Running head: OFF-BALANCE SHEET FINANCING
Leases: Off-Balance Sheet Financing and the Strive for Transparency Today
A Senior Thesis submitted in partial fulfillment of the requirements for graduation in the Honors Program Liberty University Spring 2011
OFF-BALANCE SHEET FINANCING Acceptance of Senior Honors Thesis This Senior Honors Thesis is accepted in partial fulfillment of the requirements for graduation from the Honors Program of Liberty University.
______________________________ Gene R. Sullivan, Ph.D. Thesis Chair
______________________________ James B. Shelton, Ph.D. Committee Member
______________________________ Stephen R. Bowers, Ph.D. ...view middle of the document...
The Securities and Exchange Commission (SEC) was formed by congress in 1934 to enforce the Securities Act of 1933 as well as the Securities Exchange Act of 1934. These acts were established in response to the crashing fall of the 1929 stock market and the great depression. The boldness of certain financial indecencies that surfaced following the
crash made some of today’s scandals look like petty, schoolyard, kind of slap on the wrist misbehavior. It has been suggested that at a time when the New York Stock Exchange traded the shares of approximately 800 companies, the prices of more than 1/8 of these were openly manipulated by syndicated stock pools (Ethiopis, 2005). Before the great depression, regulations existed in the form of Blue Sky Laws on securities regulation, but were not very effective. Disclosure of financial information throughout the roaring twenties was voluntary. Even though many companies typically had audited financial statements along with an attorney review, these failed to be effective because the lawyers, auditors, and brokers worked for companies, and not for potential investors. Investors seemed to trust dividend payments rather than income statements as a trust indicator of a companies’ financial condition. Upon the creation of the SEC in 1934, companies were required to publicly disclose all relevant information. The SEC served to restore investor confidence with these new regulations by ending the misleading sales practices and stock manipulations that caused the stock market crash of 1929. With the establishment of the SEC, the American Institute of Certified Public Accountants (AICPA) and the SEC began to set standards for accounting practices. This
OFF-BALANCE SHEET FINANCING led to the Committee on Accounting Procedure establishing Accounting Research Bulletins (ARB), which were first published in 1939 and included 51 bulletins concerning various accounting procedures. ARB 38 was issued in October of 1949 with the concentration almost solely on disclosure. The bulletin concluded when the transaction involved is in substance a purchase, that leased property should be included among the assets of the lessee while also accounting for the corresponding liabilities (Burton, Palmer, & Kay, 1981). The dissolution of the committee in 1959 discontinued the issuance of ARB’s and gave rise to the Accounting Principles Board (APB). The APB pronounced 31 opinions and 4 statements; several have a significant influence in areas of accounting theory and practice, including accounting for leases. APB 5, Accounting for Leases in Financial Statements of Lessees was issued in 1964 with the determination to provide a better definition of when a lease was in substance a purchase (History of lease accounting, 2007). APB opinion 7, Accounting for Leases in Financial Statements of Lessors, was issued in 1966 and this covered the lessor’s end of the deal. Opinion 7 dealt mainly with accounting distinction between an operating...