Page 156 - (DK) The Business Book
P. 156
154
ONLY WHEN THE TIDE
GOES OUT DO YOU
DISCOVER WHO’S BEEN
SWIMMING NAKED
OFF-BALANCE-SHEET RISK
he balance sheet is a
IN CONTEXT snapshot of a company’s
T assets and liabilities and
FOCUS
should show any financial risks that
Financial risk
a company is facing. Yet in reality,
KEY DATES not all of the company’s liabilities
1992 Terry Smith publishes appear there. This means that when
Accounting for Growth, an calculating the debts of a business,
insider exposé of accounting it may not be possible to account for
practices in big businesses. everything. This was the case when
Enron failed in 2001, and it was also
2001 The spectacular collapse true for the Western retailers and Enron used off- balance-sheet
of Enron shows that practices banks that struggled from 2007–08. accounting to hide overvalued assets
such as off-balance-sheet Operating off balance sheet in subsidiary businesses. Its financial
accounting are not just was at the heart of the 2011 scandal records continued to look perfect even
obscure talking points. at Japanese camera company as it spiraled toward bankruptcy.
Olympus. To hide poor management
2010 Lehman Brothers bank
decisions, such as overpaying in Off-balance-sheet finance has been
is revealed to have used “Repo
takeover bids, the board set up increasingly used by governments
105” and “Repo 108” repurchase
unconsolidated subsidiaries to hold in recent decades. In China, the
transactions to temporarily
the transactions that were causing National Audit Office has warned
remove some loans and
losses. As unconsolidated losses, the that local government may have as
investments from its balance
figures did not have to appear in the much as three times its official debt
sheet for 7 to 10 days, creating
its annual accounts. Analysts and of $600 billion in off-balance-sheet
a misleading picture of its
auditors should have spotted that unofficial debt. This will add
activities and value. something was wrong when profits greatly to future interest charges—
2011 UK care provider appeared “healthy” while cash was and may carry significant risk if
Southern Cross collapses due draining out of the business. But China experiences a credit crunch
nothing was spotted until new CEO similar to that in the US and
to off-balance-sheet debts to
Michael Woodford blew the whistle. Europe from 2007–08 onwards. ■
the value of $8 (£5) billion.
See also: Play by the rules 120–23 ■ Accountability and governance 130–31 ■
Who bears the risk? 138–45 ■ Leverage and excess risk 150–51
