Delays have been experiences when setting regulations that can address off balance sheet financing. Regulating bodies argue that companies should consolidate variable interest entities but this has been disapproved by accounting officials and industry executives. The introduction of the special purpose vehicle which is a legal entity that can perform some narrowly defined purpose of off balance sheet would help in accounting for the entities. Regulatory bodies have been found to produce regulations that are disorganized and hence defaults has existed when accounting for items in the financial statements (Finnerty 1998, p.
28). The global supervisory structures have not yet been restructured, since the international institute of finance describes the United States alone as having eight regulators. There has been a problem in the European supervisory because it consists of a multitude of supervisory authorities where there is confusion and misunderstandings as well as mistrust. Banks are advised to take less risky assets such as government bonds that are highly rated. This is highly useful for the U. K government despite of it increasing the cost of operating in the United Kingdom. There is lack of accountability in the U.
K regulating bodies. This is evident in the sense that the capital regime offers an incentive to provide liquidity to off balance sheet entities and this exposes a risk. There is need of having new accounting standards for recognizing off-balance-sheet assets as well as the need to consolidate off-balance-sheet entities. This will be a regulatory framework that comes from the International Accounting Standards Board (IASB) and Financial Accounting Standards Board (FASB). These bodies required to device new methods with which the off balance sheet activities are accounted for (Cuccia et al 1995, p.
233). According to AICPA (1999), there is need for regulating bodies to instill more accountability and ethical awareness to individuals who deceitfully structure financial transactions. Regulatory bodies should close the loop holes that exist in accounting standards as well as ensuring their enforcement for more transparency. The boards of directors of a company are supposed to ensure that the company is communicating the true and economic reality of the financial transactions as well as the financial position of the entity.
The evolution of an over overstuffed mixture of global supervisory agencies has led to fatal inconsistencies in global regulatory oversight. Previously these bodies did not give considerations in the standards for accounting for off balance sheet financing. Many regulators are not patient enough and have taken the steps to go it alone. They are not willing to wait for great and good in Basel to make up their minds. The bank of England, the treasury and the FSA do not work together anymore. The FSA is taking into consideration to make judgments based on bank to bank basis.
The FSA defines capital and applied risk weighted ratios as it sees fit. The Treasury has considered that the framework was created under duress and is temporary. The FSA rules require the banks to adhere to the new framework for liquidity risk management (Engel et al 1999, p. 264). This situation comes with many risks in the sense that there exist problems in the funding of whole sale and retail. These activities together with off balance sheet activities are required to be self assessed. Hence banks are mostly encouraged to raise funds that are able to sustain them in the long term.
The banks are also required to increase the proportion of the liquid assets that are held in their books. There is need for a more controversial way of accounting for the future fair value. The regulating bodies have failed to give accountability on the notional value of assets in the balance sheet. These assets are only accounted for by spotting them to the market. The development of fair value accounting gives guidance to people on how to treat off balance sheet activities. The fair value accounting provides better models that can be used to in valuing the off balance sheet entities.
Companies have been allowed by the generally accepted accounting principles to use off balance sheet entities responsibly. However most of the time companies are not having originality in their financial statement. There is no transparency in the regulation of off balance sheet transactions by the generally accepted accounting principles since the rules allow such transactions to be presented as footnotes at the bottom of the balance sheet (Bowman 1980, p. 247). Conclusions In conclusion, risks that come with off balance sheet financing can be reduced by enhancing transparency when accounting for the related activities.
The financial mangers and financial consultants are required to restructure financial transactions to comply with the generally accepted accounting principles. This ensures that the economic substance of financial transactions is communicated. It is evident that there are ways that companies try to accomplish off balance sheet financing by taking advantage of rules based accounting. Hence there is need for having rules that govern the way in which certain entities are handled. This will reduce the difficulties that may occur when trying to stop it.
It is important that the transactions of a company to present the economic importance of the entity. There should be availability of much prudent analysis for better reflection in the regulatory frameworks. Here a global regulator is required to be better equipped to resist the political interference to which many regulators have been subject in many years. Regulatory bodies have failed to address the issue of political contamination in international co-operation among regulators. This has brought a problem in strengthening of international standards as well as information sharing across authorities.
The idea for recognizing arguments for the creation of a global regulatory body has been dismissed by a number of regulatory agencies. Bibliography/reference list American Institute of Certified Public Accountants (AICPA) 1999, ‘Audit Committee Communications’ Statement on Auditing standards. No. 90. New York: AICPA. Bowman, R 1980. ‘The Debt Equivalence of Leases: An Empirical Investigation’, The Accounting Review Vol. 55, pp. 237-255. Cuccia, A, Hackenbrack, K & Nelson, M 1995, ‘The Ability of Professional standards to
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