Whether Sensible Business Tool or Deceptive Scheme to Conceal, the Special Purpose Entities Are here to Stay

Sunita Ahlawat, Danielle Bellomo, Kyle Ropp


This study examines whether the corporate use of Special Purpose Entities (hereafter, SPE) has changed in the wake of many well-publicized business failures and laws that followed them. In response to the Enron scandal, the Financial Accounting Standards Board (hereafter, FASB) released revised guidance in 2003 (49R) on consolidation procedures involving SPEs. Again, as the Financial Crisis unfolded in 2008, the FASB issued yet another standard, Statement No. 166, on the topic. On surface, having to consolidate SPEs may make their use less attractive to management. We discuss whether SPEs are an appropriate business practice or a deceptive tool of concealment as we test whether the use of reported SPEs by S&P 500 firms declined as a result of the Sarbanes Oxley Law (hereafter, SOX), and whether the use of SPE (or Variable Interest Entities, VIE’s) in the banking sector declined as a result of the Financial Credit Crisis of 2008, or the subsequent passage of the Dodd-Frank law. Using a random sample of 30 S&P 500 firms, we compare the average number of reported SPEs pre (2001) and post (2004) SOX. We use another sample of 30 financial institutions to compare average number of reported SPE/VIEs during pre/post SOX (2001 vs. 2004), pre/post financial crisis of 2008 (2006 vs. 2009), and pre-post Dodd Frank Law (2010 vs. 2012) periods. The results show that major business failures, credit crisis, and the subsequent laws have not curbed the appetite of the business community for SPEs.

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DOI: https://doi.org/10.5430/afr.v3n2p77


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