The Economic Impact of the Lack of Transparency in Financial Reporting (Report‪)‬

Introduction and Background Off-balance-sheet financing arrangements have been allowable under generally accepted accounting principles (GAAP) in the USA for more than three decades (Kavanaugh 2003, p. 3). Companies engage in these transactions to keep certain types of debt off the balance sheet in order to maintain attractive financial ratios (Kieso et al. 2001a, p. 1191). In addition, they are used to transfer risk, such as from parent to off-balance-sheet subsidiary, which, in turn, aids investors who may not want to invest in the higher-risk parent (Wayman 2002). There are also tax advantages to certain types of off-balance-sheet arrangements. In addition, off-balance-sheet financing can help to smooth financial figures from one period to another, keeping the volatility that normally accompanies greater risk off the financial statements. Several arrangements may lead to off-balance-sheet transactions, such as investments in the equity of other entities, transfers of financial assets, retirement arrangements, leases, and contingent obligations and guarantees ("Report" 2005, pp. i-ii).