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| Sarbanes-Oxley and Off-Balance-Sheet |
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Most special purpose
entities commit the parent company to some obligations.
Shareholders should know it.
On January 22, 2003,
the SEC adopted final
rules under the
Sarbanes-Oxley Act relating to the
disclosure of off-balance sheet arrangements, which are effective
for fiscal years ending on or after June 15, 2003.
Sarbanes-Oxley Act, Section 401 "DISCLOSURES IN PERIODIC REPORTS. (a) DISCLOSURES REQUIRED.—Section 13 of the Securities Exchange Act of 1934 (15 U.S.C. 78m) is amended by adding at the end the following: ‘‘(j) OFF-BALANCE SHEET TRANSACTIONS.—Not later than 180 days after the date of enactment of the Sarbanes-Oxley Act of 2002, the Commission shall issue final rules providing that each annual and quarterly financial report required to be filed with the Commission shall disclose all material off-balance sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer with unconsolidated entities or other persons, that may have a material current or future effect on financial condition, changes in financial condition, results of operations, liquidity, capital expenditures, capital resources, or significant components of revenues or expenses.’’. ... (c) STUDY AND REPORT ON SPECIAL PURPOSE ENTITIES.— (1) STUDY REQUIRED.—The Commission shall, not later than 1 year after the effective date of adoption of off-balance sheet disclosure rules required by section 13(j) of the Securities Exchange Act of 1934, as added by this section, complete a study of filings by issuers and their disclosures to determine— (A) the extent of off-balance sheet transactions, including assets, liabilities, leases, losses, and the use of special purpose entities; and (B) whether generally accepted accounting rules result in financial statements of issuers reflecting the economics of such off-balance sheet transactions to investors in a transparent fashion. (2) REPORT AND RECOMMENDATIONS.—Not later than 6 months after the date of completion of the study required by paragraph (1), the Commission shall submit a report to the President, the Committee on Banking, Housing, and Urban Affairs of the Senate, and the Committee on Financial Services of the House of Representatives, setting forth— (A) the amount or an estimate of the amount of off balance sheet transactions, including assets, liabilities, leases, and losses of, and the use of special purpose entities by, issuers filing periodic reports pursuant to section 13 or 15 of the Securities Exchange Act of 1934; (B) the extent to which special purpose entities are used to facilitate off-balance sheet transactions; (C) whether generally accepted accounting principles or the rules of the Commission result in financial statements of issuers reflecting the economics of such transactions to investors in a transparent fashion; (D) whether generally accepted accounting principles specifically result in the consolidation of special purpose entities sponsored by an issuer in cases in which the issuer has the majority of the risks and rewards of the special purpose entity; and (E) any recommendations of the Commission for improving the transparency and quality of reporting off balance sheet transactions in the financial statements and disclosures required to be filed by an issuer with the Commission." So, we have learned the lesson from Enron... The study required by paragraph (1) is ready. It is absolutely necessary to read it, if you want to understand the "off-balance-sheet" structures. Title: "Report and Recommendations Pursuant to Section 401(c) of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers" by the Staff of the U.S. Securities and Exchange Commission. You can download it here After Banco Ambrosiano, BCCI, Enron and Parmalat, to name only a few, we witness a market over-reaction. Very few investors understand what is a special purpose entity, but these words cause panic. Investors punish a stock just because it has off-balance-sheet items (which can be something really good if it has been honestly disclosed). |
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