• McKenna Quoted In American Banker Re: Balance Sheet “Window Dressing”

    By • Sep 19th, 2010 • Category: Pure Content, You Can Quote Me On That

    From Floyd Norris’ blog, New York Times, September 17, 2010:

    The Securities and Exchange Commission today proposed rules to require companies to disclose more about short-term debt. The idea, the commission says, is to let investors know whether a company is engaged in “window dressing” to make balance sheets look prettier at quarter’s end than it really was during the quarter.

    The immediate stimulus for the S.E.C. action was the disclosure that Lehman Brothers hid as much as $50 billion in short-term debt during its final months of life. It did that using transactions that may, or may not, have complied with accounting rules, but that clearly were aimed at misleading investors.

    Jeff Horwitz from American Banker asked me if I thought more, and more frequent, disclosure would solve the problem, as it has been defined.

    I was not sanguine.

    Commissioner Aguilar agrees:

    Financial institutions will continue “to look for the new repo 105,” Commissioner Luis Aguilar said in brief comments before a unanimous vote, referring to a type of transaction that the now-defunct Lehman Brothers Inc., and other institutions, used to blur the extent of their leverage. “What are the consequences for those that dress up balance sheets? Rules on the books are not enough.”

    Edith Orenstein, blogger for the FEI Blog, provides some references for research:

    Read more in SEC’s press release, which also provides links to the proposed rule (proposed disclosures), and the interpretive release.

    Some will say that some of these disclosures arise from the Lehman brothers debacle. Earlier this year, the SEC posted a ‘sample letter’ of a letter sent to public companies regarding disclosures of repo, securities lending, and certain other transactions.

    I told Horwitz at American Banker that I thought the SEC had made a necessary, but still quite insufficient, stab at stopping such balance sheet shape-shifting shenanigans:

    If rigorous enough, said Francine McKenna, an accounting consultant who blogs at re: The Auditors, the disclosure the proposal would require might yield more clues as to how banks are managing their balance sheets.

    “Any investigator knows it’s better to ask an open-ended question,” she said. “Instead of saying, ‘Do you do repo 105?’ you ask them how they’re financing assets and if they change that on a quarter-end basis.”

    A broad scope for the rule — coupled with fast, public and company-specific enforcement — is essential to restoring integrity to financial accounting, McKenna said.

    But McKenna said she expected companies would seek to shift the eventual implementation of the proposal toward prohibitions of concrete acts — leaving them maximum wiggle room on short-term financing matters. Banks “want the rules to be specific, and they want their advisers to help them get around them,” she said.

    Read the rest of the story at American Banker.

    (Subscription required but a free trial is available.)

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    8 Responses »

    1. The S.E.C must enforce not only the letter but the spirit of the law and come down hard on anyone cutting corners. Those lawyers, accountants and financial officers whose ethics can be compromised are of questionable value at best. I certainly know the difference when skirting the rules and don’t like being put in that position. I know my colleagues feel the same.

    2. […] this one, I comment about the balance sheet “window dressing” by the banks. All The Banks Are Window […]

    3. […] “Window-dressing” is the accounting technique used to temporarily enhance the appearance of a company’s balance sheet for creditors and investors without permanently changing the true amount of asset and liability balances. It’s not always illegal or fraudulent. However, Lehman bankruptcy examiner Anton Valukas said, in his report of the bank’s failure published earlier this year, that Lehman’s balance sheet manipulation actions were almost certainly deceptive.  And Valukas also said there were “colorable claims” against Ernst & Young as Lehman’s auditor for allowing the bank’s executives to perpetrate this deception on investors by approving the transactions and issuing clean audit opinions with incomplete disclosures of the activities. […]

    4. […] “Window-dressing” is the accounting technique used to temporarily enhance the appearance of a company’s balance sheet for creditors and investors without permanently changing the true amount of asset and liability balances. It’s not always illegal or fraudulent. However, Lehman bankruptcy examiner Anton Valukas said, in his report of the bank’s failure published earlier this year, that Lehman’s balance sheet manipulation actions were almost certainly deceptive.  And Valukas also said there were “colorable claims” against Ernst & Young as Lehman’s auditor for allowing the bank’s executives to perpetrate this deception on investors by approving the transactions and issuing clean audit opinions with incomplete disclosures of the activities. […]

    5. […] was quoted extensively in American Banker Magazine in September on banks’ balance sheet “window […]

    6. […] in spite of the fact that the Commission claims Bear Stearns also used Repo 105 tactics to “window-dress” its balance sheet. Was there lack of disclosure of the “sale” treatment of these repo […]

    7. […] I was previously quoted in American Banker on bank balance sheet window-dressing. […]

    8. […] 2. That the U.S. government and the banks’ regulators and auditors will be lenient in enforcing accounting standards that force earlier and more honest recognition of the true status of the banks’ balance sheets. […]

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