Disability Insurance Planning: Don’t Expect Claims Process to Be Easy

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MARCH 2008 - The article “Disability Insurance Planning for Professionals” by Joseph V. Bencivenga, CPA (December 2007) was very informative. Let me add some real-life experience to the discussion.

The authors hint at the leverage that the insurance companies have in determining ultimate benefit payouts when they discuss the “any occupation” definition as being up to the insurance companies to decide. This is the tip of the iceberg. The insurance companies hold a very strong hand when it comes to determining whether or not a claimant receives any benefit. They will show no mercy in interpreting the policy so that they pay little or no benefit.

If you are unfortunate enough to need to make a claim on your disability policy, specifically for a permanent disability, keep in mind the following:

  • Do not delay in making the claim; delay can be interpreted by the insurance companies as proof that you were not really disabled, just unwilling to keep working. Delay can also negatively impact the earnings baseline used to calculate your drop in earnings due to disability, and your ultimate benefit.
  • Put yourself under the regular care of a doctor specializing in your disability. Self-medicating and denial of your disability is fuel for insurance companies to deny your claim of a true disability.
  • Check out the qualifications of the doctors that the insurance companies send you to for their independent assessment; this may give you leverage when negotiating your ultimate benefit.
  • Find a qualified attorney to represent you, one who specializes in disability claims such as yours.
  • Don’t expect to receive the monthly benefit that you paid for. If the insurance companies do agree to pay, they prefer to pay a lump-sum settlement so that they avoid the long-term recurring impact on their financial statements. Having a strong disability insurance policy is an excellent part of a financial plan. But don’t count on the claim process being easy.

J.B. Martin, CPA
New York, N.Y.


Debating the Efficacy of Sarbanes-Oxley

Regarding “Sarbanes-Oxley: A Bill of Goods” (Inbox, January 2008), I am tempted to ask the writer, Joseph Bencivenga, if I use his premise of the ineffectiveness of laws and regulations at a minimum SOX, then whether we should do away with them all. Less government, less regulation, and we will achieve nirvana and utopia simultaneously.

In the case of Citibank, there may be very good reasons that 11 months before there may not have been any evidence, indication, or existence of adverse factors that could have been observed by either management or the external auditors to cause them to raise an alarm at that time, and those factors subsequently did materialize over the ensuing months. This may hold true for Merrill Lynch as well.

I suggest that no man-made system is infallible; therefore, deal with it!

John Howard, CIA, CPA
Palm Beach, Fla.

The author responds:

When I wrote my letter, I did think about the issue of subsequent events and whether it was fair to criticize Citibank or KPMG for something that developed later and that presumably they could not foresee when they gave their assurances and expressed their clean opinion on internal control over financial reporting. However, management had to have known about the off–balance sheet exposure; and the auditors should have inquired about such exposure. Citibank’s subsequent decision to put the off–balance sheet numbers on its balance sheet calls into question the issuer’s and the auditor’s prior assurances, which was partly the subject of my letter. Plus, the writer misses the point, which is that, despite Sarbanes-Oxley Act section 404, Citibank, Merrill Lynch, and other companies wrote off billions largely because of questionable internal controls. To me that’s an indictment of the efficacy of Sarbanes-Oxley.

Joseph V. Bencivenga, CPA

Observations on Financial Reporting, Past, Present, and Future

As I read the interview with FASB Chairman Robert Herz and the accompanying article on his remarks at the FEI conference in October 2007 (The CPA Journal, November 2007), the following thoughts, among others, occurred to me:

1. As someone who worked in the international accounting area for many years, I support all the efforts underway to achieve greater convergence between international and U.S. accounting standards. However, it should be recognized that obtaining complete convergence in the published standards (if that is possible) is the beginning of the process, not the end. It is highly probable that reasonable people acting in good faith will sometimes interpret the standards differently; for example, because of differences in their backgrounds or the customs and legal requirements of their home countries. To use a personal example, my former firm established an international committee in 1996 to write a book explaining the improved international accounting standards that had recently been adopted by the International Accounting Standards Board (IASB)’s predecessor, the International Accounting Standards Committee (IASC). Although four committee members (including me) had represented their countries on the IASC and had approved the new standards, from time to time we found ourselves in disagreement on the meaning of the standards we had just approved. The problem is not insurmountable, but users should realize that there will be a learning period in applying the conformed standards uniformly.

