The release of the report of the forensic audit of CLICO International Life (CLICO Life) has again drawn attention to matters of corporate governance, directors’ liability and professional ethics, to name a few. But the fundamental question on the minds of most people is, why could this failure not have been prevented?
Queries have been raised as to whether the auditors of CLICO Life, appointed under the Insurance Act, should not have provided a warning of some sort in their audit report.
Where significant concerns are observed during the course of a financial statement audit, international standards require the auditor to report these concerns directly to the board of directors or to the audit committee if one exists.
Auditors may also have a responsibility to report concerns to the regulator. Unless such matters directly affect the fair presentation of the financial statements, and are considered material, they would not ordinarily be included in the public audit report on the financial statements but rather in a separate private document.
This is not to say that auditors may automatically be absolved of all responsibility to third parties, or that it has been proven that there was not room for improvement in the level of disclosure in the financial statements of CLICO or the work of its auditors.
But there would have been a great deal of professional judgment involved, and some of the things that seem obvious now might have been more ambiguous at the time. The auditors of CLICO Trinidad have been made party to the ongoing Commission of Enquiry in that country, and it is expected that their audit work on CLICO will eventually come under scrutiny as part of those proceedings.
Note as well that the audit report on the financial statements is addressed to the shareholder – the auditor has no direct reporting responsibility to policyholders. In any event many policyholders likely did not read CLICO’s audited financial statements, before or after the purchase of their policy. Nor could the average policyholder reasonably be expected to understand or analyze these financial statements in any particularly useful manner.
If this is the case, on what basis did policyholders entrust so much of their hard-earned money to CLICO Life and British American Insurance?
This applies not only to financially unsophisticated individuals throughout the Eastern Caribbean but to institutional investors such as pension plans and credit unions. To press the point even further – on what basis do most of us feel relatively safe in depositing large sums with commercial banks or any other financial institution, whether in Barbados or elsewhere?
Clearly there is a role for professional analysis of financial statements for the benefit of policyholders, depositors and investors generally.
In more developed markets this role is filled by credit-rating agencies and stock analysts – but both have been discredited in the eyes of many observers for assigning high ratings to companies which failed shortly thereafter.
It was only in July 2007 that A.M. Best (the insurance industry specialists), downgraded its rating of the financial strength of CLICO Life Trinidad from “excellent” to “good”, expressing concern over “significant exposure to and high concentration in investments with affiliated companies and intercompany transactions”.
The company’s credit rating was again downgraded in August 2008, with comments about the high concentration of related party assets and the difficulty of valuing the group’s investments given uncertain economic conditions.
But even in 2008 did the financial analysts and insurance specialists at A.M. Best really foresee that CLICO Life would have been in such difficulty only a few months later, or that the entire CL Financial group was so fragile? They certainly did not predict this in 2007.
In hindsight, it is often relatively straightforward to identify the warnings signs and red flags that should have caused prudent investors, and policyholders, to exercise caution.
Insurance policies are not generally thought of as an investment or risky, but long-term insurance policies (including pensions and annuities) involve speculation about the fortunes of the insurer over periods well into the future.
To be truthful, the significant majority of CLICO Life’s business was represented by annuities, the bulk of which were payable within a relatively short period of time or on demand – closer in nature therefore to deposits than to insurance policies.
Deposit-taking institutions in Barbados are very tightly regulated by the Central Bank, so why did CLICO Life escape their reach? And CLICO Life would surely have vigorously defended its strategy of heavy investment in real estate. In what seemed to be an unending real estate boom, how many would have questioned this strategy at the time?
• Andrew Brathwaite is president of the Institute of Chartered Accountants of Barbados.
