Uncharted waters

Internal Auditor, Feb, 1999 by Scott White, Walter Fuller, Timothy Dugan

Audit staffs often face reviews of completely new or unfamiliar areas. While some audit departments shy away from such challenges, the internal audit staff at Sun Life of Canada charged full speed ahead with its audits of insurance sales and marketing practices - and reaped a bounty of rewards in return.

While any audit department worth its weight relishes the opportunity to be on the front lines of battle against the latest risk hot spot, such involvement often necessitates an audit of the unknown. Such was our challenge at Sun Life of Canada, a $54 billion international financial services company in Toronto. As apprehensive as we were about management's request to review general agent compliance with sales and marketing practices, we nonetheless forged ahead. In the end our efforts proved successful, and we believe the lessons learned on our journey may assist internal auditors in any industry when they are called upon to perform a new type of audit.

THE CALL

In the mid-1990s, several large U.S. insurance companies received significant media attention as a result of their allegedly unethical sales and marketing practices. The regulators eventually got involved, demanding huge settlements for customers who claimed to have been wronged by the insurers. These red flags sent a clear signal that it was time for all insurance companies to examine their policies, procedures, and practices for any potential weaknesses.

Subsequently, corporate management and the audit committee of our parent company asked the internal audit team at Sun Life's U.S. headquarters, which represents about one-third of the company's business, to review compliance in the sales and marketing area. We had some experience with audits of "career agents," those Sun Life employees who sold our products through a company-owned branch system. However, we had never audited the independent general agents who marketed our products via brokers. To complicate matters, the U.S. organization was converting its sales and distribution system from a hybrid model composed of both career and general agents to a system that sold insurance only through general agents and their brokers. Our reviews were to take place in completely foreign territory.

Our initial reaction to the project was "This is impossible!" True, the risks in general agencies were similar to those posed by our career agents. But we knew from the start that this would not be a typical audit project. To be successful, a significant amount of "out-of-the-box" thinking would be necessary.

MANAGEMENT CONCERNS

Our first challenge was to convince a sales-oriented management team of the benefits not only of the proposed audit, but also of the internal auditing function. Although management recognized the risks that Sun Life faced, their first reaction to our proposal, not surprisingly, was to push us away. The questions they raised are probably familiar to many audit staffs charged with auditing a new area: "Why do you want to do this?" "What value can you add?" "How would your work differ from that of the compliance department?" "What would you do - audit the general agents' accounting records?"

In addition, sales management was concerned that the audit process would undermine the relationships that they had worked so hard to build with the general agents. We reminded them that all general agents' contracts contained a "right to audit" clause and explained that our approach would focus exclusively on sales and marketing compliance. We assured management that we did not intend to audit the books in a traditional manner. Instead, our mission was to identify and help mitigate the sales and marketing risk that Sun Life and the general agents faced.

Management also expressed worry about the level of customer contact we would have. We explained that it was not our intention to meet with customers or "mystery shop" the general agencies. Our focus was the process by which Sun Life supported the marketing and sales efforts of our independent agents.

Management's final question to us was, "How do you know what happens in a general agency? Have you ever been to one?" They had us on that one. We admitted that we had never visited one of our independent agents, but promised to learn the business before starting our audit.

Our willingness to confess that we had a lot to learn was viewed as a positive, and management came to see the value in our proposal and the benefits of our audits. We had overcome the first and most important barrier. Management was now supportive of the project.

PREPARATIONS

To prepare for the audit, we underwent a crash course in the operation of general agencies. As promised, we spent time in a local general agency to learn and observe daily activity. Management members volunteered to accompany us on these training missions, and we learned a great deal from our preliminary visits.

As an additional preparatory step, we met regularly with Sun Life's brokerage department, the central group that administered general agent relationships, to obtain their input on topics of concern. We also visited with the internal audit staff at The New England, an insurance company in Boston, who graciously shared their general agent experiences with us.