New Liabilities, New Policies

Accounting scandals help spawn huge D&O insurance price hikes and coverage pullbacks.

As restatements go these days, it seems a pittance.

What’s more, the change reported by Westaff, a temporary-staffing company with $110 million in second quarter revenues, looked like a positive one.

Partly because of tax law changes in the federal economic stimulus bill enacted in March, the company should have recorded a $3.1 million tax benefit in the second quarter. The company made the change at the start of September, restating a $1.7 million net income loss to a $1.4 million gain in the process.

The move was apparently too arcane to even merit a press release from the Walnut Creek, California-based company. Still it was a restatement, and any time a company issues a restatement — positive or negative — these days, there is understandable concern about possible shareholder suits. After all, many CEOs and finance chiefs at public companies have only just begun certifying corporate financial statements under the mandates of the new Sarbanes-Oxley Act.

That alone could spawn a case of the jitters. Of course, CFOs and CEOs have always been liable for false certifications under the 1934 Securities Exchange Act. For many, Sarbanes-Oxley is unlikely to break new ground in terms of executive liability. “I always felt like I was doing it personally,” says Jeff Naylor, CFO of Big Lots. “If those statements were incorrect it was my name that was on the line.”

Grist for the Till

Still, now that CFO and CEO signatures are actually mandated for all public companies under federal law, they’re tangible ammunition for plaintiffs’ lawyers. Attorneys, after all, like to supply juries with bold graphics and blowups of the evidence. “That piece of paper that starts out eight-and-a-half by 11 inches becomes three feet by five feet in a court of law,” says Doug Hagerman, an attorney with Foley & Lardner in Chicago who defends corporations. “[It's] powerful evidence of individual officer responsibility.”

New liability threats also loom over board audit committees. Sarbanes-Oxley has added some hefty new powers for their members, including hiring, firing, and oversight of independent auditors. They must also be up on the critical accounting policies and practices used by the auditor. Since their new authority and knowledge is bound to make them seem more like corporate insiders, they’re increasingly likely to be defendants in court.

With the personal assets of board members and executives apt to be more at risk, maintaining solid corporate directors’ and officers’ liability insurance coverage (D&O) is becoming crucial. In the current economic climate, however, some insureds wonder how well their coverage will hold up if the insurance policies become assets controlled by a bankruptcy court. And the coverage itself, while widely available, is becoming costlier and skimpier..”

Bigger corporations and those in high-risk areas like telecommunications or biotechnology, for instance, have more to worry about, experts in the coverage say. Fortune 500 companies have, for instance, seen their premiums soar 200 percent to 400 percent on their most recent policy renewals, says Lou Ann Layton, a Marsh insurance broker specializing in the insurance. “This is the worst D&O market in the 21 years I’ve been in the business,” she says.

Discuss

Your email address will not be published. Required fields are marked *