By Emily Chasan
NEW YORK (Reuters) - Six U.S. Democratic Senators
have asked the head of the U.S. Securities and Exchange
Commission to require more disclosure about the trillions of
dollars worth of debts and financial assets U.S. companies keep
off of their balance sheets.
Led by Senate Banking Committee member Robert Menendez, the
Senators said in an Aug. 6 letter to SEC Chairman Mary Schapiro
that they want U.S. companies to provide better disclosure
about their off balance sheet activities -- ranging from
investments, to financings, to leases.
Off-balance sheet transactions are legal under U.S.
accounting rules, but have often been blamed for dramatic
collapses such as those of investment bank Lehman Brothers
Holdings and energy trader Enron.
"The SEC was founded on the premise that when investors and
creditors have full and accurate information about companies'
finances, they can allocate capital effectively. But when
companies use accounting gimmicks to mislead investors and
creditors, capital markets malfunction," said the letter signed
by Sen. Menendez of New Jersey, Sen. Ted Kaufman of Delaware,
Sen. Carl Levin of Michigan, Sen. Sherrod Brown of Ohio and
Sen. Diane Feinstein and Sen. Barbara Boxer of California.
The Senators hoped more clarity about off-balance sheet
assets from U.S. corporations would prevent future collapses.
They were particularly concerned about repurchase transactions
after Lehman Brothers' court-appointed examiner blamed the use
of "Repo 105" transactions for obscuring the bank's financial
picture before its collapse.
"We must also look forward," they wrote in the letter. "In
order to prevent this from happening in the future, we urge the
SEC to require disclosure of period end and daily average
leverage ratios in quarterly and annual reports."
The Senators also said they would like to see companies
"explicitly justify" why they have not brought their
off-balance-sheet liabilities onto the balance sheet and asked
the SEC to use its existing authority under Sarbanes-Oxley to
require that companies write detailed descriptions of all their
off-balance sheet activities in annual regulatory reports.
The request could be a big switch from current accounting
rules, which are often much more specific about the types of
disclosures companies must make to investors and when they must
"We share the Senators' interest in high quality disclosure
and accounting," SEC spokesman John Heine said, declining to
comment further before the SEC makes a formal response to the
A spokeswoman for the Financial Accounting Standards Board,
which writes U.S. accounting rules, declined to comment on the
letter, which also asked the SEC to encourage the FASB to
improve off-balance-sheet accounting.
After the collapse of Enron, the SEC staff completed a
study in 2005 that urged improvements in off-balance sheet
accounting, special purpose entities and corporate
In response, the FASB said it would work to improve
outdated and overly complex accounting rules on
off-balance-sheet arrangements in areas such as leases,
pension, consolidation policies, accounting for financial
instruments, accounting for intangible assets and disclosure
Many of those improvement projects have been designated as
convergence projects with the London-based International
Accounting Standards Board and are expected to be completed
early next year.
(Reporting by Emily Chasan; editing by Andre Grenon)