Enron Inspires Accounting Changes
Outside Partners Must Put Up More Money

By Kathleen Day
Washington Post Staff Writer
Thursday, February 28, 2002; Page E01

NORWALK, Conn., Feb. 27 -- Hundreds of publicly traded companies will have to add billions of dollars of debt to their books or raise hundreds of millions of dollars from outside investors, because of action today by the group that sets national accounting standards.

The Financial Accounting Standards Board voted to change the rules governing when partnerships can be kept off a company's books, in response to the role such entities played in the collapse of Enron Corp. The new rule would require that independent, outside investors provide cash totaling at least 10 percentof such partnership funding, up from 3 percent.

The seven-member board was expected to apply the rule to newly formed off-the-books partnerships, but it also voted unanimously to apply the 10 percent requirement to existing partnerships. Accounting experts said that means many companies, including banking and power-generating firms, will have to raise cash for the "special-purpose entities."

The 10 percent requirement will apply immediately to partnerships formed afterthe rule is published. For existing partnerships, companies will have until fiscal 2003 to either raise the required new capital or consolidate the entities on their books.

"We believe all special-purpose entities should be accounted for in the same way," board Chairman Edmund L. Jenkins said.

The board also emphasized that companies can't guarantee to protect independent partners from loss.

The FASB has been debating the rules for off-the-books partnerships for years. At each step, corporations and accounting firms protested.

Enron's demise changed that. The discovery last year that a key Enron partnership didn't meet the 3 percent rule forced Enron to move it back to its own books. That resulted in a report of $586 million in losses over five years, destroying investor confidence and leading to Enron's filing for bankruptcy protection in December.

The Securities and Exchange Commission, which oversees the accounting board, ordered it to develop the new rules by June. Jenkins said the board hopes to beat that by publishing a draft rule for comment by April and a final rule by the end of summer.

"If there's a silver lining to Enron, it's that we've tried for years to get everyone to sign on to the basic concept that financial statements that are transparent and tell the economic story are important to everyone, not just the accountants," said Timothy S. Lucas, a senior accounting board official. "I think more people support that idea today than before the Enron event, but I don't now how durable this new mind-set will be."

No one knows how many companies use special-purpose entities. Investors should get some hint when companies file 2002 annual reports next year because securities regulators require companies to say what effect new accounting rules would have had on their books, FASB officials said.

Executives from the accounting, banking and energy industries who attended today's meeting agreed that the new rule has the potential to add substantially to the debt that companies disclose in public statements. "Hundreds of companies will appear more leveraged," said a partner from one of the top five accounting firms who asked not to be identified.

Some corporate officials hoped that existing partnerships would not have to meet the new 10 percent rule. But the Enron fiasco made including current off-the-books partnerships almost imperative to restore investor confidence, industry and government experts said.

Some investor and consumer groups said the slowness with which the FASB often acts is a sign that its work is impeded by industry and even Congress, whose aid corporate America has enlisted when it especially dislikes a proposal from the accounting board.

FASB officials acknowledged that this time, because of the furor over Enron, lawmakers likely will be reluctant to interfere.