Clearly ICFR is a major agenda item at the SEC and the PCAOB.  On December 18, 2019 the SEC announced that the Commission had “charged MetLife, Inc. with violating the books and records and internal accounting controls provisions of the federal securities laws relating to two errors in its accounting for reserves associated with its annuities businesses.”  MetLife will pay $10 million to settle the charges.

This case relates to the books and records and internal accounting controls provisions of the federal securities laws.  In essence it is an ICFR case, and it illustrates the importance of disclosing material weaknesses in ICFR and also makes the point that a material misstatement does not have to occur for a material weakness to exist.

In its December 31, 2017 financial statements in Form 10-K MetLife disclosed the following:

Revisions

As a result of the following adjustments, amounts previously reported have been immaterially restated. In addition, the Company has corrected other unrelated immaterial errors which were previously recorded in the periods the Company identified them.

Group Annuity Reserves

On December 15, 2017, the Company announced that it was undertaking a review of practices and procedures used to estimate its reserves related to certain Retirement and Income Solutions (“RIS”) group annuitants who have been unresponsive or missing over time. As a result of this process, the Company increased reserves by $510 million , before income tax, to reinstate reserves previously released, and to reflect accrued interest and other related liabilities. Of this increase, $372 million was considered an error and, recording this amount in the fourth quarter of 2017 financial statements would have had a material effect on the results of operations for 2017.

Assumed Variable Annuity Guarantee Reserves

An internal review of practices and procedures was completed in early 2018, focusing on the calculation of certain reserves associated with MetLife Holdings variable annuity guarantees assumed from a former operating joint venture in Japan. As a result, the Company reduced these reserves by $896 million , before income tax. Of this decrease, $682 million was considered an error and, recording this amount in the fourth quarter of 2017 financial statements would have had a material effect on the results of operations for 2017.

Interestingly, the materiality of the revisions is based on the “iron curtain” versus “roll-over” thought process in SAB 108, but the effect on each year reported was not deemed material.

With all of that as a starting point, in MetLife’s Form 10-K for the previous year, 2016, their ICFR report in Item 9A stated that ICFR was effective:

Management’s Annual Report on Internal Control Over Financial Reporting

 Management of MetLife, Inc. and subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with GAAP.

Management has documented and evaluated the effectiveness of the internal control of the Company at December 31, 2016 pertaining to financial reporting in accordance with the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

 In the opinion of management, MetLife, Inc. maintained effective internal control over financial reporting at December 31, 2016 .

 Deloitte & Touche LLP, an independent registered public accounting firm, has audited the consolidated financial statements and consolidated financial statement schedules included in the Annual Report on Form 10-K for the year ended December 31, 2016 . The Report of the Independent Registered Public Accounting Firm on their audit of the consolidated financial statements and consolidated financial statement schedules is included on page 386.

MetLife’s 2017 Form 10-K Item 9A included this different report:

 Management’s Annual Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. In fulfilling this responsibility, estimates and judgments by management are required to assess the expected benefits and related costs of control procedures. The objectives of internal control include providing management with reasonable, but not absolute, assurance that assets are safeguarded against loss from unauthorized use or disposition, and that transactions are executed in accordance with management’s authorization and recorded properly to permit the preparation of consolidated financial statements in conformity with GAAP.

Management evaluated the design and operating effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO framework”). Solely because of the material weaknesses in internal control over financial reporting described below, in the opinion of management, MetLife, Inc. did not maintain effective internal control over financial reporting as of December 31, 2017.

 A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Identification of the Material Weaknesses in Internal Control over Financial Reporting

 The Company has identified the following deficiencies in the principles associated with both the control activities and information and communication components of the COSO framework:

 RIS Group Annuity Reserves:

 Ineffective design and operating effectiveness of the controls related to processes and procedures for identifying unresponsive and missing group annuity annuitants and pension beneficiaries (Control Activities); and

Ineffective design and operating effectiveness of the controls intended to ensure timely communication and escalation of the issue throughout the Company (Information & Communication).

 Assumed Variable Annuity Guarantee Reserves:

Ineffective design and operating effectiveness of the controls related to data validation and monitoring of reserves for variable annuity guarantees issued by a former operating joint venture in Japan and reinsured by the Company and included within MetLife Holdings (Control Activities).

 These deficiencies, if not effectively remediated, could result in unprevented and undetected misstatements of accounts or disclosures related to liabilities for certain RIS group annuity contracts and MetLife Holdings assumed variable annuity guarantee reserves. Such misstatements could result in a material misstatement of the annual or interim consolidated financial statements.

The Company’s independent registered public accounting firm, Deloitte & Touche LLP, has issued its report on its audit of the effectiveness of internal control over financial reporting, which is included on page 401.

There was no material misstatement in MetLife’s financial statements as a result of these ICFR material weaknesses.  Still, as the enforcement release brings out, the material weaknesses created books and records violations and resulted in the fine.

As always, your thoughts and comments are welcome!