SEC Implementing Sarbanes-Oxley

New rules would require companies to explain pro forma results, off-balance-sheet deals; will MD&As become novellas? Elsewhere: Fastow on the cusp, debt valley days, a layoff roundup, and the return of free parking.

The Securities and Exchange Commission took another big step toward implementing provisions of the Sarbanes-Oxley Act.

On Wednesday, the commission proposed a number of critical rules regarding pro forma results, off-balance-sheet entities, and executive stock-trading.

The commission is seeking public comment for 30 days. Then the rules will be published in the Federal Register.

Under the proposals governing pro forma results, companies that issue non-GAAP financials must explain how those numbers differ from results using generally accepted accounting principles.

In addition, pro forma results must not mislead investors.

The SEC also proposed rules that require the disclosure of all material off-balance-sheet transactions, as well as disclosure of arrangements, obligations, and relationships with unconsolidated entities. The commission wants public companies to present such information in the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) section of a company’s regulatory filings.

The rules, an outgrowth of the Enron scandal, would affect an estimated $3 trillion in off-balance-sheet debt, according to Bloomberg.

“While off-balance-sheet arrangements can have a legitimate business purpose, they can also be extremely complicated, can mask financial problems or the true state of a company’s financial health, and they can have drastic consequences,” said SEC commissioner Cynthia Glassman.

The proposal would require companies to present tables identifying when their obligations—including debt, leases, lines of credit, and guarantees—mature over at least the next five years, Bloomberg reported, citing SEC officials.

In addition, the SEC yesterday proposed rules that would limit the ability of executives and directors to sell stock in retirement plans such as 401(k)s. The commission would bar such sales during a blackout period—if that period lasts more than three consecutive business days and if a company temporarily suspends the ability of at least half of the plan participants to conduct any stock transactions.

Fastow Indictment Coming Soon?

Back in November, management at Enron Corp. first acknowledged that it had improperly kept more than $600 million in debt obligations off the company’s balance sheet. In what was a jaw-dropping announcement at the time, Enron management noted that financial statements from 1997 through the third quarter of 2001 “should not be relied upon, and that outside businesses run by Enron officials during that period should have been included in the company’s earnings reports.”

One of the “Enron officials” running the off-balance-sheet entities was then-CFO Andrew Fastow. Indeed, Fastow reportedly made $30 million overseeing those unconsolidated businesses—businesses that eventually forced the Houston energy company into bankruptcy.

It’s been almost a year since Enron’s stunning announcement, and Fastow still has not been indicted for his apparent role in the Enron debacle. In fact, some are wondering if Fastow will he ever be charged with a crime.

Yesterday, the 24-hour TV news channels were proclaiming that Enron’s former chief financial officer would be indicted by the end of the day. He was not.

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