Trust fund accounting in Zimbabwe’s insurance sector

PHILLIMON MHLANGA

The pensions and insurance sector plays a vital role in ensuring financial security for Zimbabweans.

However, the sector faces significant challenges in managing funds, making robust trust fund accounting practices essential.

This article explores trust fund accounting within the insurance industry, examining regulatory requirements, common challenges, violations, the role of forensic audits, and practical recommendations.

We begin by distinguishing between general trust structures and insurance-specific trusts.

A trust is a legal arrangement where a settler transfers assets to trustees, who manage them for beneficiaries.

Trusts are used for life assurance, pension funds, estate planning, asset protection, and ensuring asset distribution according to the trustor’s wishes.

They are also used in payroll, real estate, and education to manage and safeguard funds. Below, we compare trusts in the insurance sector with general trusts.

In insurance, trusts manage and distribute benefits.

Examples include life assurance trusts that handle policy payouts, and pension fund trusts that oversee retirement funds.

These trusts, typically structured as trust funds, are generally overseen by the organization’s compliance function.

This oversight ensures that the funds are managed in accordance with the Insurance Act [Chapter 24:07] and International Financial Reporting Standard (IFRS) 17 on Insurance Contracts.

The primary focus is on financial management and guaranteeing that beneficiaries receive the intended benefits.

Regulation

Trusts in the insurance sector must follow the Insurance Act [Chapter 24:07] and meet standards set by regulatory bodies to protect beneficiaries’ interests.

Trusts in the Legal Sector (Deed of Trust)Purpose: Trusts created by a deed of trust can be used for estate planning, asset protection, or charitable giving.

The deed specifies the trust’s terms and conditions.

Management: Trustees named in the deed of trust manage assets per its terms, including financial instruments, real estate, personal property, or business interests.

Regulation: Legal trusts in Zimbabwe are regulated by common law and various pieces of legislation based on their purpose.

Relevant legislation includes the Deeds Registries Act [Chapter 20:05], which governs the registration of trusts, and the Income Tax Act [Chapter 23:06], which outlines the taxation rules for trusts.

The trust deed must meet all legal requirements, serving as the constitution of the trust and guiding all parties involved.

Insurance Sector Trust Funds For insurance companies, trust funds are crucial for separating policyholders’ funds from shareholders’ funds. This ensures policyholder funds pay claims and benefits rather than being diverted.

The Insurance Act and International Financial Reporting Standards (IFRS) 17 on Insurance Contracts guide insurers on maintaining accurate accounting records, emphasizing good governance, risk management, and compliance with insurance trust fund accounting.

Trust funds are crucial for the insurance sector for the following reasons: Trust fund accountants keep policyholders’ funds separate from shareholders’ funds.

This separation maintains financial integrity, ensuring the funds are used only for claims and benefits.Insurers protect policyholders by keeping premiums separate from other operational expenses or investments.

Keeping accurate records by segregating funds ensures transparency and accountability, helping regulators monitor insurers’ financial health and their obligations to policyholders.

Properly managing insurance trust funds ensures funds are available for policyholder claims, reducing insolvency risk and enhancing financial stability. Good governance ensures prudent management of insurance trust funds, focusing on sustainability and regulatory compliance.

Maintaining Insurance Trust Accounting Records in Zimbabwe: Challenges Insurers in Zimbabwe struggle to maintain accurate accounting records due to several challenges.

A major issue is the implementation of IFRS 17, which requires detailed measurement of insurance contract liabilities and profit statements over time.

Insurers find IFRS 17 complex due to data collection, analysis, and the costs of system upgrades and staff training. Zimbabwe’s economic instability, marked by hyperinflation and currency fluctuations, further complicates financial record maintenance.

The lack of exchangeability between USD and ZWG complicates determination of the functional currency and compliance with IFRS.

Additional challenges include:Technological Obsolescence: Insurers struggle to upgrade their accounting systems with new software and hardware that meet IFRS 17 requirements.Data Integrity and Security: Accuracy and security of financial data are crucial.

Insurers need strong data management to prevent breaches and maintain record integrity.

Regulatory Compliance: Adhering to evolving regulations and ensuring compliance with both local and international standards can be challenging. This involves conforming to the Insurance Act [Chapter 24:07] and other pertinent legislation.Training and Capacity Building: Continuous staff training is essential to stay updated on the latest accounting standards and practices, especially in a dynamic regulatory environment.

Economic Factors: The wider economic environment, including challenges such as liquidity constraints and restricted access to foreign currency, further complicates financial management. Insurers in stable regions like the UK benefit from predictable economies and advanced technology.

