Sarbanes-Oxley hasn't cleaned up the accounting practices ofcorporate America enough to improve loss costs for directors andofficers liability insurers, and might in fact be prompting moreexposures than it prevents for carriers, experts contend.

The so-called “SOX” law–The Public Company Accounting andInvestor Protection Act of 2002–set rules of corporate governanceand financial disclosure for public companies, as well as penaltiesfor executives involved in corporate fraud, in the wake of largecorporate meltdowns such as Enron.

However, while SOX “has cleaned up some of the transparency andquality-of-earnings issues,” it's also creating some new ones,according to Marc Siegel, director of research for Rockville,Md.-based CFRA, a forensic accounting firm.

“I don't think [D&O insurers] are safer from losses as aresult of SOX,” he told roughly 1,400 D&O brokers, underwritersand litigators at the Professional Liability Underwriting Society'srecent D&O Symposium here.

Mr. Siegel said “accounting games” typically start when theeconomy is bad. “It's cyclical. If the economy's going okay, thenSOX will be deemed a success; but if it turns at all, what you'llsee–and you've already started to see–is that it isn't the panaceapeople think.”

In particular, he said while companies have become more diligentand transparent about the quality of reported earnings, they arealso highlighting different components of their results–other thanearnings–as evidence of their well-being to investors. “They'resaying, 'Look at our cash flows, [which] are really strong'…becausethere's more discretion on cash flows. You don't have to betransparent.”

Public companies are also talking about “other metrics,” likesame-store sales, he noted. “Those aren't even accounting metrics.Auditors don't look at those [and] SOX doesn't cover them.” Headded that “we're seeing metrics management rather than earningsmanagement.”

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

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 othercorporate accounting meltdowns “really created more securitiesclaims” than SOX prevented.

“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, U.S. stock 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 SOX, which she said will “have a dramatic impact”on D&O insurers.

In the post-SOX world, audit committees have become more activein overseeing financial and governance issues, and outside auditorsare requiring investigations–in many instances examining issuesthat “have never before been issues,” she added.

With SOX disclosure requirements, many internal investigationsare quickly disclosed, which then prompts securities class actionsor SEC investigations, she said.

The documents created by these costly investigations areavailable to plaintiffs' lawyers and the Securities and ExchangeCommission pursuing such actions, she noted. “What I find mosttroubling is that [defense] lawyers are now coming in to representevery constituency possible” in these actions–the CEO, the CFO, theaudit committee and the company sometimes,” she said. “All of thoselawyers are feeding from the same financial trough, which will havegreater impact on the D&O industry.”