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Accounting of repurchase agreements comes under scanner

The Securities and Exchange Commission has started an inquiry into about two dozen financial companies to determine whether they followed accounting practices similar to those recently disclosed in an investigation of Lehman Brothers.

Repurchase agreements, which are a common way that investment banks provide funds for trading activities. The commission wants to know whether other Wall Street players used tactics like those that Lehman used to mask their debt levels from investors.

This inquiry is part of its duties to review the financial filings of public companies and any irregularities will be sent to its enforcement wing to eventually bring charges on such errant companies.

As per the news item appearing in New York Times, “Since Lehman was accused of using a transaction known as Repo 105 in 2008 to hide about $50 billion in debt, analysts have said there should be a widespread inquiry of accounting on wall Street before the financial crisis.

The commission is focusing on all sorts of repurchase agreements, not just those Lehman used. The commission asked the companies if they had classified the transactions, which are often considered loans, as sales. The commission also asked whether those transactions affected data provided to investors, analysts, regulators or ratings agencies.”

See the full report here: http://www.nytimes.com/2010/03/30/business/30sec.html

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