A summary of an internal audit engagement performed at the request of the audit committee is presented below.

The claims department of Gecko Insurance Company has instituted new claims procedures for local offices. Local offices review claims to determine if the insurance company is liable to pay for damages based on the wording of the claimants policy and the details surrounding the claim being filed.  The new procedures have been designed to: improve the review of claims, to prevent overpayment of claims (paying more than the policy requires) and to prevent the payment of false claims . Management mentioned their concerns about the new procedures at the entrance  meeting of the audit engagement.

Management told the internal auditors that three complaints had been received recently regarding the excessive time it took to receive the insurance proceeds (payments) for their claims. The company advertises 48-hour claim resolution. The complaints received were the result of claims which took seven days to process and resolve.

Management said they had never received such complaints in the past-- these were received only after the new procedures were implemented. Management feared that if the claims took too long to process, many clients would switch to another insurance provider. The internal auditors decided to find out if processing time had increased, and if so, whether this was because of the new procedures.

The internal auditors decided to test 25 randomly selected claims made since the change in the procedures and 25 claims made before the procedures were changed (for comparison purposes).

The tests revealed that the new process had caused an increase in the processing time for two reasons. First, staff had to deal with a  learning curve (improve their knowledge and comfort) related with the new required forms. The claims department often had to correct the forms and request additional information before claims could be processed. Second, the new process required a more extensive review of the claims than before, sometimes even including a field visit by one of the claims staff in addition to the regular inquiry by one of the company's claims adjusters over the telephone.

The internal auditors estimated that the delayed disposition of the claims seriously impacted the marketability of the company's insurance policies, perhaps decreasing sales by as much as 10 percent in the first year and up to 25 percent in subsequent years. The new procedure also increased the cost of servicing claims by 5 percent to 10 percent, depending on whether an additional inquiry is conducted by one of the claims department staff members. The estimated savings on payment of improper claims was equivalent to a maximum of 10 percent of total expenditures in any one year.

The internal audit team determined that returning to the previous claims service procedures, with minor modifications, would serve the intended purpose and avoid the problems associated with the revised procedures. The additional review procedure recommended by the internal audit team was that a computer scan of company records be performed to ascertain any previous claims by the claimant and the nature as well as the amount of prior claims.

You have been asked to write up an audit finding to be discussed with management at the exit meeting.

 
Required

Based on the information provided above prepare an audit finding, identifying the: condition, criteria, cause and effect.