Up to Code ROBERT J. RIETZ
The Carol of the Bells
tHe HoliDays Will arrive Before We knoW it, and
i’m reminded of some professional advice i received about 25 years
ago. i was chatting at a holiday party with the general counsel of an
actuarial consulting firm, trying to find a common topic between an
actuary and an attorney. He told me that, in his experience, almost all
actuarial malpractice arises from one or more of three causes:
■ A very short time frame to complete
the engagement;
■ A smaller fee than is usual for the
type of engagement;
■ A topic that is near the edge of the
actuary’s personal expertise.
I have applied his advice to my actuarial practice since that conversation,
and any one of these factors causes my
personal warning bell to ring.
While the Actuarial Board for Counseling and Discipline (ABCD) isn’t
involved in malpractice litigation, it
does address the professional behavior and practices of members of the five
U.S.-based actuarial organizations. The
following examples describe hypothetical circumstances that could cause an
actuary to potentially violate the Code of
Professional Conduct and indicate which
precepts of the code the ABCD may consider if a complaint were filed. Let’s take
a look at how each of the three factors
should cause your warning bells to ring.
i need this quickly!
Precept 1 of the code tells actuaries that
we must act with honesty, integrity, and
competence. Precept 3 states that the actuarial services that an actuary provides
must satisfy applicable Actuarial Standards of Practice (ASOPs).
Suppose you’ve been periodically
meeting with a large prospective client,
trying to discover a project you can provide to her. At your next meeting, the
client asks if you can prepare a due-dili-gence report for a proposed acquisition,
and she indicates that the report is needed
by the end of the week. Of course, you’re
thrilled to “strut your stuff” for this employer, and you have visions of large
fees over several years. But you discover
the target acquisition maintains eight
collectively bargained pension plans, participates in four multiemployer plans, and
sponsors two retiree medical plans. You
also discover that two of the valuation reports aren’t available and that three of the
union plans have been recently amended,
but the amendments aren’t reflected in
the most recent valuation reports. The
actuary for the target company is using
assumptions that you and your prospective client agree appear to be somewhat
conservative. She tells you to also estimate the impact of using her company’s
current assumption set, which you believe is somewhat aggressive. Your two
best actuarial students just left on their
honeymoon, and you haven’t done much
programming over the past few years.
Can you competently prepare the
report, without cutting necessary corners? Can you be certain that your report
will satisfy all of the applicable ASOPs?
Will you have time to document all your
assumptions and methods and demonstrate how they satisfy the applicable
ASOPs? Will your report contain any
necessary deviation clauses? Do you
even know which deviation clauses need
to be included? What do you do if you
discover an error in your report afterward? Do you hear a bell?
i can’t pay that amount
for this project.
Precepts 1 and 3 are pertinent for this
example as well.
Many clients are currently experiencing financial difficulties, and their
consulting budgets are being reduced
across the board. Suppose you’ve proposed a project for your largest client
that will help them address a significant
cash-flow issue. The only problem is that
the scope cannot be reduced any further
without compromising the project’s integrity, while the client insists that he can
pay only half the fee you believe is necessary to adequately complete it. When
you return to your office, your boss says
billings are down and asks if you have any
work for the actuarial staff. You mention
the outcome of your meeting, and he encourages you to accept the project at the
reduced fee to keep the client satisfied,
but helpfully tells you “to find a way to
make it work.” You might be tempted to
accept the reduced fee and not bill the
client for the work necessary to complete
the project. But your boss has been very
clear recently that the firm cannot tolerate future cost overruns.
Are you certain you can complete the
project for the stated fee, and withstand
the pressures to finish it regardless of the
need to thoroughly check and document
