Friday, April 2, 2010

Accounting Tricks Investigated by SEC....Finally

The US financial regulator has launched an investigation into accounting tricks by Wall Street firms designed to mask heavy losses.

The Securities and Exchange Commission (SEC) has written to financial firms to see how widespread the use of accounting tools such as Repo 105 is. A recent report accused collapsed bank Lehman Brothers of using this device to hide the true extent of its losses.

The SEC said the investigation will last a number of weeks.

Shifting assets

Earlier this month, a report by a court-appointed examiner criticised Lehman Brothers for using Repo 105 to give the impression that the bank was reducing its levels of debt, when in reality it was not.

It accused Lehman's of removing temporarily $50 billion of assets from its balance sheet in 2008 alone. The collapse of the 158-year-old investment bank in September of that year was the world's largest bankruptcy.

Repo 105 is a legal accounting device that involves shifting around assets to reduce the size of a company's balance sheet, and effectively give the appearance that debts have been cut. The SEC is concerned that the practice is widely used on Wall Street.

"We'll be getting very detailed reporting information from financial institutions about how they have accounted for and disclosed their refinancing or their sales under repos," said SEC head Mary Schapiro.

On the Web:

US Securities and Exchange Commission

AP; Reuters; Wall Street Journal

1 comment:

Company Lawyer Chris Neufeld said...

What more can one say about the SEC, which has been too busy with tackling matters after the fact. Even this approach appears to be misplaced, as it will look to prosecute matters which until now may not have been illegal and for which many of these major financial institutions have taken internal actions to address so that they don't have a situation similar to that of Lehman Brothers. This would appear to be another instance where the SEC will mismanage their limited resources, being late to the party and prosecute something that doesn't require prosecution, simply because for public appearances it looks like they are doing their job. The SEC needs to focus its energies on real, substantive investigations that will protect public investors.