The Sarbanes-Oxley Act hasn't cleaned up the accountingpractices of corporate America enough to improve loss costs fordirectors and officers liability insurers, an accounting expertsaid here yesterday.

The legislation, officially known as The Public CompanyAccounting and Investor Protection Act of 2002, set rules ofcorporate governance and financial disclosure for public companies,as well as penalties for executives involved in corporate fraud, inthe wake of large corporate meltdowns like Enron.

But while Sarbanes-Oxley (SOX) “has cleaned up some of thetransparency and quality of earnings issues,” it's also creatingsome new ones, according to Marc Siegel, director of research forRockville, Md.-based CFRA, a forensic accounting firm.

“I don't think [directors and officers liability insurers] aresafer from losses as a result of SOX,” he told roughly 1,400D&O brokers, underwriters and litigators and the ProfessionalLiability Underwriting Society D&O Symposium in New York.

Mr. Siegel said “accounting games” typically start when theeconomy is bad, and if there is a downturn SOX will be revealed asno panacea.

In particular, he said that while companies have become morediligent and transparent about quality of their reported earnings,they are also highlighting different components of theirresults–other than earnings–as evidence of their well-being toinvestors.

“They're saying, 'Look at our cash flows, [which] are reallystrong'…because there's more discretion on cash flows. You don'thave to be transparent.”

Public companies are also talking about “other metrics,” likesame-store sales, he said. “Those aren't even accounting metrics.Auditors don't look at those [and] SOX doesn't cover them.”

“We're seeing metrics management rather than earningsmanagement,” Mr. Siegel said.

If investors, analysts and underwriters are making decisionsbased on results a company is portraying with these new metrics–andif those results are manipulated or managed in any way–then “you'llcontinue to see [D&O insurance] problems,” he advised.

Greg Flood, chief operating officer for National Union, a unitof New York-based American International Group, said he believedthe “regulatory zeal that came out of Enron, WorldCom” and othermeltdowns “really created more securities claims” than SOXprevented.

“In our business, we're insuring the frailty of decision-making[and] the frailty of human nature, [and it's] more than likely thatsomebody's going to fail,” he said. “So I'm not so sure, as aninsurer, that SOX has been a lot of help.”

He also observed that prior to SOX the U.S. exchanges weregetting a lot of listings of American Depository Receipts fromforeign companies. “Last year, only 10 percent of all foreigncompanies accessed capital markets here in the United States. Thecomplexities of SOX were just too daunting,” he said. Otherspeakers suggested that foreign issuers were better risks from aD&O underwriter's perspective.

At an earlier session, Susan Muck, a defense lawyer for Fenwick& West in San Francisco, highlighted “the proliferation ofinternal investigations at public companies” as an “unintendedconsequence” of Sarbanes-Oxley that will “have a dramatic impact”on D&O insurers.