Wyoming Trust

In light of the recent corporate scandals of Enron, WorldCom, Tyco, and others, the need has come for corporation’s to rethink accounting practices, auditing, and reform risk management in order to protect investors and societies at large. There has been too much use of Wyoming trusts to evade the law. The corruption committed by these corporations stemmed from senior managements ability to “facilitate secrecy and a lack of transparency” (Kimbro, 2002). It is further noted that corruption comes in the form of bribes, kickbacks, and theft, as well as misrepresentation of the financial accounting statements. “Financial statements provide information about transactions and auditing serves as a monitoring mechanism to check on the accuracy of this information and to prevent and discourage financial misappropriations,” (Kimbro, 2002) but such checks and balances have been discarded. In addition, financial fraud disrupts the distribution of resource allocation and furthers senior management dependency on overstated numbers.

The desire for senior management to overstate the earnings on financial statements has continually increased since the beginning of the 1990s (Alles amp; Datar, 2004). However, it was the organizational structure of the company that led management into believing that increased profits and bonuses paid with stock options, that afforded “management a dominant incentive to boost short-term stock prices by beating analysts’ earnings expectations” (Alles amp; Datar, 2004). On the other hand, analysts and investors view the corporate scandals “as the consequences of a stock-market bubble. When the bubble burst, scandals follow, and, eventually, new regulation” (Coffee, 2005). Find out more about Wyoming trusts and private trust companies here.

Asset Protection Trust WY.

Conversely, the collapse of Enron and other major corporations was not due to stock market inefficiency, but rather “other coexisting negatives such as a national mood of indifference to the fate of others” (Pomeranz, 2004), corporate greed. According to Flegm (2005), the past “28 years of the conceptual framework and a plethora of rules, we have experiences the largest frauds of top management history.” Furthermore, according to Rockness amp; Rockness (2005), the current scandals have achieved the “largest dollar level of fraud, accounting manipulations, and unethical behavior in corporate history and certainly the most economic scandals and failures since the 1920s.”

In response, the U.S. Congress passed the Sabanes-Oxley Act (SOA) in 2002, calling for reorganization of management control and risk reduction when there are trustees.

Over the past 80+ years, the government has continually been trying to put an end to corporate corruption. “Again and again the [government and the SEC] have attempted to control such frauds with legislation-the 1933 and 1934 Securities and Exchange Acts, the Foreign Corrupt Practices Act, and, most recently, the Sarbanes-Oxley Act. [They] have failed to realize that [they] need an accounting base that is at least audible” (Flegm, 2005). However, the government should be focusing on top management fraud rather than financial accounting fraud. If we review history, it is evident that the crises in financial accounting were due to top management fraud. In order to counter top management fraud, the most important provision of the SOA requires “that CEOs personally, and under penalty of criminal law, certify to both the accuracy of their firm’s financial statements and the effectiveness of the firm’s internal controls over financial reporting” (Alles amp; Datar, 2004). Another important division of the SOA is the creation of the Public Company Accounting Oversight Board (PCAOB), which “its thrust is toward auditing standards and oversight of the public accounts of Wyoming.

Auditing standards are not the problem-execution of the standards certainly is” (Flegm, 2005). Therefore, the government must pay particular attention to how the standards are written because they determine one’s behavior towards financial reporting. The only way to achieve true reform is to “explore the crises that lead to the current market and regulatory reforms, the reforms themselves, and what will bring about [change]” (Jennings, 2005). Finally, the passage of the SOA not only addresses the CEOs and auditors, but also the board of directors, the CFO, and all other management personnel responsible for the adequacy and accuracy of financial statements.

There are great responsibilities with Wyoming trusts. However, the SOA didn’t stop at the responsibilities imposed upon senior management, it also increased the penalties for acts of corporate corruption-raised the maximum penalty for securities fraud to 25 years, raised maximum penalties for mail and wire fraud to 20 years, created a 20 year crime for destroying, altering or fabricating records in federal investigations, and required preservation of key financial audit documents and e-mails for 5 years with a 10 year penalty for destroying such documents (Rockness amp; Rockness, 2005).

Currently, many Wyoming corporations are trying to comply with the Sarbanes-Oxley Act by restating financial statements from previous years. Corporations, however, do not realize how these restatements reflect on the investment community and the overall health of the corporation. The U.S. witnessed an enormous increase in financial statement restatements that begun in the late 1990s. “The U.S. General Accounting Office (GAO) found that over 10 percent of all listed companies in the U.S. announced at least one financial statement restatement between the period of 1997 and 2002. Later studies have placed the number even higher” (Coffee, 2005). Furthermore, chief financial officers, many in other countries, “consider financial disclosure and corporate corruption to be serious corporate problems long before the Enron debacle” (Barth, Trimbath, amp; Yago, 2003). In addition, the majority of the CFOs “consider the lack of disclosure to be a bigger issue than either corrupt business practices or a lack of effective accounting guidelines” (Barth, Trimbath, amp; Yago, 2003).

