Accounting, Auditing, and Assurance Services

The purpose of this blog is to provide definitions of accounting, auditing, and assurance services. In addition, the relationship between accounting, auditing, and assurance services will be explained and examples will be provided.

Accounting services can be defined as the preparation and analysis of financial information which is reported to internal and external users via financial statements. Auditing services involve evaluating the reliability and credibility of financial information, as well as "the systems and processes responsible for recording and summarizing that information" (Messier, Jr., Glover, & Prawitt, 2006, p. 5-6). Assurance services can be defined as independent professional services that evaluate the reliability, credibility, relevance, and timeliness of information in order to improve the quality of information for decision makers (Messier, Jr. et al., 2006, p. 15). Assurance services may or may not be associated with financial information.

Relationship

The relationship between accounting and auditing can be compared to the relationship between an author and editor. Like the author, the accountant creates the material, in this case financial statements and reports. Like the editor, the auditor examines the material and suggests changes and corrections that must be made in order to meet the reliability and credibility requirements specified by the company and outside agencies, such as the Financial Accounting Standards Board (FASB). Assurance services take things one step further by examining the material to insure it meets relevance and timeliness requirements.

Examples

Examples of accounting services include services provided by accounts payable employees, accounts receivable employees, staff accountants, and the accounting manager or controller. Some specific services performed by these individuals include keying invoice information into an accounting program, processing timely payment of invoices, recording receipt of payment for products sold, reconciling inventory usage and receipts, and creating financial statements. Examples of auditing services include services performed by the internal audit staff and the external audit company, usually a CPA firm. Some specific services performed by these individuals include determining the reliability and credibility of accounting reports and financial statements, and assessing risk control in various areas.

Examples of assurance services include services performed by the external audit company. Some specific services performed by these individuals include determining the relevance and timeliness of accounting reports and financial statements, and reviewing company internal controls to assess the effectiveness of those controls. As previously mentioned, assurance services may or may not be associated with financial information. Assurance services that are associated with financial information include auditing internal controls or reviewing historical financial statements. Assurance services that are not associated with financial information include Nielsen television ratings and information about businesses that is provided by the Better Business Bureau.

Financial Statements

Financial statements are the backbone of a businesses financial accounting. There are four different types of financial statements which include balance sheets, income statements, retained earnings statements, and statement of cash flows. This information is used by internal employees as well as external sources to make decisions for the company's future. Understanding how to use these financial statements are vital to the success of your company's financial future. This introduction will help you get a general idea of how and who uses them. Even if you outsource this portion of your business you should still understand how it works.

Income statements are used to report the success or failure of the company's operation for a period of time. This is usually done on a monthly basis. This statement lists the company's revenues followed by the company's expenses. Expenses can include salaries, supplies, rent, insurance, interest, and depreciation expenses. Investors will buy or sell their stocks based on the company's financial future and this statement provides that information.

Retained earnings is the net income retained in the corporation. Therefore, the retained earnings statement simply shows the amounts and causes of changes and retained earnings during the period. This statement is calculated on the monthly bases and enclose the company's net income and dividends. This statement allows users to evaluate dividend payment practices. Most investors will invest in a company that has a history of paying high dividends. This statement allows investors to determine if they want to invest in a business.

Assets and claims to those assets at a specific point and time is reported on a balance sheet. This information is used by creditors to analyze the likelihood of being repaid. They carefully look at the company's liabilities and assets to make the decision. Liabilities can include notes payable, accounts payable, interests payable, unearned revenue, and salaries payable. In addition, the statement will house the company stockholders' equity.

Finally, I will introduce the statement of cash flows. This statement provides financial information about the cash receipts and cash payments for a business. It reports the cash effects of a company's operating, investing, and financing activities. It shows them any increase or decrease in cash, and any cash that is left at the end of the period. This statement is used to show what is happening to a company's most important resources. It answers the questions:

 How was cash used?

Where did cash come from?

Was there any change in the cash balance during the period?