They also have better access to training and system resources, facilitating high standards of financial reporting.Nature of Insurer Violations Pertaining to Trust Fund Accounting Violations by insurance companies can occur in various ways, often involving financial mismanagement and regulatory non-compliance.

Some of the common types of violations include: Misuse of Funds

When insurance companies misuse funds intended for claims or reserves, it can result in inadequate coverage for policyholders and weaken the insurer’s financial stability.

Lack of Separate Record Maintenance

Insurers must keep policyholders’ funds and shareholders’ funds separate to prevent using policyholder funds for business expenses.

Failure to Comply with Regulatory Requirements: Insurance companies must follow regulations to protect policyholders and maintain industry integrity. Non-compliance, such as not meeting capital requirements, failing to submit reports, or mishandling claims, can result in legal penalties, loss of license, and reputational damage.

It also risks putting policyholders in jeopardy. Manipulation of Financial Statements: Some insurers may manipulate financial statements to hide losses or inflate profits by underreporting liabilities, overvaluing assets, or using creative accounting. This can mislead regulators, investors, and policyholders about the company’s true financial health, leading to a loss of trust and financial repercussions if exposed.

Redress for Insurer Violations of Trust Fund Accounting

The Case for Forensic Audits In Zimbabwe and abroad, forensic audits are not mandatory for trust funds but can be requested by interested parties like the Insurance and Pensions Commission (IPEC) or Trustees if there are suspicions of fund misappropriation, non-compliance with asset separation, or fraudulent reporting.

The audits follow the Terms of Reference (ToR) provided by the contracting party.

Conflicts often arise after forensic audit findings are presented. Here are some potential conflicts:Disputes with Findings:Forensic audits can spark disputes over findings. Insurers may claim their submissions were improperly reviewed, especially regarding fact interpretations, accounting standards, and legal principles.

The complexity of IFRS 17 can heighten these disputes due to varying interpretations and compliance challenges.

Management Interference

Forensic auditors may face conflicts with management, especially if they uncover financial mismanagement or fraud. Management might resist findings or try to influence the audit, causing tension and potential obstruction or limitation of scope.

Legal and Ethical Considerations

Forensic auditors face significant legal and ethical challenges. Proper evidence handling is crucial for court admissibility, as mishandling can undermine findings. Auditors must adhere to strict ethical standards to ensure work integrity.

Accounting For Trust Funds: Tips for Addressing Accounting Challenges and Conflicts with Forensic Auditors

The tips are as follows: – Prevention of Future Violations by Insurers Misuse of Funds: Implement rigorous internal controls and conduct regular audits to ensure that funds are utilized for their designated purposes. Establish clear policies and procedures for fund allocation, and consistently review adherence to these policies.

Failure to Maintain Separate Records

Strictly segregate accounting records for policyholders’ and shareholders’ funds.

Use software that separates funds and perform regular reconciliations to ensure compliance. Train financial staff on maintaining separate records to prevent issues.

Non-Compliance with Regulatory Requirements: Create a compliance program with regular training, internal audits, and an effective reporting system. Designate a compliance officer to oversee regulation adherence and timely report submissions. Stay updated on regulatory changes by engaging with relevant bodies.

Manipulation of Financial Statements:Strengthen internal audits and use forensic accountants to detect financial statement manipulation. Implement whistleblower policies for reporting unethical practices.

Regularly update accounting policies to match best practices and regulations. Forensic Audits and Conflicts with Audited Entities Disagreement with Findings: Create a clear process for resolving audit disputes, such as an independent review panel.

Keep transparent communication between auditors and the audited entity. Management Interference: Ensure forensic auditors’ independence by setting protocols that prevent management interference. Auditors should report to the board or an independent audit committee, not management.

A code of ethics can also help maintain their independence.

Legal and Ethical Issues: Ensure continuous training for forensic auditors on both legal and ethical standards.

Develop detailed guidelines for the collection and handling of evidence to guarantee its admissibility in court. By following these recommendations, insurers in Zimbabwe can improve their accounting practices, comply with regulatory requirements, and increase the integrity and transparency of the insurance sector.

Additionally, Forensic Auditors’ work becomes more reliable, reducing conflicts with audited entities.ConclusionTrust fund accounting and forensic audits are crucial for the integrity of Zimbabwe’s Pensions and Insurance sector.

Addressing challenges and implementing recommendations will enhance transparency, accountability, and trustworthiness.

This will protect citizens’ financial futures and restore confidence in the sector.