SEC to Take Hard Look at Off-Balance-Sheet Disclosures

Off-balance-sheet transactions, once abused by Enron to hide debt and overstate profits, will be closely scrutinized as regulators look for ways to improve financial disclosures.

That warning came from Donald T. Nicolaisen, chief accountant of the Securities and Exchange Commission, according to the Wall Street Journal. Nicolaisen said at a Financial Accounting Standards Advisory Council meeting Tuesday that the agency will study the details about off-balance-sheet activity that companies provided in their latest filings. The SEC will provide Congress with a report on the issue later this year, he said.

In the past, companies have not been required to report how their current or future financial conditions might be affected by off-balance-sheet arrangements, which often involve entities formed to diversify risk and issue securities, leasing arrangements and other contractual obligations, the Journal reported.

Companies are beginning to report on their connection to an unconsolidated entity, including nature, size and amount of risk in SEC filings, but studies have shown that not all companies are embracing the requirements.

Nicolaisen also told the advisory council that the SEC will continue helping companies disclose more useful, understandable financial information. For example, the SEC issued guidance late last year intended to improve disclosures in the "management discussion and analysis" section, or MD&A, in companies' stockholder reports.

The advisory council, which acts as a "sounding board" to the Financial Accounting Standards Board, also heard a report from FASB Chairman Robert Herz. In the next few days, FASB is expected to reveal its plan to require companies to recognize employee stock-option compensation as an expense on income statements. The board then plans to hold public roundtable discussions in late June before it enacts a final rule, Herz said.

In recent weeks, executives of technology firms and other options-dependent companies have stepped up their lobbying campaign to persuade lawmakers to intervene.

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