Accounting Issues at Insurance Company Spark Auditors’ Resignation

Michelle Remo, “Big 4″ observer
June 12, 2011 /

Amid possible court actions by the Securities and Exchange Commission against insurance company Life Partners Holdings Inc. due to accounting issues, another controversy has racked the firm leading to the resignation of its auditors.

Ernst & Young auditors have decided to terminate accounting services for Life Partners and withdrawn its 2010 financial report opinion after concluding that the insurance company‘s management is no longer reliable in terms of its representations.

In June 6, Texas-based Life Partners admitted it had received an amended notice from the SEC stating that the securities regulator would recommend civil action against the insurance company and three of its officers, including Chief Executive Brian Pardo, General Counsel R. Scott Peden and Chief Financial Officer David Martin.

The SEC questioned the accuracy of the company’s estimates of the life expectancies of the customers it was buying policies from. The related calculation of life expectancy, which was a key part of the equation, was said to have fallen short, thus making the investors shell out larger amounts.

The Wall Street Journal found that in policies brokered by Life Partners in 2002, 95 percent of the insured people were still alive even after the life expectancy period estimated by physicians of the insurance company.

The amended notice also included accounting issues and policies, from revenue recognition, impairments of settlements held by the insurance company for investment, and the stated policy for premium advances that the firm might make on some client policies.

Ernst & Young said in a letter addressed to the securities regulator that it was resigning after Pardo threatened to “take action” against the accounting firm if it did not immediately approve the insurance company’s financial statements for the fiscal year 2011 ended February 28. The threat was contained in a letter that Pardo sent to an outside sales representative.

The letter, along with other issues storming Life Partners, prompted Ernst & Young to conclude that it no longer relied on the management representations of the insurance company. The accounting firm added that it no longer wanted to take part in preparing the financial statements of the insurance company.

Also, Ernst & Young withdrew its opinion on the 2010 results.

Life Partners hired Ernst & Young in March 2010, replacing the company’s former auditors from Eide Bailly LLP.

However, Life Partners moved to insist that the letter did not stand for the audit committee.

In a filing by Ernst & Young, the insurance company was said to have inaccurately recorded some of its revenue, thus necessitating a restatement of financial report for the prior period. The allegations were denied by Life Partners.

Life Partners is a major player in the “life settlement” business, arranging the purchase of unwanted life-insurance policies and selling pieces of those policies to retail investors.

Shares of the insurance company fell 19 percent to $3.05 in pre-market trading.

 

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