Recommendations for Shareholder Financial Statements

Financial accounting is considered to be a nonmanufacturing cost (Atkinson, Kaplan, Matsumura, & Young, 2009). These costs are flexible as one month we may have 200 shareholders and the next we may have 10,000 shareholders so with that being said the cost must be flexible and able to meet the growing needs of a growing company.

We know that our company must follow the general accepted accounting practices (GAAP). This is a set of principles that are used by companies to compile financial statements. "The GAAP are imposed on companies so that investors have a minimum level of consistency in the financial statements they use when analyzing companies for investment purposes" (Investaopedia, 2009). This means that shareholder financial statements will be consistent with the companies' growth and disclosures of pertinent consumer information.

These financial statements help us maintain a relationship with our shareholders. The requirements made by our shareholders help guide our company to achieve our goals, in this case our expansion and adding another line of products (Course Materials, 2003). This is why we must offer our shareholders quarterly statements. They must be kept abreast of our business practices, our growth and development of possible other lines of antiques.

It seems that if our external accountant is not examining the financial statements we are sending to our shareholders then we must beware that she may be operating outside the lines of the GAAP.

The following recommendations will help us to prevent any future negligence on this matter. The first thing we must do is have the general accepted auditing standards (GAAS) put into force in our company. The second thing we should do is have a financial statement auditor come in, that uses the GAAS, and they can help us reduce the probability of missing material information (Investapedia, 2009). This will help us supply our shareholders with better information and this will assure that our external accountant is doing her job correctly. An "auditors can take into account all current and where appropriate, prospective auditing, accounting, and reporting regulations and guidance. They can help us make sure we are in compliance with all regulations, give us advice on controls and processing system weakness, confirm accounting treatments , give us increased monitoring of prospective accounting and regulatory changes, give us an independent review of externally reported information and go over accountants reports" (PriceWaterhouseCoopers, 2009).

In conclusion if we can open ourselves up to some small accounting changes we can keep our present clients happy and in turn gain more future clients through word of mouth from our present ones. The better and more professional our business looks the better the type of clientele we will attract. By following the GAAP and by having an auditor come in we can reduce cost, increase profitability, improve customer services and expand our business as planned.

The Financial Statements as Tools for Planning and Control

Periodically created financial statements reflecting the historical economic transactions of the company can serve the organization and its shareholders through internal application and analysis of the data as well as through their general purpose of external reporting. Internal analysis of the financial data presented in the organization's financial statements differs from the analyses of external users, as the internal purposes are geared toward operational planning and controlling. Used externally, the financial statements provide the user with an overall view of the operational performance of the company. However, applied internally, more specific details can be added to the financial data to provide the managers specific performance and operational data that meets the informational needs associated with planning and controlling activities. The lack of regulation associated with using this economic data internally allows the organization to reorganize the data in such a way that provides essential, customized economic data that will assist in appropriately adjusting operational strategies to further the organization toward its goals. Reports and information that assist management with problem solving, improvement strategies, activity based management, added-value assessment, and analysis of the value chain can all be created using the balance sheet, income statement, statement of cash flows, and statement of owner's equity (CTU Online, 2008).

The financial position of a company is reflected in the balance sheet. The balance sheet provides a periodic view of the organization's assets, liabilities, and owner's equity (Horngren, Harrison, & Bamber, 2005). Inventory accounts represented on the balance sheet include three separate inventory classifications: raw materials, work in process, and finished goods (Garrison, Noreen, & Brewer, 2008). The information included in the balance sheet, including specific inventory classifications, can be broken down to more specific products, asset categories, business divisions, even specific equipment categories and processes to provide greater insight into performance and progress of the many different operational areas (CTU Online, 2008).

