Ethics and Related Issues

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Ethics and Related Issues The auditor's liabilities and potential defenses The auditor that sanctioned the IPO ought to have known that under reinsurance accounting, losses incurred by ceded business should be recorded by the ceding insurer as an offset to the increase in its gross loss reserve in a amount equal to the reinsurance it expects to recover from the insurer yet in Converium's IPO prospectus Zurich Re purchased reinsurance from Inter-Ocean and ceded these liabilities to a Zurich entity. Had the auditing firm done its job perfectly it would have realized that Converium had violated Section 10(b) of the Exchange Act and Rule 10b-5 by knowingly and recklessly making false and misleading statements in the events leading to the IPO. In the process of conducting the audit the auditing firm should have realized that Converium understated its pre-tax losses for the previous year before the IPO was conducted. In its defense, the auditing firm could possibly posit that instead of engaging in risk transfer analysis, it undertook to use the deposit method despite the fact that the latter lacks the potential accounting benefits of re-insurance accounting. Facts of the cases that necessitated investigation Zurich Re designed transactions to enable them to transfer risks to third party reinsurers when no risks were essentially transferred outside of Zurich-owned entities. While Zurich Re appeared to have ceded risk to third party reinsurers it indeed take them back
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