SPE's 958

  • Hiya Folks,
    Here’s one for those folks most likely in the banking world…
    If you have an SPE that is consolidated into the group, and the group company is a filer with the SEC, there is no question that the filing company needs to adhere to sox. But could an instance arise where the SPE would have to comply with sox in its own right?
    In other words, I’m a bit confused as to which entitities are required to comply with sox.
    Most of these SPE’s dont issue equity but do issue debt securities to the US public.
    Many thanks.

  • There are some years now… every time I hear SPE (Special Purpose Entity), I remember Enron…%0AIt was 2001… Enron shares fell from USUSD85 to USUSD0.30. Too bad for a ‘blue chip stock’, a real disaster. This happened after it was revealed that much of its profits and revenue were the result of deals with SPEs, special purpose entities . The result of this was that many of the losses that Enron suffered were not reported in its financial statements. %0A Sarbanes Oxley is here to ‘restore investor confidence.’ You must be very careful with SPEs. %0A Very important question: Are there any conflicts of interest with respect to company officers and directors also owning shares in these SPEs? %0A________________________________________________%0A What is a SPE? %0AA special purpose entity (SPE) is a firm created by a company for several reasons (for example to isolate financial risks). SPE can be a corporate, partnership, LLC, trust or other kind of agreement or relationship. It is almost entirely owned by the parent company, but it is required that at least 3% be owned by another investor.%0A Tell me more about Sarbanes Oxley and SPE. Is there any problem? %0AA SPE is one of the Accounting Warning Signs. SEC also knows what to investigate…%0AIn SEC they know that:%0A1. Most special purpose entities commit the parent company to some obligations. %0ASEC under SOX is very sensitive to off-balance sheet arrangements , to any transaction, agreement or other contractual arrangement to which an entity that is not consolidated with the reporting company has, or in the future may have any obligation.%0A The fraud: ‘Certifying Officers’ of the parent company make it look like the SPE bear the risk of loss, when the sponsoring company actually retains most of the risk%0A2. Company sometimes sale assets to SPE at inflated prices and subsequent recognition of the proceeds as revenue(some CEOs are so creative.)%0A Are there any good reasons to use a SPE? %0A1. To employ workers without paying them benefits 8O (just kidding). In fact, it is not rare…%0A2. For legal reasons, for example to prevent competitors accessing the technology through pre-existing licensing deals (for example, Intel and Hewlett-Packard created a SPE for this reason) %0A

  • Well said George.
    Hearing SPE would have set off alarm bells for me pre-Enron. Now one has to be especially careful.

  • Hearing SPE would have set off alarm bells for me pre-Enron
    Yes, Denis, I absolutely agree with you. Unfortunately, I liked SPEs for some reasons, and I still like them, but they may be too dangerous after Sarbanes Oxley.
    I want to confess that I considered them ‘structured risk management solutions’ 8O
    My friends from accounting considered them ‘balance sheet management solutions’ 8O
    But, everybody was happy. We (IT, security and risk directors and consultants) could even drink a couple of beers with accountants and enjoy it 8O 8O
    But, before Sarbanes Oxley, it would be difficult to persuade large companies not to use special purpose entities (SPEs). A SPE was the perfect tool for ‘financial engineering’. You could easily generate profits when needed or even hide assets and liabilities :roll: .
    SPEs have some great advantages:

    1. Attract investors
      These business entities are formed for the purpose of conducting a well-specified activity (that is the reason they are called ‘special purpose’ entities). Investors often like that everything is clearly specified by design, that there will never see transactions and activities they will not like. There is a specific project, a well-defined risk and return.
    2. SPEs have been used for decades
      It was (before SOX) the best entity to raise financing for large international projects.
    3. A SPE limits the liability of a company
      The problem
      C level executives love private airplanes…
      Airplanes expose the company’s assets to significant liability in the event of an accident…
      Stockholders worry about it…
      The solution
      Companies set up SPEs, special purpose flight entities, having airplanes as assets and ‘business flights’ as a purpose (for the parent company and subsidiaries, even for other companies). A great shield against lawyers.

    I want to be clear: I do not like companies that use SPEs for illegal purposes. You can see the result: We can not use SPEs today, even for legal purposes. You must not even travel to beautiful places like Luxembourg, the Caymans, Jersey (old), Guernsey, and Gibraltar. :lol: Everybody believes that what you want to do is money laundering, off balance sheet transactions, mischaracterize revenues and losses, perpetrate fraud on unwitting fund investors, move money offshore for tax evasion, channel funds to terrorist operations, disguise the source of money for illegal sales… :lol:

  • Hiya Folks
    Well there is no question that spes are inherently risky but are nontheless used extensively in banking. my question still remains…
    In other words, I’m a bit confused as to which entitities are required to comply with sox.
    Most of these SPE’s dont issue equity but do issue debt securities to the US public.
    do you folks have any ideas on the above?
    many thanks

  • Ramir,
    It is a complex issue, and there is not one general answer.
    The general rule is:
    Special Purpose Entities must be consolidated in an enterprise’s (primary beneficiary ) consolidated financial statements.
    There are exceptions.
    After Sarbanes Oxley Act, U.S. and non-U.S. public companies have to disclose in registration statements, annual reports and proxy statements all material off-balance sheet transactions, obligations, contingencies and other relationships of the company with unconsolidated entities or other persons that may have a material current or future effect on its financial statements.
    Banks are significant users of SPEs, not only for their own benefit, but also for their customers.
    There are several thousand SPEs sponsored by banks. Most are affected by SOX.
    You must look at the FASB (Financial Accounting Standards Board fasb.org/st/ ) to see which types of SPEs should remain off-balance sheet and which should be consolidated by the sponsor or the primary beneficiary of the arrangement. There is also the ‘Report and Recommendations Pursuant to Section 401© of the Sarbanes-Oxley Act of 2002 On Arrangements with Off-Balance Sheet Implications, Special Purpose Entities, and Transparency of Filings by Issuers’, a report by the Staff of the U.S. SEC (http://www.sec.gov/news/studies/soxoffbalancerpt.pdf).
    It is for sure: We will see more SPEs being consolidated. Even in banks, the use of SPEs will be less widespread.
    We speak about banks and Sarbanes Oxley…
    There is a special challenge for banks… Section 402, loans to executive officers and directors (arrangements with executives, that had been around for years and were never questioned)

  • thanks for the link.
    ill give it a ponder and post what weve decided on our end.
    thanks again…

  • You are welcome.

Log in to reply