The income statement reflects the revenues and expenses incurred from operations over a specific period of time, communicating the resulting profit or loss (SMBTN, 2007). Used internally, income statements can provide performance information relative to specific products, product lines, processes, or divisions within the company (CTU Online, 2008). Cost structure is essential to profitability, therefore specific cost information is imperative to appropriate operations planning. Restructuring and reassigning costs by their behavioral patterns creates a contribution margin income statement. The contribution margin income statement represents the resources remaining to cover fixed expenses after variable expenses are accounted for (Edmonds, Edmonds, Tsay, & Olds, 2006). The benefit of reclassification and reorganization of costs to management, as they plan for future periods and work to control costs and increase profitability, is that it provides profitability information as it relates to the different processes and products. This facilitates more informed and intelligent decision-making regarding pricing, price adjustments, product line development and eliminaqion of productsuor processes tuat are unprofituble and drain on resources created by more profitable products and processes.

Incoming cash receipts and outgoing cash payments are reported in the statement of cash ulows. Fluctuatiuns in cash duriug the reportinu period are evident in the cash flow statement. Inflows and outflows are classified into three specific business activities: operating, investing, and financing activities. Operating activities will generate revenues, associated expenses, and any gains or losses, directly influencing the net income as provided from the income statement. Current assets and liabilities are also directly influenced by operating activities, further impacting the company's balance sheet. Long term assets are increased and decreased through investment activities, and all purchases and sales relative to long term assets, as well as loans to others and collections on loans, are reported as investment activities on the cash flow report for the period. Obtaining cash for launching or funding continuing operations for the business are classified as financing activities. Issuance of stock, borrowing money from a bank or other lender, the purchase and sell of treasury stock, and paying dividends to shareholders are all considered financing activities and are reported as such on the statement of cash flows. When analyzing the statement of cash flows, it is generally a good sign for long-term success if the majority of the cash flows associated with business activity are generated through operating activities. If the majority of the cash flow is generated through financing activities, that should represent only a short-term situation, as financing should not persist and investors will begin to demand a return. If the organization's reported investing activities make up the majority of cash flows for any given period, that is typically interpreted as a bad sign, as it could signal business troubles through sales of long-term assets (Horngren, et al.). Understanding how to correctly classify and analyze operational inflows and outflows will assist management in spotting problem areas and restructuring to maximize on organizational potential.

All changes occurring within a specific reporting period are shown on the statement of owner's equity. Equity increases from investment and income, and decreases from withdrawals and losses as they relate to the owners or shareholders of the company and are communicated in this financial statement (Horngren, et al.). Information relative to the income or increase in value as experienced on the ownership level is essential to ensuring future funding and investment opportunity.

The different financial statements discussed are used together and separately in numerous ways to assist management in planning and controlling future operations as the specific data resulting from analysis provides the information needed to make the operational changes required for improved overall organizational efficacy. Financial statement analysis as applied to managerial accounting practices will focus on horizontal analysis, vertical analysis, and ratio analysis (CTU Online, 2008).

Horizontal, or trend analysis, is the analysis of the data for a specific financial statement item as reported over a period of time, showing year to year or quarterly changes in terms of dollars or percentage of change. Trend percentages can be calculated when multiple periods are reviewed and compared against the chosen base year (Garrison, et al.). Both the dollar changes and percentage changes associated with the specific areas of analysis on the financial statements must be given consideration as to not allow one of the results to be given unearned significance (Winicur, 1993). For instance, a specific dollar amount may not be correctly judged in its significance when not viewed in relation to actual percentage of change. Realizing the trends associated with the specific focus of analysis assists in setting more realistic goals for the future and preparing a budget that more closely reflects the most likely scenario for operational performance. Proper planning and budgeting, as produced through horizontal analysis, will ensure that all necessary resources are available to meet the anticipated demands of the organization.