2. FASB and the IASB should be careful not to overstate what their pronouncements have accomplished. A good example is FASB’s efforts with respect to lease accounting, which Herz rightly criticizes. Many people seemed to have the impression that FASB had written a strict standard on lease capitalization and that its efforts were subsequently undermined by preparers, their financial advisors, and compliant outside auditors. As one who followed the lease accounting project from day one, I can say that this scenario is not what happened. The original leasing standard was both convoluted and flawed (some called it the Swiss cheese standard). The conventional wisdom when it was issued was that no one would have to capitalize a new lease under the new standard unless they wanted to. The numerous amendments and interpretations that ensued were an ongoing attempt to shore up an unsteady foundation. If FASB and the IASB want to write a standard requiring lease capitalization, they should do so in a straightforward manner; for example, all leases with a term of more than one year, including renewal options under the control of the reporting company. While that would not solve all the problems, it would be a good start.

3. It is good to see that FASB and the SEC, after years of strong resistance, now support the idea of principles (or objectives)-based accounting standards. Given the litigious environment in this country, FASB should make clear the respective responsibilities of preparers and auditors in implementing this approach. It seems clear the preparers should make the initial determination of how to apply this approach to their financial statements. I think it should also be made clear that the auditors’ responsibility is to assess whether the company has a reasonable basis for the positions it has taken. The auditors should not be expected to override the company’s determination in this regard, even if they would have reached a different conclusion in the circumstances, as long as the company’s position was reasonable. I think this was the approach usually followed when the functional currency concept was introduced into the accounting for foreign currency translation, and it seemed to work well.

4. I agree that financial instruments should generally be carried at fair value. Recent experience has shown that this laudable principle can be difficult to apply in practice. According to press reports, some of the recent large losses in the financial markets have occurred because the buyers did not fully understand what they were buying. More troubling, from a financial-reporting standpoint, are the losses that have been incurred because subprime loans have performed as expected in the absence of future appreciation. Stated differently, it was known at origination that many subprime borrowers could not make the payments required by the terms of their loan. Both lender and borrower were looking to future appreciation/refinancing to satisfy the loan. There seems to be a serious question as to whether current fair value for reporting purposes should be based on hoped-for-but-not-assured future appreciation. Herz mentioned that these and related fair-value questions are presently being studied. Perhaps the standards setters will always be playing catch-up. One of Herz’s predecessors said the problem was that Wall Street works 24 hours a day and FASB only works eight. (Maybe Herz has changed that.)

As a retiree still interested in financial reporting matters, I appreciate the efforts of the NYSSCPA and The CPA Journal to report on these important matters.

Ronald J. Murray, CPA (Retired)
Stamford, Conn.

Editor’s note: The writer is a former member of FASB’s Emerging Issues Task Force (EITF) and Advisory Task Force on the Consolidation Project; the International Accounting Standards Committee (IASC), now the International Accounting Standards Board (IASB); and the AICPA’s Accounting Standards Executive Committee (AcSEC).

Pension Accounting

In “How the New Pension Accounting Rules Affect the Dow 30’s Financial Statements: Potential Implications for Policymakers and Equity Research Analysts” (by Stephen H. Bryan, Steven Lilien, and Jane Mooney, The CPA Journal, March 2007), the footnote to Exhibit 2 contains what I consider an error. The term “mark-to-market,” describing the retained earnings columns, is not used correctly.

SFAS 157 changed the definition of fair value (also known as market value). As a result, the effective-settlement pension liabilities of SFASs 87 and 106 are no longer considered to be fair value. SFAS 159 prohibits the use of fair value for pension and for other postretirement benefits (OPEB) liabilities (paragraph 8). So, what SFAS 158 provides is essentially a mark-to-funded status based on effective-settlement measurement for liabilities and market value for assets.

Daniel P. Moore
Aon Consulting

One of the authors responds:

The reader correctly points out that we continue to have a mixed attribute model in the area of pension accounting. There are a number of other scope exceptions to fair value in the literature, particularly in business combinations. The purpose of our article was not to consider the impact of these mixed attribute measurements, which we accordingly believe would be a topic for another article. The authors do not think a correction is necessary, particularly because our article was estimating the impact of a new pronouncement using earlier period calculations.

Steven Lilien, PhD, CPA
City University of New York–Baruch
College, New York, N.Y.





















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