Sarbox Could Spell Lower Rates For CPAs, Lawyers

The Sarbanes-Oxley corporate governance legislation, passed in 2001, may result in lower professional liability rates for attorneys and accountants. After three difficult years, the market finally has started to soften. Although traditional supply-and-demand pressures are a factor, the legislation appears to have leveled the playing field.

If corporate officers deliberately set out to deceive investors, it was very difficult for auditors to detect. The expectation was that the auditor would look over the chief financial officer's shoulder to catch errors and to eliminate aggressive accounting that might be technically correct but give an overly rosy picture of the company.

In the wake of the well-known corporate scandals of the late 1990s, investors and the plaintiffs' bar began looking for deep pockets. They found them at the large accounting firms, some of which were unfairly held liable for failure to catch fraudulent statements.

Sarbanes-Oxley now requires that top management, as well as the auditors, sign off on financial statements, certifying that they are correct. The result is that we can expect fewer deliberate cases of fraud, now that chief executive officers and chief financial officers know that they can be held personally liable for false statements.

No longer can management afford to be lazy in its review of financial statements and expect the auditors to pick up any problems. The onus is back on the client.

There also can be no expectation that insurance will pick up the tab when investors are deliberately misled. Virtually every professional liability policy specifically excludes fines and other penalties for fraud.

"Employed lawyers," or in-house attorneys, for firms that have exposure due to Sarbanes-Oxley should review and confirm with their underwriter the extent of coverage in an employed lawyers policy. They need to be concerned that defense expenses for investigations and civil disciplinary actions are covered. Coverage for fines and penalties assessed under Sarbanes-Oxley, by law, are uninsurable.

Sarbanes-Oxley has clarified the expectations of management. Standards of care exist, meaning that insurance carriers and their clients know what is expected.

Skeptics of the Sarbanes-Oxley impact, however, still exist, and it is a little early to be certain that lower rates will result from the act. The plaintiffs? bar is skilled at finding causes for lawsuits, and Sarbanes-Oxley has given it many new avenues to explore.

So what does this mean that brokers and carriers should tell their clients?

• Rates for law and accounting practices, as always, will depend on the size of the firms, their areas of practice and their individual claims experience.
• Attorneys and CPAs whose clients work for large, publicly held companies face the greatest risks.
• Risks may increase for attorneys and CPAs who serve smaller, privately held companies as the impact of Sarbanes-Oxley starts to trickle down. Even though there are no outside investors, private companies can face lawsuits from employees and customers if they believe they were misled.
• Some insurance carriers are asking clients to show specific evidence of compliance with the Sarbanes-Oxley Act. Brokers need to find out whether directors and officers, as well as attorneys and CPAs, understand the law before writing a policy.

In summary, the way to maintain lower rates is simple: Attorneys, CPAs and their clients should follow both the spirit and the letter of Sarbanes-Oxley.

James A. Young is a professional liability specialist for RiskProNet International Inc., a network of independent insurance brokers in the United States and Canada. He also is managing director of ProAccess, LLC in West Orange, N.J., and a director of Herbert L. Jamison & Co., LLC, with offices in New York, New Jersey and Washington, D.C..

Reproduced from National Underwriter Edition, October 28, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.