E & O in the New Corporate Environment

The importance of E&O coverage has never been more evident than in today's business environment. In the much-watched case of Newby v. Enron, 2002 WL 31854963 (S.D. Tex. Dec. 19, 2002), plaintiffs leveled claims against not only Enron's directors and officers, but also targeted lawyers, auditors, and even investment banks for their respective roles in Enron's collapse. Newby paved the way for other disappointed shareholders to expand their litigation targets beyond the directors and officers.

In addition, regulatory changes sparked by Enron-type abuses are increasing the types of claims facing corporate decision-makers. The Sarbanes-Oxley Act (the Act) includes rules governing the standard of conduct for third parties such as auditors and lawyers who routinely assist corporations with their financial compliance. For example, Section 204 of the Act now requires outside auditors to report specified information to auditing committees, including “critical accounting policies and practices” and “alternative accounting treatments.” The critical accounting practices would include an assessment of management's disclosures and any proposed modifications by the accountants that are not included in the disclosures. Section 802 of the Act, likely inspired by Arthur Anderson's conduct, now requires accounting firms to retain audit work papers and other documents that form the basis for the audit for seven years. Section 307 of the Act establishes minimum standards of professional conduct for attorneys who appear or practice before the SEC, including requirements that attorneys report evidence of any “material violations” up the corporate chain.