Reconsidering a personal guarantee as a credit enhancement: your guarantor may be shielding assets with an asset protection trust as a result of the Sarbanes-Oxley Act.(Credit Column)

For credit professionals, personal guarantees furnished by a company's officer can increase the prospect for payment. A personal guarantee provides the vendor with a second pocket to look to, in the event the corporate customer fails to pay. A credit executive must take certain steps to ensure he or she has a valid guaranty to avoid unnecessary legal attacks by the guarantor.

For example, the language in the guarantee should clearly state that the particular individual signing the guaranty is agreeing to answer for the debt of another. In today's legal environment, the credit professional must now scrutinize whether the guarantor has shielded his or her assets under an asset protection trust, perhaps putting assets to pay for the corporate sale out of reach.

Congress enacted federal legislation, the Sarbanes-Oxley Act (SOA), to combat corporate fraud. Recent reports of corporate fraud, from Enron to WorldCom to Global Crossing, are estimated to have cost the economy $200 billion. SOA requires more accurate financial disclosure and reporting from public companies. The CEO and CFO must sign a certification that the company's periodic reports, 10-Q and 10-K reports do not contain untrue statements. All financial information must accurately present the company's financial conditions and results of operation for the period.

As a result of SOA, company officers are looking for ways to protect their personal assets. Asset protection trusts are now being used by officers to attempt to protect their assets from creditor claims. What is an asset protection trust? Does an asset protection trust protect the personal assets of a guarantor from a creditor seeking to collect on a judgment?

Sarbanes-Oxley Act and Management's Personal Liability

SOA was adopted to combat the wave of fraudulent accounting and financial reporting scandals and corporate bankruptcies. SOA focuses on the conduct of corporate officers and public accounting finns and adequate disclosure in public company financial statements. SOA imposes a number of duties and restrictions on officers and management of publicly traded companies. The CEO and CFO must sign a certification that the company's periodic reports, 10-Q mad 10-K reports, do not contain untrue statements. All financial information must accurately present the company's financial conditions and results of operation for the period.

Certifying officers must establish internal controls to ensure that employees provide material information regarding the company and its subsidiaries. Signing officers must also acknowledge that they have evaluated the company's internal financial controls within the 90 days before the filing of the report. The report must include conclusions of their evaluation. Certification must also state that the CEO and CFO have reported to the auditors and audit committee of the company all information regarding significant deficiencies in internal controls that could adversely affect the company's ability to provide an accurate report.