finance wiley - understanding off balance sheet accounting [2003]

[...]... corporate accounting, but until recently they have been few in number Perhaps the best-known accounting critic is Abraham Briloff, who wrote Unaccountable Accounting (1972), More Debits Than Credits (1976), and The Truth About Corporate Accounting (1981).2 These books have two themes First, accounting distortions, improprieties, and even frauds are more widespread than commonly believed Briloff documented... high-risk investments and a mass of debt For a while it seemed to perform adequately, but then those high-risk investments yielded poor results In particular, in 1999 Enron’s managers and its board of directors decided to create financing vehicles and specialized partnerships that seemingly permitted in some cases off- balance sheet financing However, the management team at Enron then engaged in hanky-panky,... (AICPA) Happily, Briloff continues to write about accounting scandals, but unhappily the stock market decline due to accounting lies has proven his allegations correct We all would have been better off if the accounting profession had listened to Briloff’s wisdom instead of throwing stones at him Eli Mason has also performed diligently the role of accounting critic He has served the profession in a... by looking at the equity method, lease accounting, and pension accounting From that base, I then look more carefully at special-purpose entities, their use and their abuse, and examine more carefully the amount of debts involved and how firms have deceitfully hidden these debts from their balance sheets The rest of this chapter provides a thumbnail sketch about accounting and auditing abuses, including... equity method, the investor company places the proportional net assets (assets less liabilities) of the investee it owns on its own balance sheet Notice that the liabilities of the investee are unreported, thus demonstrating that the equity method is itself a tool for off- balance sheet reporting Trouble arises when the parent firm has virtual control of what the subsidiary can do even though the parent has... Abraham Briloff and Eli Mason After this, I review the concept of financial risk and then take a more in-depth look at Adelphia, Enron, Global Crossing, and WorldCom, since these malfunctions specifically entail lies about each firm’s true amount of debt I conclude with some thoughts on accounting ethics and why I think these accounting frauds form a serious threat to American society ACCOUNTING PROPHETS:... data in the accounting records The report also states that “aggressive accounting is not necessarily improper accounting. ” While it is true as written, this assertion is a bit misleading The point is that financial statements should communicate information to shareholders A little aggressive accounting may not impede this process too much, but there comes a point when a lot of aggressive accounting. .. Bahnson joined Paul Miller on it After a year’s respite, I found myself writing Accounting Annotations” for Accounting Today and “The Accounting Cycle: Wash, Rinse, and Spin” for SmartPros.com Then Enron disclosed problems in its third-quarter report of 2001 and soon declared bankruptcy All of a sudden people were interested in accounting at levels I had never experienced previously During the first half... aspects, the first of which deals with its energy contracts At the risk of oversimplifying the accounting, the rules require entities to report such contracts on the balance sheet at fair market value When the firm holds a long position in an energy contract and energy prices rise (fall), then the balance sheet reports these contracts at higher (lower) amounts and the unrealized gain (loss) is placed... The large accounting firms have attempted to silence Briloff’s voice through litigation Each and every one of the previous Big Eight firms sued him, but the fact that Briloff has never lost one of these suits speaks volumes Firms continue to persecute him, however, as can be seen in trumped-up ethics charges brought by the American Institute of Certified Public Accountants (AICPA) Happily, Briloff continues . Financial Risk Understanding Off Balance Sheet Accounting 00 Ketz FM 5/21/03 9:58 AM Page i 00 Ketz FM 5/21/03 9:58 AM Page ii Hidden Financial Risk Understanding Off Balance Sheet Accounting J information about Wiley products, visit our web site at www .wiley. com. Library of Congress Cataloging-in-Publication Data Ketz, J. Edward. Hidden financial risk : understanding off- balance sheet accounting. our Customer Care Department within the United States at 80 0-7 6 2-2 974, outside the United States at 31 7-5 7 2-3 993 or fax 31 7-5 7 2-4 002. Wiley also publishes its books in a variety of electronic