PracticeAuditSEC investigates Repo transactions

SEC investigates Repo transactions

Regulator demands details of repo-transactions from banks and insurance companies

Almost two dozen US financial institutions have ten days to reveal their
accounting treatment for controversial repo-transactions, as the US securities
regulator explores whether dubious practices by the collapsed bank Lehman
Brothers were widespread.

The US Securities and Exchanges Commission (SEC) has written to chief
financial officers at major insurance companies and banks asking how they
classify their repurchase or repo-transactions.

The letter comes two weeks after Anton Valukas, appointed by the New York
bankruptcy court, released his lengthy report into the Lehman Brothers collapse,
highlighting the bank’s accounting treatment of repo-transactions. The bank was
accused of keeping $120bn (£79.6bn) in bad assets off its balance sheet by
classifying repo-transactions as sales.

Repo-transactions are short-term finance arrangements which involve the
transfer of assets in exchange for cash. Lehman Brothers transferred assets for
about ten days during sensitive reporting periods as a means to improve it’s
balance-sheet position, according to Valukas. It would then repurchase the
assets after the reporting period had ended.

Valukas report may form the basis of a class action against directors of
Lehman Brothers and possibly their auditor Ernst & Young.

The SEC now wants to know how many banks use similar set-ups along and has
asked for a detailed justification of their use.

It comes about a week after the UK reporting watchdog, the Financial
Reporting Council, investigates whether there was a role played by accounting
firm Ernst & Young’s UK arm in signing-off on the arrangements. Ernst &
Young said it would co-operatre fully with any probe.

Read the full SEC release:
LEHMANS
SPECIAL REPORT

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