual Statement and the comparisons if SAP GAAP. I have worked with actuaries, reinsurance carriers, and intermediaries on reinsurance transactions and their treatments in both SAP and GAAP financial statements as well as for tax return purposes. In addition, I have assisted in identifying potentially insolvent Insurance carriers and then testified as an expert in bringing those carriers into the rehabilitation and liquidation division of the DFS. I have also opposed the Division of Rehabilitation and Liquidation in filing claims and securing more than $20 million of shareholder funds from the DFS. It is most definitely below the standard of care for an auditor to allow such off-balance sheet transactions without any disclosure regardless of solvency, but certainly when the situation results in a solvency issue.