U.S. regulators will vote this week on rules that may make it harder for companies to mask debt after Lehman Brothers Holdings Inc. was accused of misleading investors by temporarily moving assets off its books.
Securities and Exchange Commission members will meet Friday to consider expanding what firms must disclose about their “short-term borrowing,” the agency said on its Web site. Commissioners will also vote on whether to issue guidance to help companies assess whether they are adhering to disclosure rules for “liquidity and capital resources,” the SEC said.
SEC Chairman Mary Schapiro in April said the agency would review whether new rules are needed to prevent banks from using accounting maneuvers to reduce borrowing at quarter-end when they have to reveal debt levels to investors. The agency was concerned that companies were boosting debt after quarterly reports, giving investors a misleading impression, she said.
Lehman filed the biggest bankruptcy in history on Sept. 15, 2008, exacerbating a global credit crisis following the collapse of the U.S. mortgage market. Bankruptcy examiner Anton Valukas wrote in a March report that New York-based Lehman tried to hide its true financial picture by moving $50 billion of assets off its books and accounting for the transactions as sales.
Lawyers for former Lehman Chief Executive Officer Richard Fuld said he didn’t know about the transactions or how the accounting was done. Spokesmen for Ernst & Young LLP have said the Lehman financial statements it audited were in compliance with accounting rules.
The SEC sent letters to 19 financial companies in March to ask about their use of so-called repurchase agreements, in which firms contract with outside parties to sell assets and buy them back later. Lehman improperly accounted for some repurchase agreements as sales, instead of financings, giving investors the impression it had removed assets from its books, Valukas said.
While banks are required to disclose their average short- term borrowings in annual reports, they have no obligation to do so quarterly. Banks are only obligated to disclose their maximum month-ending and quarter-ending debt levels once a year. Non- banks don’t have to reveal average borrowings.
Any rules proposed at the SEC’s meeting this week would be subject to public comment by companies and investors. After SEC staff members review the comments, the regulations would require a second vote by agency commissioners before taking effect.
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