SEC Report on Auditing

     Several provisions of Sarbanes-Oxley directed identified federal agencies to prepare reports on topics of concern.  Section 401 requires the SEC to study the nation's accounting rules and specifically to study the accounting rules for "off-balance sheet" transactions.  Enron's use of Special Purpose Entities to hide debt prompted the Congressional directive.  The SEC delivered its report on financial statements to Congress yesterday.

     The SEC in the report found that the balance sheet "is not nearly as transparent as it ought to be."  The SEC recommended changes in the new FASB special purpose entities rule (it is too complex), criticized the current pension accounting rules (for income smoothing), and discussed the variety of choices for lease accounting.    In sum, the SEC noted that the accounting rules were vulnerable to exploitation by clever professionals who were intent on obscuring the true state of a given company.