In part, the reason for the increases is a shaken faith in the ability of auditors to do the right thing, Mr. Hartwig said. The shaken faith, he said, can be traced back to the use of aggressive accounting by booming Internet companies, who used the now questionable practices to show positive earnings.

The practice spread well beyond those companies, he said.

With the bust of the dot-coms, there came the onslaught of securities litigation, increasing claims for directors and officers and accountants professional liability insurers. The collapse of Enron has led to “a big case of the shakes all over” the financial industry. And insurers are not immune.

In investment losses, insurers will lose $3-to-$4 billion, Mr. Hartwig said, and $350 million will come in the form of directors and officers liability claims alone. Already insurers are taking Enron to court, asking that D&O insurance contracts be declared null and void because of its accounting practices, he said.

For the accounting industry as a whole, the depth of coverage and premium paid will ultimately come down to underwriting fundamentals. The risk is everything, insurers say.

There is division in underwriting between accountants who deal with publicly-traded companies and those who deal with private companies and personal accounts, noted Sean Fitzpatrick, chief underwriting officer for Chubb Specialty Insurance, based in Simsbury, Conn.

While those that have Securities & Exchange Commission exposure are seeing large premium increases, those without the exposures saw increases of 15 to 25 percent, Mr. Fitzpatrick said, adding that recent renewals went “relatively smooth.”

The major five accounting firms, among them Arthur Andersen, who do handle the bulk of SEC exposures, are in a different league in insurance, Mr. Fitzpatrick explained, noting that the Big Five work largely with captives and reinsurance. He said their programs, which Chubb has some participation in, run on a three-year cycle. Each year, however, the accounting firms reevaluate whether to wait for renewals or alter the existing program. He speculated that the full effects of the fallout will not be seen “for a year or two.”

However, Mr. Fitzpatrick suggested, the full impact of Enrons fall would be more on the regulatory side than insurance as the SEC and Congress examine the whole profession.

“It is way too early to tell how this will play out,” he added.

For those carriers that deal exclusively in insuring certified public accountants, EnronArthur Andersen will not have a dramatic impact on underwriting procedures, insurers said.

“We have always tried to maintain good underwriting. For us there has not been a material change,” said John Dodsworth, chief executive officer of Camico headquartered in Redwood, Calif.

“The fallout from Enron may be in cases where, at some time, a verdict comes down to whether the jury believes the accountant or not,” Mr. Dodsworth observed.

“We won those wars in the past, but it may not happen as much in the future and claims could become more expensive.”

“Most of our clients with SEC exposure have been at it quite a number of years. And unless something happens, we are not too concerned with their SEC practices,” explained Bill Thompson, vice president of operations for CPA Mutual Insurance Company of America Risk Retention Group, headquartered in Gainesville, Fla. Its the experience that counts most, he said.

CPA Mutual covers about 700 firms of an average size staff of 14 throughout the country, he said.

Practicing under strict underwriting guidelines since 1987, the company has left rates pretty much unchanged, except for its evaluation of risk.

The insurance company knows what it is doing, and is steering away from new applicants, which are numerous, with SEC exposure, said Mr. Thompson.

“We just feel it is not worth the premium at this time,” Mr. Thompson noted.

Mr. Dodsworth said Camico also pays close attention to underwriting.

A major risk evaluation issue that the insurer faces arises from the diversification of accounting firms, he said, noting that accounting firms are entering into financial planning, securities and other fields.

“Our study shows that when they do enter these other disciplines, there is a learning curve, which means more risk,” Mr. Dodsworth explained. “We have always been more keenly interested in what they are doing, that they are comfortable [in the other disciplines] and that they know what they are doing.”

Ultimately, CPAs must exercise their professional judgment and walk away from clients who “make them nervous,” Mr. Dodsworth observed.

“There are a lot of areas where the rules are not hard and fast and require professional judgment,” he said.

“Our advice is that if it gets to that point, what they want to do is the right thing and be able to say good-bye to a client,” Mr. Dodsworth noted. “Its basic risk management at the end of the day.”

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, February 25, 2002. Copyright 2002 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.

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