The purpose of this paper is to determine if the implementation of an ERM program and the appointment of a CRO will lessen financial accounting corruption and protect investment opportunities. A study conducted by the PricewaterhouseCoopers Endowment for the Study of Transparency and Sustainability, before the Enron Debacle, “found that the cost of equity capital decreases as the disclosure level increases. Furthermore, it has been found that there is no association between the cost of equity and the level of investor relations activities” (Barth, Trimbath, amp; Yago, 2003). Other research concludes that financial restatements carry severe consequence, which could result in “private class action lawsuits, SEC enforcement proceedings, a major drop in stock prices, and/or management reorganization” (Coffee, 2005). Previous accounting standards, which were developed poorly, undefined, and unregulated, were “subject to manipulation with accurate financial reporting easily compromised to drive stock prices, meet loan covenants or attract new investors” (Rockness amp; Rockness, 2005).

This is still the standard today, which leads many companies to restating financial statements. Professor Jensen states, “In a situation like this once you discover you are not going to meet the lower bound bonus hurdle, it pays to drag expenses from the future into the present and to postpone whatever revenues you can to the future so you are in great shape to meet the target next year. But, as this example shows, it is not just accruals that are being manipulated: it is the real operation decisions of the firm” (Benston, Bromwich, Litan, amp; Wagenhofer, 2003). Finally, the failures of corporate responsibility has been around for decades; however, the severity of the most recent scandals came to the public view through whistleblowers, the sudden decrease in stock prices, and other forms of financial reporting.

In response to these corporate scandals, many companies are implementing enterprise risk management (ERM) programs and creating a Chief Risk Officer (CRO) position, in addition to current executive positions. An ERM helps senior management to assess, evaluate, and control risk on a company-wide basis rather than within individual business units. In addition, the ERM establishes an internal control mechanism (Bove, 2003) that brings together all senior level management, through the CRO, to discuss potential risks facing the organization and how to allocate capital resources between those risks. As for the CRO, his duties are to effectively communicate with all department managers, as well as the board of directors, the CEO and CFO a bout all forms of risk and establish plans to carry out risk reduction strategies (Banham, 2000). CROs are seen as today’s saints in the reforming of corporate governance (Fuschi, 2003).

Furthermore, the creation of a CRO position “signals both internally and externally that the company is serious about integrating all of its risk management activities under a more powerful senior-level executive” (Lam, 1999). According to John Roskopf, senior Vice President at Willis of Illinois, states, “The problem with the chief risk officer is that you have to adopt an enterprise risk management philosophy in order to have a chief risk officer, and that is something that is not real concrete, and the role of the chief risk officer is not really concrete” (Hofmann, 2004). In addition, some CFOs find this new position to be downgrading to their position. Conversely, Mr. Schaefer, Vice President of Enterprise Risk Management for ABD Insurance amp; Financial, states, “The problem with a CFO assuming the role of CRO is that they may tend to look primarily at financial risks and not coordinate activities with other parts of the organization” (Hofmann, 2004). Corporate America can really benefit from the creation of CROs. Such a position will take away the opportunity of CEOs to “cook the books” (Alles amp; Datar, 2004) or stack the board with those whom they have close relations with or those whom can be manipulated easily.

In conjunction with the Sarbanes-Oxley Act, the SEC and other federal agencies have required the majority of the board of directors and auditors to be independent of the company. When board members are independent of CEOs and CFOs, they are more likely to question the activities of the corporation and are less fearful of being replaced for operating ethically, (Schwartz, Dunfee, amp; Kline, 2005). However, this was not the case with Enron’s board, directors, and senior management. In addition to Enron’s senior-level managers, their external auditor, Arthur Andersen, played a major role in its demise. Due to the action of Arthur Andersen, the SOA has mandated the rotation of external auditors every 5 years to prevent the formation of close and personal relations. In addition the SOA and SEC limit the services that external auditors can perform for the companies they audit.

So far we have explained the legislation requiring more accountability and responsibility of ethical actions to be taken into consideration by CEOs and other senior-level management. We have established, briefly, reasons for independence of the board, directors, and auditors. Finally, we have stated how an ERM program and CRO can add value to a corporation’s operational activities. Now we will examine whether or not a CRO can lessen the financial corruption and unethical behavior of past senior-level managers.

