Off-Balance Sheet Arrangements and the Transparency of Corporate Financial Reports

Hey Readers!

My name is Joe Carnazza and I am currently a Junior and an Accounting major at the College. This summer, I will be conducting research with Professor Kimberly J. Smith in the Accounting Department.

During her time serving as Academic Accounting Fellow at the Security and Exchange Commission, Professor Smith was the coauthor of a study on off-balance sheet arrangements that was conducted in fulfillment of requirements outlined in Section 401(c) of the Sarbanes-Oxley Act of 2002. This study collected data for a sample of companies for the year 2003, reported descriptive statistics about the extent of off-balance sheet arrangements such as leases, pensions, certain investments, securitizations, purchase obligations, and contingent liabilities, and made recommendations to improve financial reporting transparency. As a future accountant, the effect of off-balance sheet arrangements on transparency in financial reporting drew my attention almost immediately toward this project.

In almost all of my Accounting classes at William and Mary, I have learned that one of the primary purposes of Accounting is to provide financial information that can be used to make investment decisions about companies to current and potential investors. Because of this important role that accountants play, it is crucial for a company’s accountants convey information to its investors in a way that they can understand. I have found (through class case study assignments as well as professor anecdotes) that more often than not, it takes a trained eye to weed through the countless pages of financial data disclosed by public companies to get down to the real value of a company to its investors. The off-balance sheet arrangements discussed in the SEC study are a major component of this “real value.”

Thus, my study, “Off-Balance Sheet Arrangements and the Transparency of Corporate Financial Reports,” seeks to discover whether or not the transparency of corporate financial reports actually improved as a result of the SEC’s efforts. To do this, I will collect data from the annual reports (i.e., Form 10-K filings) of 200 companies for the years 2002 to 2010. With this data, I will measure the extent of certain OBS arrangements as well as the transparency of the related disclosures and code my findings into a research database. Analysis of these data and comparison of transparency before and after the SEC study will serve as the basis for my research presentation.

The first step for me in my research will be to meet with Professor Smith after my last final exam to discuss our methodology for measuring transparency. Much of our conversation will focus on developing a preliminary measurement technique that may eventually require adjustments this summer as I use it in analyzing the financial statements for the companies we are studying.

I’m really excited to work on this project and am looking forward to updating you all on my progress.