Vertical financial statement analysis focuses on the relationships of the many different elements within the financial statement for a single reporting period. Vertical analysis produces a percentage representative of the portion of the individual items or activities as they relate to a larger, or overall item, activity, or view of the statement. Vertical analysis of an income statement might reflect the total percentage of sales associated with individual corporate divisions or products. Likewise, those items could be shown as a percentage relative to the total costs, or compared to other product costs for the period. Sales are often compared against a benchmark percentage taken from specific industry data, helping to assess organizational performance and compare actual progress with budgeted or anticipated progress. Vertical analysis of the balance sheet would convey items in terms of their percentage of total assets or total liabilities. This information is often used to compare organizational performance to industry averages and against anticipated goals. Managers and/or analysts also use vertical analysis to construct common-size financial statements, standardizing the financial information by giving it a common base or common perspective. Common size statements provide the user with a greater understanding of relationships among the many different elements of the financial statement such as sales and expenses, assets and equities, or cash flows and changes in cash, further facilitating wise decisions as all dependent factors are considered (Plewa & Friedlob, 2002).

Results from both horizontal and vertical analysis are employed to create pro-forma financial statements and budgets for use within the organization. The evident trends and interdependent relationships help management create financial statements reflecting anticipated performance for future operating periods. Also known as the projected income statement, or projected balance sheet, these statements communicate to management the anticipated production and operational needs of the organization that they might appropriately secure and allocate all necessary resources, human, financial, material or otherwise (Atkinson, et al.). Financing must be secured, cash must be available for inventory purchases and all payments, and all goals and expectations must be well communicated to everyone in the organization to provide a point of reference for future operational decision-making activities (Edmonds, et al.). Pro forma statements and budgets will also reflect the impact of intended process or product changes within the company, providing users and planners with a view of how these changes will directly affect the financial reports once implemented. The ability to analyze these potential changes further serves management in the decision making process as the value-added principle is applied. The master budget and all divisional budgets will convey goals and expectations for operational efficacy within the different departments of the organization and provide a means of measure by which to gauge progress and performance.

Although ratio analysis is more commonly used by investors or other external decision makers with a potential stake in operations and performance, management within the organization will want to know how well they are performing and how they are viewed externally. Understanding organizational performance as it is viewed by others provides management with information relative to the desired level of performance in all areas in which the company might be evaluated. Problem areas are recognized through understanding this performance, providing opportunity to correct these areas and present the company as a more desirable investment opportunity (CTU Online, 2008). Countless ratios are applied to the data on the financial statements to determine profitability, operational efficiency, financial leverage, liquidity, asset use, and market value (Atkinson, Kaplan, & Young, 2005). Financial ratios provide specific numeric values or percentage values that answer questions related to the organization's ability to repay debts, how quickly finished inventory is sold, or how much each shareholder has earned over the purchase price of their stock. It is obvious that specific information such as this will be needed by those judging the organization's potential for success, and easily understood that knowledge of these specific elements within the organization provide us with financial performance targets.

From appropriate pricing and product selection practices, through projecting operational expectations, the role of financial statements and their inclusive data is evident in successful completion of the many responsibilities of the manager and the continual success of the organization. Planning a strategy for success and procuring all necessary resources to attain organizational objectives, and having the specific cost information for products and processes allowing managers to better control operational activities and achieve optimal efficiency are significant elements in the organization's efforts toward continual improvement and increasing value and stability.

International Accounting: Convergence and SEC's Acceptance of International Financial Reporting Standards

A debit is still a debit no matter what country. A credit is a credit around the world. The fundamentals of accounting may be universal, but specific rules and pronouncements are not. Historically, United States Generally Accepted Accounting Principles (GAAP) has differed from United Kingdom GAAP has differed from Australian GAAP and so on. This may have worked when businesses operations were primarily domestic, but, in today's increasing global business environment, this creates confusion and tedious work for accountants. The lack of a universal accounting system is highly debated. In the United States, there are two main issues surrounding differences between U.S. GAAP and foqeign GAAP, nameuy that of Europu. The first ofuthese issues is the recent ruling by the Securities and Exchange Commission to permit the filing of financial statements prepared under International Financial Reporting Standards (IFRS). The reconciliation of these foreign-prepared financial statements with U.S. GAAP will no longer be a requirement. The second issue surrounds the convergence efforts of the United States' Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB). These two bodies are working toward establishing a more uniform set of financial accounting standards.