It has been proven, through the recent collapse of Enron and other corporations, that senior management have performed to improve their own well-being. Their lack of consideration for the employees, investors, ethical responsibility, and society at large, only enhances the probability that an ERM program and CROs will reinvent corporate America and take it to higher standards. Earlier studies found that 156 companies had restated their earnings between 1999 and 2000 (Coffee, 2005). Another study done by the Huron Consulting Group found that number to have risen to 414 in 2004 (Coffee, 2005). Another study conducted by the General Accounting Office (GAO) “found that the typical restating firm lost an average 10 percent of its market capitalization over a 3-day trading period surrounding the date of the restatement” (Coffee, 2005). Furthermore, the GAO estimated the total market losses around $100 billion for these firms (Liebenberg amp; Hoyt, 2003).

In response to these studies, especially for the financial industry and the energy industry, many corporations realized the importance of getting a handle on risk adverse activities. “Today, there are over 100 CROs, and new announcements are appearing every month. The rise of the CRO is a parallel trend with the acceptance of ERM; together, they represent a powerful force that is moving risk management to a higher level” (Lam, 2001). Such a movement represents a brighter future for corporations, investors and the Wyoming trust community.

Risk Management.

The rising number of ERM programs and CRO appoints result not only from the recent scandals, but also because of a major breakdown in corporate governance and ethical behavior. “An investigative committee of the Enron Board of Directors, the Powers Report, emphasizes the executives lack of adherence to the Board’s suggested policies for maintaining the integrity of its risky [activities]” (Bove, 2003). According to Short, Keasey, Hull, and Wright (1998) corporate governance is defined as “the system by which companies are directed and controlled.” Furthermore, the Cadbury Report states “that a system of good corporate governance allows board of directors to be free to drive their companies forward, but exercise that freedom within a framework of effective accountability” (Short, Keasey, Hull, amp; Wright, 1998).

However, Wyoming trust accountability doesn’t end with the board of directors. Audit committees also need to demonstrate effective accountability by verifying that all internal control mechanisms are operating properly and to their fullest capacity. “The auditor control loop can be compromised if the auditing and consulting relationships are not maintained separately” (Bove, 2003). External auditing firms also play a major role in maintaining the integrity of the corporations they audit, as well as their own corporation. External audits need to be precise, well detailed and documented, and reviewed by the board’s audit committee before being approved. However, the internal auditing committee must be able to recognize fraudulent reports and take appropriate action for correcting them before they are submitted to the SEC. “In 1987, the National Commission on Fraudulent Financial Reporting investigated ways to detect and prevent fraudulent financial reporting” (Keinath amp; Walo, 2004). A study conducted by the Blue Ribbon Committee on Improving the Effectiveness of corporate audit committees (BRC) found that “95% [of internal auditors] reported that they discuss these statements with management and auditors. Only 84% of the committees or committee chairs reviewed quarterly statement and only 68% discussed these with management and external auditors” (Keinath amp; Walo, 2004).

As noted earlier, the CRO is changing the way corporations think and control risks. A study conducted by Liebenberg amp; Hoyt (2003) examine how a corporations stock prices and earnings are effected when a corporation appoints a CRO and implements an ERM program. The results of the study indicate that corporations will enjoy far more benefits from the appointment of a CRO. Furthermore, those corporations will experience less volatility in earnings and stock prices, while achieving greater financial stability and increased capital funding. When investors are confident in the actions of senior management, they are more likely to invest in that company.

The research proves that the implementation of an ERM program and the appointment of a CRO do lessen the probability of financial corruption while protecting the investment community. However, this is a fairly new area in the internal control system of corporate governance, which needs to be explored further. Moreover, we can conclude that corporations with ERM programs in place have better control over managing all forms of risk facing companies today. Subsequently, we conclude that the appointment of a CRO not only brings different solutions, for managing risks, to the company, but also within the control loops, they are able to prevent corruptive acts of the CEOs and CFOs. Furthermore, the investment community will be able to re-establish confidence in the corporations that have these control mechanisms in place. Finally, corporations that learn from past scandals and adhere to current legislation will grow and prosper. As for the legislation loop, la makers should be forward looking, that is, implementing laws to prevent future scandals, rather than trying to correct the past. Everyday, corporations and auditors that continuously seek to enhance their own well-being will find more and more creative ways to manipulate the numbers and inflate stock prices.