WHEN THE ENRON CORPORATION scandal broke in late 2001, the mortgage banking industry braced for a problem. Enron, it seemed, had used special-purpose vehicles (SPVs) to achieve off-balance-sheet treatment. So do many mortgage companies. Would the regulators rush in to stop the use of SPVs by honest companies for legitimate purposes, or would they understand the difference between legitimate and abusive SPVs? Would the mortgage industry's honorable participants lose this valuable tool of risk management because of what the Enron gang did?
To their credit, the Securities and Exchange Commission (SEC) and the Federal Accounting Standards Board (FASB) took the time to evaluate the SPV terrain before treading in with revised rules. And the revisions that have been promulgated and proposed to date do not run roughshod over this terrain. FASB Interpretation No. 46R (dealing with which entities must be consolidated for financial reporting) and the proposed revisions to FASB Statement 140 (tinkering with the requirements for treatment as a qualified special-purpose entity), both issued in 2003, reflect a nuanced understanding that there are legitimate transactions that use SPVs and that that should be accounted for as sales, moving assets off-balance-sheet. If FASB Interpretation No. 46R and the FAS 140 proposal move the goal posts, it is as much a response to changes in market practice as it is to changed sensibilities post-Enron.
Yet there are now two other phenomena--also accounting-related, and also an outgrowth of the Enron after-math--that have the potential to be more insidious for financial managers at mortgage companies.
You're on your own
The first problem derives from the Sarbanes-Oxley Act of mid-2002, and the resulting changes in the accounting firms' view of their own roles. That is an unwillingness, or inability, on the part of the accounting firm that audits a company to provide advisory services about structuring transactions. Where audit firms used to seek out opportunities to serve as consultants, helping to design transactions for intended accounting treatment, those firms now are wary of being too close to the company during the planning stages of a transaction.
At a Dec. 1, 2004, meeting of the FASB's Small Business Advisory Committee, the chief executive officer of a top accounting firm himself is reported to have complained about auditors' "inability to give answers." He blamed pressure from the SEC and the Public Accounting...