Why are International Financial Reporting Standards such a hot button issue at the moment? They aqe different frum U.S. GAAP. U.u. GAAP are ruleu-based; IFRS are principles based. American accountants are accustomed to (more or less) clearly defined rules, and not the more subjective IFRS. IFRS, although there are many similarities between them and U.S. GAAP, would drastically alter the way accountants their field. Accounting would be less about rote memorization and more about critical thinking (Cabrera, 2008).

Currently, approximately 100 countries either require or allow the use of IFRS . Sir David Tweedie, Chaiman of the IASB, estimates that this number will have risen to 150 within the next five years. Approximately another twenty will continue under their current GAAP-based systems (Pickard, 2007). This means that roughly 75% of the world will be operating under the same basic accounting system. If the United States does not make some move toward IFRS, whatever that move may be, it will be left behind. The world is going in one direction; it is only wise for the U.S. to move in that same direction.

SEC's Acceptance of IFRS

Historically, the SEC has required that firms with international operations reconcile their financial statements with U.S. GAAP. Any corporation wishing to be listed on a U.S. stock exchange was required to reconcile its financial statements with U.S. GAAP (GAAP, 2007). This is true regardless if the corporations prepared their financial statements in accordance with IFRS or any other set of accounting standards. However, in December 2007 issued a ruling that it would begin accepting financial statements prepared in accordance with IFRS. These new rules apply for financial statements issued for fiscal years beginning after November 15, 2007. The rules were effective as of March 4, 2008 (Cabrera, 2008).

The SEC's decision applies only to financial statements prepared according to IFRS as issued by theqInternational Aucounting Standauds Board (IASB)u Financials prepared wiqh regional varuations of IFRS ure specificallyuexcluded from the SEC ruling. If the election not to reconcile is made, then the SEC requires a special disclosure in the notes to the financial statements. This disclosure must indicate that the financial statements were prepared in accordance with the IFRS issued by the IASB. The company must also provide an auditor's report attesting to this, just as it would if the financial statements were prepared under U.S. GAAP (SEC, 2008).

With the adoption of this rule comes an important question: how will American investors be able to understand financial statements prepared under IFRS? Many differences exist between financial statements prepared in accordance with U.S. GAAP and those prepared in accordance with IFRS. Titles of the statement itself, categories of assets (e.g. current vs. non-current), and layout are three important differences. A balance sheet in the United States isustill a balanceusheet abroad, but in certain sutuations (such as for a cash basis reporting entity rather than an accrual basis entit), other terminulogy is used (Bullandi, 2007). uategories of assets may be referred to by different names. An important example of this is the category of assets referred to as "property, plant, and equipment" in the U.S., but is more commonly referred to as "fixed assets" overseas. In addition, rules for determining current versus non-current assets and liabilities differ slightly between GAAP and IFRS. Furthermore, the format and layout of the balance sheet is virtually opposite under the two sets of standards. For example, under U.S. GAAP, assets are reported in order of decreasing liquidity; the opposite is true under IFRS (Bellandi, 2007). These differences, although seemingly minute, could affect an investor's interpretation of financial statements. Assuming that a principal reason for filing annual reports with the SEC is to provide stockholders with information about the company and that information is only useful if it is understandable, should the SEC allow financials prepared in accordance with IFRS?

Similarly, if the financial statements of one company are prepared in accordance with U.S. GAAP, but the financial statements of another company are prepared in accordance with IFRS, are they still considered comparable? Isn't a primary reason for having standards to enhance the comparability of whatever the standards apply to? Many experts have expressed concern that the elimination of the reconciliation requirement will decrease the comparability of financial statements (Cheney, 2008). Most experts believe that the scope of this SEC ruling will eventually be expanded to include U.S. companies, not just multinational corporations. The SEC has made a proposal to this effect, but there has yet to be an official ruling on the issue (GAAP, 2007).

