FT.com / UK - FSA on defensive over Lehman failings.
Good to know I got yesterday's musings on Lehamn right.
As the FT reports:
UK financial regulators said they had no reason to question the so-called "accounting gimmick" used by Lehman Brothers to flatter its results because the investment bank's UK subsidiary's reports accurately reflected the transactions.
Why - because they were correctly reportted on balance sheet under UK GAAP here.
But as they also note:
In the UK, the bank was able to get a legal opinion certifying that the transactions qualified as sales . Lawyers not connected to the transactions said the UK's definition of sale is slightly less restrictive than the relevant law in the US.
The legal opinion made no difference to the Lehman UK subsidiary's accounts to the FSA because they were made under UK accounting rules, which require both repos and sales to be reported on the balance sheet, the FSA said. But when the UK accounts were consolidated back to the US, under US accounting standards, known as GAAP, the transactions disappeared off Lehman's balance sheet, the Valukas report said.
"The balance sheet effect referred to in the Lehman report only occurred in the consolidated accounts which were prepared under US GAAP," Mr Sants [of the FSA] said.
"This is a matter for US financial reporting standards, not . . . for UK supervision," he said. "This is arbitrage between US accounting rules and UK law."
This is exactly as I suggsted.
But Hector Sants is wrong because if accounts can be abused in this way of course it is an issue for UK regulators.
So this should be high on the FSA agenda when its continued existence is confirmed after the election.
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I don’t think your analysis is right. The group audit preceded the audit of the UK accounts (even if some of the fieldwork for the latter incorporated the former). The group audit work in the UK would have been on the UK reporting pack(s), prepared under Lehman GAAP. We don’t know what the UK (E&Y) firm was directed to report to the US firm: maybe they were told to ensure compliance with Lehman GAAP; maybe they were told to comply with US GAAP.
Regardless, we do know that they must have been aware of the Repo 105 transactions, because they removed them for UK accounts purposes. That suggests it was the US firm that took the judgement that Repo 105 could be regarded as a sale. Or at least that they tolerated that treatment.
@FCAblog
I suggest you keep up the anonymity
You really don’t know much about GAAP arbitrage and its use in tax and reporting abuse do you?
Sorry – your view of accounts is simplistic in the extreme
And just wrong in this case
As the FSA note
Richard
Hi Richard
I don’t know whether you want to debate this here or over at my blog. Either way, I reiterate my claim that your analysis of this situation isn’t right. I’ve explained why on my blog. I’m happy to do so here as well, if you like.
It would be nice if you could provide a little more detail of why you disagree, beyond “your view of accounts is simplistic” and unsubstantiated statements that I am “just wrong”.
CM
@FCAblog
Let me give reasons why I won’t debate with you:
a) You claim to be an FCA – there is no evidence you are. This could be a serious misrepresentation
b) You use a pseudonym to abuse others – if you are an FCA this is an ethical offence
c) You deliberately seek to offend – taking your cue from Tim Worstall. This is profoundly unprofessional
And you want me to debate with a person who claims to be something they may not be, who uses a false name and does so whilst abusing others?
With respect, I will not do so
Richard
PS The debate is also closed – the FSA has confirmed I’m right….