What are the Problems with Special Purpose Entities?
“The SEC Staff grew concerned about accounting for SPEs around 1985” (Ketz, 2003, p. 215). This was 15 years after the vehicle had become widely used in the industry. According to Bala G. Dharan (2004a) one of the major issues with accounting for an SPE is whether it should be consolidated with that of the sponsoring company. A report by the Staff of the US Securities and Exchange Commission (2003) noted, “The term, off balance sheet, has sometimes carried the connotation of something underhanded or at least less than fully transparent” (p. 7). In Enron’s case, most of the SPEs were used in this manner. They were able to deceive investors because they did not consolidate the financial statements of the sponsoring company with that of the various SPEs. The accounting guideline, EITF 90-15, allowed a loophole for companies to not consolidate based on what has become the famous 3% ownership rule. In essence, the sponsoring company could own up to 97% of the SPE without consolidating it if
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