Hidden Financial Risk: Understanding Off-Balance Sheet Accounting / Edition 1

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The parade of catastrophic accounting scandals, chief among them the Enron debacle, has intrigued business and the general public as few corporate scandals ever have. The extraordinary number of people materially affected by these episodes, coupled with the irresistible spectacle of base human greed run wild, guarantees that public attention will not soon recede. Everyone agrees that "mistakes were made." There are two very different responses, however, on what to do about it. Are there simply a few bad apples whose just punishment will bring the financial stars back into alignment? Or are the scandals the product of profound systemic failures, the remedy for which can only be revolutionary reform? Accounting professor and renowned authority, Edward Ketz, emphatically proclaims the latter and offers a comprehensive analysis of how firms bury risk, why nobody stops them, and what to do about it in Hidden Financial Risk: Understanding Off-Balance Sheet Accounting.

In Hidden Financial Risk, Ketz thoroughly and accessibly explains the dubious methods by which firms hide debt and the failings by managers, directors, auditors, regulators, and investors who allowed these methods to poison financial reporting. Ketz places particular emphasis on understanding Special Purpose Entities (SPEs), Enron’s preferred method of deception. Among other services, this compelling analysis:

  • Identifies the incentives for managers to deceive investors and creditors about the firm’s financial risk
  • Illustrates the equity method, lease accounting, and pension accounting, popular methods of Off-Balance Sheet accounting, and explains how investors can deconstruct them
  • Examines the failure of boards of directors, accountants, the FASB, and the SEC to minimize accounting failures
  • Discusses what must be done to reduce the number of corporate managers who lie in financial reports
  • Shows what individual investors must do to protect their investments in a world filled with accounting and auditing fraud
  • Explains how the Sarbanes-Oxley bill will affect financial reporting

Ketz concludes with an illuminating look at Arthur Andersen who, while one of the biggest losers in the accounting scandals, may nevertheless hold the key to the industry’s resuscitation. Financial reporting is in critical condition. Edward Ketz supplies a compelling diagnosis, prescription, and vision of its road to recovery in Hidden Financial Risk.

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Editorial Reviews

From the Publisher
"Ketz' discussion is fascinating, although all too useful to future scamsters wanting to find out just how those clever guys at Enron did it." (UPI Business and Economics, August 11, 2003)
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Product Details

  • ISBN-13: 9780471433767
  • Publisher: Wiley
  • Publication date: 7/16/2003
  • Edition number: 1
  • Pages: 298
  • Sales rank: 1,546,197
  • Product dimensions: 10.00 (w) x 7.00 (h) x 0.75 (d)

Meet the Author

J. EDWARD KETZ, PhD, is MBA Faculty Director and Associate Professor of accounting at Penn State’s Smeal College of Business. He has been cited in the press over 500 times since Enron’s bankruptcy, and is well known as an accounting expert as attested in writings, vast citations in the press and on television, including the New York Times, the Wall Street Journal, and the Washington Post. His column "Accounting Annotations" is published in Accounting Today and his column "Accounting Cycle: Wash, Rinse, and Spin" appears regularly at SmartPros.com. He is also the author of Bridge Accounting: Procedures, Systems, and Controls (Wiley).

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Table of Contents



1. What? Another Accounting Scandal?

2. Balance Sheet Woes.


3. How to Hide Debt with the Equity Method.

4. How to Hide Debt with Lease Accounting.

5. How to Hide Debt with Pension Accounting.

6. How to Hide Debt with Special Purpose Entities.


7. The Failure of Managers and Directors.

8. The Failure of the Auditing Profession.

9. The Failure of Regulation.

10. The Failure of Investors.


Chapter 11. Andersen Has the Solution—Really!



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Sort by: Showing 1 Customer Reviews
  • Anonymous

    Posted August 3, 2003

    Prevents Financial Risk

    A book that every Enron investor wishes they owned four years ago, and a book that all investors should own. Offers the insights investors need to prevent getting duped by accounting and auditing firms that appear to support how managers hide bad debt and inflate stock offerings. This might be the first book that gives average investors the tools to make sense of balance sheets and annual reports. It became clear that--thanks to questionable accounting methods--many companies were able to inflate their earnings. Ketz's book blows the lid off of these tools of deception. I loved reading attacks by Penn State alumni working for Andersen that are profiled in the foreward. It just highlights the basic problem in the industry. Accounting firms propping up bad companies and take good money from average investors.

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