Financials Lack Transparency, Senator Says

Rhode Island's Jack Reed puts the knock on FASB and IASB for allegedly lax accounting standards that leave investors unaware of off-balance-sheet l...
Stephen TaubFebruary 13, 2008

A prominent politician is calling on the heads of the U.S. and international accounting standard setters to make off-balance-sheet liabilities more transparent.

In a letter to Robert Herz of the Financial Accounting Standards Board and Sir David Tweedie of the International Accounting Standards Board, Senator Jack Reed (D-RI), chairman of the Banking Subcommittee on Securities, Insurance, and Investments, asserted that the huge accounting scandals in recent years were facilitated by transactions designed to keep liabilities off balance sheets.

Lax accounting standards kept investors in the dark about the effects these transactions, Reed charged.

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Recent efforts by FASB to remedy these shortcomings have fallen short of what investors need, according to Reed, who pointed to recent articles raising questions about the quality and application of financial reporting standards, including FIN 46R and FAS 140.

“Given uncertainty and increased volatility in the capital markets, investors seem to be seeking more timely and high-quality information about off-balance-sheet architecture,” Reed wrote.

This would include information on the relationship between a company sponsoring or creating a structured investment vehicle (SIV) or special-purpose entity (SPE); the conditions under which a sponsor could incur losses (or gains) as a result of guarantees made to the SIV or SPE; and any negative impact such losses would have on the sponsoring institution’s liquidity or income.

Reed also said investors want to know about explicit or implicit arrangements, such as a liquidity put, that may result in a sponsor reacquiring assets sold to the SPE or SIV, and that “raise questions as to whether a true economic sale occurred in the first place, or whether the structured transaction was merely done to evade accounting rules and hide liabilities from investors.”

More information is needed, as well, about special-purpose entities involved in securitizations such as collateralized debt obligations (CDOs), their assets and obligations, and which entity is responsible for the losses of a SIV, should they occur. And investors need to know about the magnitude of losses to which SIV or SPE sponsors may be exposed, changes in the values of securities and assets held by SIVs and SPEs, and any information available to management that would provide advance warnings of potential or pending losses.

Reed called on FASB to provide the senate subcommittee with a written description of steps it is taking to adopt improved standards, and to provide a written description of the key differences and similarities between FASB and IASB accounting and disclosure standards for off-balance-sheet financing transactions.