Enron-Era Disclosure of Off-Balance-Sheet Entities

Abstract

The scandal that followed Enron's failure to disclose billions of dollars of debt held by off-balance-sheet entities (OBSEs) prompted investor interest in these entities and motivated auditors to request more accounting guidance. The SEC responded by issuing Financial Release No. 61 (FR-61) to remind managers to follow SEC guidance for disclosures on liquidity and capital resources in the Management's Discussion and Analysis section of the annual report. FR-61 identifies disclosure objectives but does not require specific disclosures. We study how the OBSE-related disclosures of companies that sponsored OBSEs before Enron changed after Enron/FR-61. We find that while OBSEs were widely used by S&P 500 firms before Enron/FR-61, a majority of these firms either did not disclose their OBSEs or, if they did, provided little useful information. After Enron/FR-61, OBSE disclosure levels increased significantly but not uniformly across firms. The pattern of increases suggests that FR-61 reduced regulatory uncertainty and increased the perceived minimum level of required OBSE disclosure. Our results are consistent with the view that general guidance (of the type found in principles- or objectives-based accounting standards) may result in underdisclosure or a large disparity in level of disclosure, and that reminders of responsibility and suggestions to consider specific disclosures partially remedy both problems.