The Directors' and Officers' (D&O) market is reaching a crisis point (refer to my column dated December 24, 2001 for how D&O policies work). How can D&O underwriters underwrite for society's greed? How do they choose which company understands and is following corporate governance? Even worse, is any company not committing fraud in some shape or form? The buying and selling of D&O cover is about to change dramatically as a result of radical changes to financial reporting.

The Financial Times ran a story called "Enron's directors contributed to collapse" on July 7, 2002 which quoted a US subcommittee as saying, Enron's board of directors was derelict in its "paramount duty" to safeguard shareholders' interests.

This report alleges board members witnessed "numerous indications of questionable practices" over several years - including high-risk accounting, inappropriate conflict-of-interest transactions, extensive undisclosed off-the book activities and excessive executive compensation - but chose to ignore them.

While there were some instances in which board members were misinformed to misled, Enron's high-risk accounting practices "were not hidden from the board"." Any surprises to anyone? Who in their right mind will serve on a board right now knowing that the US government is looking for someone to prosecute so it can look like it is doing its job? Sitting on a board does not hold the same glamour as it used to in days gone by.

In this day and age it seems that if you sit on a board, you are risking losing everything you worked for because of capitalism gone wild.

And what's worse is that there is no insurance to cover fraudulent acts therefore board members will be left to pay these suits out of their own personal pockets.

Recently, the SEC published a list of companies it wants to complete signed statements verifying that their financial records are accurate and without fraud.

There are some 534 companies on this list - most of which are the big Fortune 500 companies. What will happen should a majority of these companies admit to cooking the books? If it is true that the majority of these companies have committed fraud in some way, how will consumer confidence ever be restored in the financial markets?

Should a majority of these companies admit to cooking the books, what does this mean for D&O contracts? Will they all be considered null and void under the pretext of material misrepresentation or simply concealment or fraud? It's insane what the connotations of such widespread fraud could mean to the D&O market.

How does an underwriter protect himself from being hung out to dry for not spotting an inaccuracy on a balance sheet when qualified auditors, Chief Financial Officers, Chief Operating Officers and Chief Executive Officers of companies have not?

With the recent balance sheet adjustments that have come to light, it seems the accountants in these companies have found ingenious ways to doctor the books.

Each case being completely different and very difficult to spot unless an underwriter has a practical understanding about the way the industry group works, he is underwriting. In this day and age, technical knowledge does not appear to be enough.

Allegedly, the fraud committed by WorldCom was no where near as complicated as Enron's but it was still very cleverly orchestrated.

Quite simply, WorldCom was declaring liabilities as assets by disguising their real meaning behind technical jargon specific to the telecommunications industry.

Qualified auditors could not understand what the books were really telling them so how does an underwriter stand a chance? What questions does a D&O underwriter ask now when reviewing an account? Does she come right out and ask as the SEC has done; are the company's financial statements accurate? Will any client admit to committing a crime? Will clients become defensive and offended that an underwriter would effectively accuse his company of criminal misconduct? Admirably, many D&O underwriters are requesting the presence of a CFO, COO or CEO in D&O meetings to answer the tough questions about the company's financials.

If anyone is following the Enron and WorldCom fiascos, one will see that all of these guys are pleading the fifth when questioned about the misdeeds of their companies.

How can D&O underwriters expect to get the true picture in underwriting meetings? It was recently announced that D&O underwriters are shying away from all telecommunications companies as a result of WorldCom. But the buck doesn't stop there.

There is a general feeling as evidenced by the SEC's request for signed affidavits from 534 companies attesting to the accuracy of their company's bookkeeping, that fraud is prevalent across the spectrum.

I would hate to be a D&O underwriter at the moment because it must be very difficult trying to underwrite an account knowing that quite possibly, fraud has been committed. Sure, underwriters can always use fraud as a means for declaring contracts null and void.

But if the biggest exposure that companies now face is shareholder suits as a result of fraud, what options will innocent directors and officers have to protect their assets? D&O premiums are increasing exponentially despite fraudulent acts being excluded.

I believe D&O underwriters are correct in asking for higher premiums until the financial market stabilises.

The pendulum will swing the other way for a while as the stock market falls to take into account the widespread adjustments which will be made to correct inflated financials.

As a result, it is very likely that shareholders will be disappointed with the performance of their stocks and will sue for false projections.

An interesting time for D&O underwriters as it is for us all because of the inevitable swings in extreme directions for the economy and hence the stock market before we find the middle ground.

A direct consequence of the unstable economy and stock market will be instability in shareholder's confidence in their companies and hence an increase in shareholder suits.

I hope D&O underwriters are getting their numbers, retentions and limits right because it could be a long hard adjustment period before some form of normalcy returns.