Consolidating special purposes entities
Also called special purpose vehicles, SPEs typically are defined as entities created for a limited purpose, with a limited life and limited activities, and designed to benefit a single company.They may take the legal form of a partnership, corporation, trust, or joint venture.Critics harshly criticized Enron's auditor, Arthur Andersen, for allowing Enron to exclude from its financial statements the SPEs it sponsored, thereby keeping a substantial amount of debt off its balance sheet and recognizing substantially higher profits from transactions with SPEs .We believe it is useful, therefore, to review both the authoritative guidance for the general area of consolidation of financial statements as well as guidance specific to SPEs. Until recently, many people in the accounting profession, including accounting educators, never heard of SPEs.However, commercial paper has a maximum maturity of 270 days, far less than most MBSs, so the SIVs have to sell more commercial paper to pay for the ones maturing.
In extreme cases, it cannot even sell its commercial paper, forcing it to restructure or to turn to its sponsoring bank for financing.
This review also provides insight into how standard setting leading to changes in GAAP responds to changes in business practice, and how it might have been more effective in helping to prevent abuses in accounting for SPEs, such as those that ostensibly led to or exacerbated the downfall of Enron (Powers et al. Some who heard of these esoteric financing vehicles knew little about how they operated or the accounting standards that guide the accounting and financial reporting by companies who sponsor SPEs.
Reports in the popular press that preceded Enron's Chapter 11 filing in December 2001 introduced many accountants for the first time to the topic of SPEs and sent many CPAs scrambling to understand the generally accepted accounting principles (GAAP) dealing with these entities.
For instance, Axon Financial, Cheyne SIV, and OTTIMO Funding Ltd.
were recently downgraded and forced to restructure because of their inability to sell their commercial paper in the money market.