Accounting and Legal Standards for Securitization in the United States

"Disclosure of financial results in compliance with GAAP is merely the starting point for disclosure by public companies in reports filed under the [Securities] Exchange Act [of 1934]." Since the fall of Enron Corporation in 2001 and the enactment of the Sarbanes-Oxley Act of 2002in the following year, requirements for financial disclosure for the public companies have been changed. Now, the public companies not only have to comply with generally accepted accounting principles (GAAP), but also new requirements for disclosure of financial condition under the Sarbanes-Oxley's Act of 2002 and new rules implemented by the Securities and Exchange Commission. This article discusses how these regulatory accounting changes affect the legal structure of securitization transactions, and what would be the possible advantages or disadvantages for adopting more stringent mandatory disclosure rules for public companies. According to GAAP, a company is not required to consolidate securitization transactions involving special purpose entities inits financial statements if the company has satisfied specified conditions under GAAP. However, the Commission has long been of the view that compliance with GAAP does not guarantee a sufficient and adequate financial disclosure. Since the Sarbanes-Oxley Act of 2002 was enacted, the Commission finalized a number of proposals with respect to disclosure requirements for public companies. The SEC's new rule with respect to securitization transactions elaborated more on standards for public companies to comply with regarding financial statements. It requires a registrant to provide an explanation of its off-balance sheet arrangements in a separately captioned subsection of the "MD&A" section of a registrant's disclosure documents and to provide an overview of certain known contractual obligations in a tabular format. In general terms, these changes are intended "to result in still greater transparency of what lies behind the reported financial results." These changes in GAAP and the Commission's rules would certainly change the securities market along with other changes. We hope that these more stringent mandatory rules will solve problems which have been raised since the collapse of Enron in the United States: what would be the most effective way of disclosure policies in practice? However, it is a legitimate concern that these changes might cause a flood of information. Although market intermediaries such as investment banks, brokers and underwriters might be able to sort out significant information from the disclosures and provide it to the investors, it is possible that the flood of information might blur the overall picture of public companies