"A One GAAP World"

Some professionals feel that the elimination of the reconciliation requirement may be a catalyst toward convergence. They feel that this may cause a competition between the two standards boards to produce the "better" set of standards (Heffes & De Mesa Graziano, 2007). However, continuation of the current convergence efforts is believed to be the least likely of all possible "IFRS in the U.S." scenarios (Cabrera, 2008). Tweedie believes that the mutual understanding between the IASB and the FASB that neither board's standards are perfect is what will move convergence forward. He states that in many cases the changes will only be minimal, but, in other cases, both boards' standards are outdated. In these situations, the FASB and the IASB are planning on working together to write new standards.

The move toward convergence began in 2002 with the Norwalk Agreement between the IASB and the FASB (Pickard, 2007). That was six years ago, and convergence is an oft-misunderstood concept. Both Americans and Europeans hear the word and think that it means IFRS is morphing into U.S. GAAP, and less often, that it means the opposite. However, convergence is more about the two most important authoritative bodies developing two sets of accounting standards that are markedly similar. As mentioned earlier, one important difference exists between U.S. GAAP and IFRS: the former is rules-based, the latter is principles-based.

Furthermore, convergence poses questions outside the realm of accounting standards. The SEC oversees the FASB; a similar organization oversees the IASB. Who will oversee the governing body of a truly-international IFRS? Will the two standards boards continue to co-exist or will they somehow merge? (Dzinkowski, 2008). If the move is made toward IFRS, a change in accounting education must occur. Currently, IFRS are taught at only a handful of colleges and universities and are not covered on the CPA exam. The costs to alter both accounting curriculum and the Uniform CPA exam would be astounding. Management Information Systems would need to updated and/or replaced (Cabrera, 2008).

Currently, a more unlikely event is the outright adoption of IFRS by the FASB as a replacement for GAAP as it stands. However, this is highly unlikely as there are several issues paramount to the FASB that have yet tq be resolved beuween the two bouies. These priuarily include accounting for business combinations, fair value accounting, income taxes, earnings per share, and financial statement presentation. Americans are unwilling to simply give up their accounting system2as we know it tu adopt a set austandards whereusome methodologies may be inferior. Alternately, a set of IFRS based on U.S. GAAP has been suggested; however, this is also unlikely. Europeans are also unwilling to give up their accounting methods (Dzinkowski, 2008).

What Will Happen Next?

How likely is a United States move to International Financial Reporting Standards? According to most experts, very. Most assert that it is only a matter of time before the U.S. moves to IFRS. In fact, the SEC held a roundtable discussion in December 2007 and the consensus was that the U.S. is headed in that direction. The question of U.S. adoption of IFRS is no longer "what if?" but "when?". Some cite this date as 2011 (though it is in fact yet to be determined), when Canada, India, and Korea are making the transition from their local GAAP to IFRS. The SEC's ruling is considered to be a move in the direction of U.S. adoption of IFRS. Will the face of accounting as Americans know it change forever? Will the accounting students of tomorrow be studying IFRS instead of GAAP? The answers to these questions have not been written yet, but they will be and soon, and American accountants must be prepared for the answer, whether they like it or not.

Chief Risk Officers Lessening Financial Accounting Corruption

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. 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 & 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 & 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, scqndals follow, und, eventually, new regulation" (Coffee, 2005). 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 & 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.

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 & 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: Auditing standards are not the problem-execution of the standards certainly is" (Flegm, 2005). Therefore, the governmeqt must pay partucular attentiou to how the staudards 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. 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 & Rockness, 2005).

Currently, many 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, & 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, & 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, & 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 & 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, & 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.

Participants

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 Presidunt of Enterpriue Risk Managemeut for ABD Insurunce & 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 & 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, & 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.

Results

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 & 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 activiqies. "Today, tuere are over 1u0 CROs, and newuannouncements 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 community at large.

The rising number of ERM programs and CRO appoints result not oqly from the recunt scandals, buu also because ou 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, & Wright, 1998). However, 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 & 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 & Walo, 2004).

As noted earlier, the CRO is changing the way corporations think and control risks. A study conducted by Liebenberg & 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.

Discussion

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.