Ted Kaufman - United States Senator for Delaware

Senators press SEC on off balance sheet activity

Source: Reuters

By Emily Chasan

August 13, 2010

Six Democratic Senators have asked the head of the Securities and Exchange Commission to require more disclosure about the trillions of dollars worth of debts and financial assets U.S. companies keep off of their balance sheets.

Led by Senate Banking Committee member Robert Menendez, the Senators said in an August 6 letter to SEC Chairman Mary Schapiro that they want U.S. companies to provide better disclosure about their off balance sheet activities -- ranging from investments, to financings, to leases.

Off-balance sheet transactions are legal under U.S. accounting rules, but have often been blamed for dramatic collapses such as those of investment bank Lehman Brothers Holdings and energy trader Enron.

"The SEC was founded on the premise that when investors and creditors have full and accurate information about companies' finances, they can allocate capital effectively. But when companies use accounting gimmicks to mislead investors and creditors, capital markets malfunction," said the letter signed by Sen. Menendez of New Jersey, Sen. Ted KAUFMAN of Delaware, Sen. Carl Levin of Michigan, Sen. Sherrod Brown of Ohio and Sen. Diane Feinstein and Sen. Barbara Boxer of California.

The Senators hoped more clarity about off-balance sheet assets from U.S. corporations would prevent future collapses. They were particularly concerned about repurchase transactions after Lehman Brothers' court-appointed examiner blamed the use of "Repo 105" transactions for obscuring the bank's financial picture before its collapse.

"We must also look forward," they wrote in the letter. "In order to prevent this from happening in the future, we urge the SEC to require disclosure of period end and daily average leverage ratios in quarterly and annual reports."

The Senators also said they would like to see companies "explicitly justify" why they have not brought their off-balance-sheet liabilities onto the balance sheet and asked the SEC to use its existing authority under Sarbanes-Oxley to require that companies write detailed descriptions of all their off-balance sheet activities in annual regulatory reports.

The request could be a big switch from current accounting rules, which are often much more specific about the types of disclosures companies must make to investors and when they must make them.

"We share the Senators' interest in high quality disclosure and accounting," SEC spokesman John Heine said, declining to comment further before the SEC makes a formal response to the Senators' letter.

A spokeswoman for the Financial Accounting Standards Board, which writes U.S. accounting rules, declined to comment on the letter, which also asked the SEC to encourage the FASB to improve off-balance-sheet accounting.

After the collapse of Enron, the SEC staff completed a study in 2005 that urged improvements in off-balance sheet accounting, special purpose entities and corporate transparency.

In response, the FASB said it would work to improve outdated and overly complex accounting rules on off-balance-sheet arrangements in areas such as leases, pension, consolidation policies, accounting for financial instruments, accounting for intangible assets and disclosure frameworks.

Many of those improvement projects have been designated as convergence projects with the London-based International Accounting Standards Board and are expected to be completed early next year.

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