Professionalism: A
Legal Perspective
Lauren M. Bloom
General Counsel
American Academy of Actuaries
Litigation against actuaries is
increasing for several reasons:
Actuaries are doing more;
 The weak economy has highlighted
reserve shortfalls;
 American society is increasingly litigious;
 The plaintiffs’ bar has found the actuarial
profession.

Claims against actuaries are
usually for malpractice:
Failing to follow generally accepted
practice; thereby
 Injuring a plaintiff to whom the actuary
has a legally-recognized duty;
 Causing the injury in fact and law; and
 Generating compensable damages.

Various defenses are available
(e.g., plaintiff’s contributory
negligence), but do not
eliminate liability if the
elements of malpractice are
present.
The more professional
assignments an actuary
undertakes, the greater his
or her malpractice risk.
Professional standards (the
Code, ASOPs and Qualification
Standards) are strong
evidence of generally
accepted practice.
Failure to comply with the
Code, Qualification
Standards and ASOPs may
be considered malpractice.
To comply:
Identify and read all applicable
professional standards;
 Conform work to the standards or
deviate and be prepared to explain;
and
 Document, document, document.

Which standards apply?
The Code and Qualification
Standards apply to all professional
services rendered in U.S.
 The Code can also apply to practice
abroad -- see draft white paper on
international practice.

Which ASOPs apply?
The ASB’s ASOPs apply to U.S.based practice.
 Not all ASOPs apply to each
assignment.
 Use the Academy’s Applicability
Guidelines as a starting point.

Two (non-casualty) ASOPs
almost always apply:
ASOP No. 23, Data Quality; and
 ASOP No. 41, Actuarial
Communications.

Keep the ASOPs close at
hand when working, and
follow recommended
processes.
If you deviate:
Describe the nature, rationale and
effect of the deviation in an
appropriate actuarial
communication; and
 Be prepared to defend it.
 Deviations can cause special
problems in litigation.

Documentation can be
critical to successful
malpractice defense.
Documentation should
(usually) include:

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A description of what was done and why;
Sufficiently detailed work papers for
another qualified actuary to review the
work for reasonableness;
A record of what the principal was told
and when;
Proof that open questions were asked and
answered.
Documentation should
(usually) not include:
Rough drafts of finished documents;
 “Back of the envelope” calculations;
 Evidence that outstanding questions
were never asked or answered.

Documentation:
Can be maintained as part of an
ongoing document retention policy do not destroy evidence!
 Will be reviewed with the benefit of
hindsight.
 Helps you if it shows you complied
with applicable law and standards.

In litigation, standards help
defendants who complied,
but can hurt defendants
who didn’t.
The absence of published
standards does not prevent
litigation.
The profession can mitigate
its litigation risk through
active participation in the
standard-setting process.
Actuaries can mitigate their
risk of liability through:
E&O Insurance
 Establishment of appropriate
business relationships
 Recognition and adjustment for
high-risk assignments
 Peer review

Actuaries can mitigate their
risk of liability through:

Use of engagement letters
Limitations on liability
 Arbitration clauses
 Third party indemnification
 Waiver of jury trial
 Limitation on use of work product
 Ownership of intellectual capital
 Billing and payment terms

Enron and related cases
have triggered:
Adverse media attention for the
accounting profession
 Shareholder anxiety
 Immediate and strong Congressional
action
 Lessened respect for professions

The Corporate Responsibility
Act:

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Establishes Accounting Oversight Board
Enhances auditor independence
requirements
Heightens management accountability
Enhances financial reporting requirements
Imposes stiffer penalties for misconduct
by accountants, analysts and managers
The Corporate
Accountability Act also
limits the ability of auditing
firms to provide other
services to their clients.
Absent advance audit committee
approval, an audit firm cannot
provide:
Bookkeeping services
 Financial information systems design
 Appraisal or valuation services
 Actuarial services
 Internal audit outsourcing services

Absent advance audit committee
approval, an audit firm cannot
provide:
Management/human resources
functions
 Broker/dealer or investment advisor
services
 Legal or expert services (unrelated
to audit)
 Other services prohibited by Board.

These restrictions may
significantly change the role
of actuaries working in
audit firms.
For most actuaries,
however, the question will
be how best to work with
auditors in the post-Enron
world.
Auditors will be facing:

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Oversight from new Board
New and untested rules and ethical codes
Heightened scrutiny from press
More inquiries from management,
especially audit committees
Increased potential penalties from various
sources
Management will be facing:
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Sensitized SEC
Heightened media scrutiny
Congressional concern
Shareholder anxiety
Personal culpability
Ongoing demands to produce profits
Actuaries can expect:
More questions from auditors and
management
 Ethical requirements in addition to
the Code
 Additional documentation
requirements
 (Maybe) more pressure to keep
reserves low

Actuaries will need to:
Comply with applicable ASOPs
 Document work products and retain
the documentation as required by
law
 Be prepared to respond to
questions
 Anticipate uncertainty until the new
rules are sorted out

Applicable ASOPs include:
ASOP No. 21 (under revision)
 ASOP No. 23
 ASOP No. 41
 ASOPs relevant to the task at hand
(e.g., ASOP 9,36)

Use the profession’s tools:
Practice Notes and Applicability
Guidelines
 Consider a peer review program
 Call the ABCD for guidance when
questions arise
 Keep current with publications and
seminars

Case Study
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You work for a large consulting firm.
Client A of your Chicago office (where you are
employed) is negotiating to purchase Client B of
your Boston office.
A & B both wish your firm to assist in the
valuation of the assets and liabilities to be
transferred to Client from Client B.
A & B have both signed conflict waivers and your
firm has established “Chinese walls,” though
neither client requested them.
Case Study (cont’d.)

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You are part of the consulting team working for
A. While reviewing the sale documents, you
discover a “typo” in the draft contract language
prepared by your Boston office.
The “typo” would increase the assets to be
transferred to A by $50 million more than you
think B intended to offer, and by $25 million
more than the opening position A was prepared
to put forward.
Case Study (cont’d.)
What are the ethical issues
presented?
 What Precept(s) of the Code of
Professional Conduct apply?
 What are your alternatives?

Questions?