Enron-Era Disclosure of Off-Balance Sheet Entities

41 Pages Posted: 30 Aug 2005

See all articles by Uday Chandra

Uday Chandra

SUNY University at Albany

Michael Ettredge

University of Kansas - Accounting and Information Systems Area

Mary S. Stone

University of Alabama - Culverhouse College of Commerce & Business Administration

Date Written: April 2006

Abstract

The scandal that followed Enron's failure to disclose billions of dollars of debt held by off-balance sheet entities (OBSEs) prompted investor interest in these entities, and motivated auditors to request more guidance. The SEC responded by issuing Financial Release 61 (FR-61) to remind managers to follow SEC guidance for disclosures on liquidity and capital resources in the Management's Discussion and Analysis section of the annual report. FR-61 identifies disclosure objectives but does not require specific disclosures. We study how the OBSE-related disclosures of companies that sponsored OBSEs before Enron changed after Enron/FR-61. We find that while OBSEs were widely used by S&P 500 firms before Enron/FR-61, a majority of these firms either did not disclose their OBSEs, or if they did, provided little useful information. After Enron/FR-61, OBSE disclosure levels increased significantly but not uniformly across firms. The pattern of increases suggests that FR-61 reduced regulatory uncertainty and increased the perceived minimum level of required OBSE disclosure. Our results are consistent with the view that general guidance (of the type found in principles- or objectives- based accounting standards) may result in under-disclosure or a large disparity in level of disclosure, and that reminders of responsibility and suggestions of specific disclosures to consider partially remedy both problems.

Keywords: FR-61, Off-balance sheet, Enron, MD&A, Disclosure,Objectives-based standards

JEL Classification: G34, M41, M43, M44, M45, G38

Suggested Citation

Chandra, Uday and Ettredge, Michael L. and Stone, Mary S., Enron-Era Disclosure of Off-Balance Sheet Entities (April 2006). Available at SSRN: https://ssrn.com/abstract=787800 or http://dx.doi.org/10.2139/ssrn.787800

Uday Chandra

SUNY University at Albany ( email )

1400 Washington Avenue
Building, Room 109
Albany, NY 12222
United States
518-442-9092 (Phone)

Michael L. Ettredge (Contact Author)

University of Kansas - Accounting and Information Systems Area ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States
785-864-7537 (Phone)
785-864-5328 (Fax)

Mary S. Stone

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Box 870223
School of Accountancy 314 Alston Hall
Tuscaloosa, AL 35487-0223
United States
205-348-2915 (Phone)
205-348-8453 (Fax)

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