Off Balance Sheet Financing Practices Essays

1400 Words Jun 3rd, 2013 6 Pages
Off Balance Sheet Financing Practices
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Off Balance Sheet Financing Practices
The traditional accounting methods have been replaced by a number of new accounting techniques. Some of which are observable while other remain hidden. Off Balance Sheet Financing or OBSF is one of these new accounting techniques. It is a mode of obtaining finance for a business without disclosing significant capital expenditures on the balance sheet of a company by means of using different ways of classifying such expenses. OBSF is most of the times used by business enterprises to maintain their leverage or gearing positions in such a way which would not have any negative implications on the company.
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Apart from a benefiting role played by the off balance sheet accounting techniques, there are some serious consequences which are often associated with the application of this concept. As for instance, it is argued that among many other reasons, the practices of off balance financing and accounting also had a significant share in the recent financial downturn (Allen, et al. 2002). In this regard, Enron would be a good example to look upon. While striving for a healthy outlook of Enron’s balance sheet, the management made use of special purpose entities with the objective of making large transactions which would not appear on the balance sheet of the company. This resulted in a healthy balance sheet outlook with huge of amounts of capital inflows but at the expense of nothing. However, this bubble of progress did not last long as the company’s stock prices started fluctuating sharply and consistently. These events created a sense of being not informed entirely about the company’s operations among the investors and after the Enron’s climax, the regulators jumped in with Sarbanes Oxley Act 2002. The Act was aimed at securing the investments of investors and introducing regulations with respect to corporate social responsibility. But these checks proved to be ineffective upon the emergence of the financial crisis in 2008 (Hall and Liedtka 2007).
Increase in the global competition and more expectations from the investors and shareholders to maximize their value

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