Disturbing report in the Financial Times about how JPMorgan Chase was using the same accounting trick as Lehman Brothers, declaring trades as sales. According to the FT, JPMorgan ended the practice in 2005. The question is how far does this spread? How many other investment banks and financial services firms were doing the same thing?
As the FT reports: "JPMorgan's accounts list sales – the sort of deals Lehman undertook – and purchases, which imply it acted as a counterparty for others doing the same trades. Its counterparty is not thought to have been Lehman."
It not only raises the question of how many other firms were doing this. As columnist Jennifer Hughes says, it's an issue that goes to the heart of accounting. The rules are not water tight and are open to interpretation which means that what off the books, or stays on them, remains a permanent area of debate.
Hughes writes: "In spite of rulemakers' repeated, and increasingly lengthy, efforts to clarify matters, accountants and company managers know there remain many gray areas. This makes it a middle ground where managers can challenge their auditors with some comfort that, in spite of the shadiness implied by the term "off-balance sheet", they are legitimately debating an area without absolutely definite rules for all situations. 'It's always easier to break a rule than to draft a general rule in this area that says what the treatment ought to be,' says Allan Cook, a former technical director of the UK Accounting Standards Board. He recalls receiving a series of letters from accountants and managers suggesting specific rules for off balance-sheet accounting and giving examples in which they would apply. 'The problem is you can't write a standard as a series of good solutions to individual situations; the rules have to be phrased in general terms,' he adds."
What that means is that the gray areas of accounting rules exploited by Lehman will never go away.
no comment untill now