Sarbanes-Oxley Consulting Creates Opportunities, Risks for Underwriters

Underwriters and accountants will have many opportunities to advise companies in interpreting and implementing the Sarbanes-Oxley Act, but they should be aware of the increased exposure to risk, attendees at the most recent the PLUS E&O Symposium were told.

Douglas Carmichael, chief auditor for the Public Company Accounting Oversight Board, reviewed the requirements of the Act and said the responsibilities for managers and accountants go beyond adhering to generally accepted accounting principles (GAAP). He outlined the procedures for disclosing financial weaknesses or deficiencies, and he described the penalties under the Act for failure to do so.

“Compliance with accounting standards won’t be a comprehensive defense if you had criminal intent,” Carmichael said.

Criminal penalties associated with improper financial reporting would differ if they were “knowing,” which implies recklessness versus “willful,” which implies actual knowledge or intent, Carmichael said.

David A. Sukert, senior vice president for Aon Insurance Services, said that companies have a continuing obligation to stay on top of the changes involved in implementing Sarbanes-Oxley. He said that market reaction so far has not been different from other areas of practice-client selection is still the theme. Before taking on a client, consulting firms need to be sure they can do the job and have the requisite personnel. “You also have to ask yourself, ‘Will this be part of our long-term succession plan?'” Sukert said.

Mario Lemme, president of Lemme Insurance Group Inc., agreed. He added that underwriters and brokers need to get clients talking. “You want your clients to be transparent and educate the underwriters.”

Lemme also observed that the shortage of qualified people in the accounting field is a concern. Although Sarbanes-Oxley is aimed at private companies, he said he believes it will cascade to not-for-profit companies.

Thomas Manisero, member of Wilson, Elser, Moskowitz, Edelman and Dicker LLP, and co-chairman of the firm’s Professional Liability Practice Team, discussed the claims likely to be generated by SOX consulting. He suggested the first step for consulting firms is to put clear provisions in engagement letters. Manisero said auditors will be sued if there is a loss or claim due to internal control failures.

Manisero cautioned that “there is an opportunity for exposure for these firms-this is not a risk-free way to make money.” He said that there are risk management tools that firms should take advantage of, including having liability provisions in their engagement letters. Provisions could be made that management will indemnify consultants, if the consultants face liability, as another level of protection, he said.

Carmichael added that because the deadline has been extended for some filers, there may be a debate over who is at fault-the company or the consulting firm-if the company doesn’t meet the deadline.

The PLUS E&O panel was moderated by John Wynn, assistant vice president at AXIS PRO.