In today’s New York Times, Floyd Norris begins his “High & Low Finance” column by amplifying the question, “Did accounting help cause the financial crisis?” The column discusses the accounting treatment of structured investment vehicles (SIVs), a breed of assets that have much in common with that other tri-acronymic species of Enron fame: SPEs, or special-purpose entities. Like SPEs, SIVs have enjoyed the fruits of off-balance-sheet accounting, where companies get to bump assets from their books — thus removing them from the line of sight of investors.

According to Norris, the big banks were able to get their way when it came to accounting standards by engaging in what he refers to as “regulatory arbitrage,” whereby they would apply influence “from one regulator to another to seek more lenient treatment.”

In the case of the private standards-setting body known as the Financial Accounting Standards Board (FASB), you need only to look back at the history of accounting and SPEs to bring into focus the role regulatory arbitrage may have played in derailing the creation of solid standards. The letters listed below are part of that history.

Keep in mind that when it comes to SPEs, the phrase “consolidated financial statements” is perhaps a more socially acceptable way of saying “off-balance sheet arrangements.”

Below are a few letters that speak for themselves.

Meanwhile, James Kroeker, chief accountant of the SEC, this week expressed confidence that recent improvements to off-balance-sheet accounting requirements will noticeably improve the financial reporting landscape. “I am quite sure structured finance will evolve, I do believe the new standards related to consolidation and off-balance-sheet accounting have the potential to meaningfully improve the information provided to investors,” said Kroeker, in a speech delivered at AICPA’s recent national conference.

Letter to the FASB (1996)

Letter to the FASB (1999)

Letter to the FASB (2003)

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