by Glenn Cheney

Norwalk, Conn. - Maybe, just maybe, if years ago the Financial Accounting Standards Board had been able to issue a standard on special-purpose entities, it might have prevented the collapse of Enron.

And then again, maybe not.

Human ingenuity finds a way of wiggling around the rules, but a proposed interpretation that establishes tighter guidance on the consolidation of SPEs leaves less wiggle room. FASB’s solution is to expand the concept of "controlling interest" to include not only parent companies with controlling voting interest in an SPE but companies that are the primary beneficiary of an entity.

"We make the assumption, under plain economic theory, that if you’re the one with the most at risk, you’re the one who has had to do something to protect your interest," FASB project manager Ron Lott explained. "You can’t make the decisions, but you’re the primary beneficiary, which is very similar to being the parent of the SPE."

Lott explained that many SPEs are designed so that a de facto controlling organization may have no voting power while the people who do vote have little financial risk in the entity. In reality, Lott said, nobody is going to let those without financial risk control the entity.

FASB’s proposed guidance would also consider the interests of a company’s employees to be the same as the interests of the company. If employees are the primary beneficiaries of an SPE, it would be consolidated into the company’s financial statements.

The proposed Interpretation, Consolidation of Certain Special-Purpose Entities, would apply to public and private companies that have an ownership interest, contractual relationship or other business relationship with an SPE. The guidance would not apply to not-for-profit organizations.

In an official statement, the board reiterated that the proposal is not meant to restrict the use of SPEs for such valid business purposes as isolating assets or activities to protect the interests of creditors and investors, or to allocate risk among participants. The expanded definition of controlling interest, however, is likely to result in the assets, liabilities and results of activities of more SPEs being consolidated into the financial statements of the companies that are the primary beneficiaries of the entities.

The common opinion among accounting professionals is that existing generally accepted accounting principles probably would have sufficed to require Enron to consolidate its SPEs. The debacle was not caused by inadequate standards. FASB’s current proposal, however, would have made consolidation a clearer requirement.

"I can’t say whether Enron would have consolidated under this interpretation," Lott said. "They might have gotten around these rules, too. I think it would have been a little more difficult, but people can be very inventive."

Jim Mountain, a partner with Deloitte & Touche’s global market group, said that the proposal is not entirely what he expected after following FASB discussions at public meetings. He also

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