This is an off-topic post. It has a bit to do with Compliance, but nothing to do with Security, so read no further if you are offended by such things.
I am surprised that we have not been reading more about the off balance sheet ‘assets’ that was brought to light last week. In a nutshell, over $900 billion in ‘assets’, spread across the 19 largest US banks, was not part of the normal 10K/10Q, and the SEC is telling banks they need to be brought back onto the balance sheets. This is an issue is because these ‘assets’ are mostly comprised of real estate and credit card debt owed to the banks.
The change could result in about $900 billion in assets being brought onto the balance sheets of the 19 largest U.S. banks, according to federal regulators. The information was provided by Citigroup Inc., JPMorgan Chase & Co. and 17 other institutions during the government’s recent “stress tests,” which were designed to determine which banks would need more capital if the economy worsened. … In general, companies transfer assets from balance sheets to special purpose entities to insulate themselves from risk or to finance a large project.
Given the accelerating rate at which credit card debt is going bad, and the fact that real estate values in states like Arizona have dropped as much as 70% since 2006, it’s likely we are looking at the majority of these ‘assets’ simply vanishing. Across the board, 12% of all homeowners are behind in payments or in foreclosure, and the remaining assets are worth far less than they were originally. It was ironic that I ran across an article about the need to repeal the Sarbanes-Oxley Act of 2002 on the very morning I saw this news item. There has been a methodical drumbeat for several years now about the need to repeal SOX, saying it makes it harder to fill out company boards of directors, going so far as to claim the reversal could help stimulate the economy. Of course corporate executives never liked SOX as there were additional costs associated with keeping accurate records, and it’s hard to balance the perception of financial performance with the potential for jail time as a consequence of rule violations. The scandals at Worldcom, Enron, Tyco, and others prompted this regulation to ensure the have accuracy and completeness in financial reporting which might enable us to avoid another similar fiasco. But we find ourselves in the same place we did in 2001, where many companies are in worse financial shape than was readily apparent – many of the same firms requesting more money from the government (taxpayer) to stay afloat.
Section 302 was specifically about controls and procedures to ensure that financial statements are accurate, and it looks to me like moving hundreds of billions of dollars in high risk real estate & credit card loans “off balance sheet” would violate the spirit of the act. I would have thought that given the current economic situation, and with the motivating events for Sarbanes-Oxley still in recent memory, there would be greater outcry, but maybe people are just worried about keeping the roofs over their heads. But the call will come for additional regulation and controls over financial systems as more banks fail. Clearly there needs to be refinement and augmentation to the PCAOB guidelines on several accounting practices, but to what degree will not be determined for a long time.
Will this mean new business for vendors who collect data and enforce policies in and around SOX? Nope. Instead it will underscore the core value that they cannot provide. Security and Compliance vendors who offer help with SOX policy enforcement cannot analyze a balance sheet. While there were a couple notable examples where internal auditors monitored accounting and database systems to show fraud, this is not a skill you can bottle up for sale. Collection of the raw data and simple policy enforcement can be provided, but there is no way any product vendors could have assisted in detecting the shuffling of balance sheet assets. Still, I bet we will see it in someone’s marketing collateral come RSA 2010!