Although the heading above resembles title of a Star Wars spin-off in a rather bad-taste, it indeed denotes a serious financial risk malady of the most dangerous kind: The secret kind. A formal and by-the-book area of accounting, off-balance sheet accounting, may sometimes be used for sweeping specific items under the carpet in order to achieve an appearance which is kept up contrary to the real situation in order to deceive related parties; shareholders, customers, investors and in most cases everyone involved. The technicalities and toolkit used may differ in a myriad of ways but the road paving to this kind of white-collar embezzlements all stems from neglecting foundational pillars of the accounting business; ethics, honesty and fairness.

Clichés are quite understandably tried to be avoided to spice up a blog a little bit and entertain the reader through uncharted territory. However, it is a peculiar type of crime not to mention the monumental and colossal cliché of the case Enron, the baronet of all financial shenanigans. Speaking of financial shenanigans’ entirety, all financial shenanigans can be more or less netted down to a single premise; generating (pseudo) cash flows and procuring non-existent profit from this nonmonetary pattern. While doing this, arguably “The Smartest Guys in The Room” (the title of the documentary as regards Enron, it is on YouTube and highly recommendable) exploited the below cited main techniques which all resulted in hidden risks made to duck mostly among dark shrubberies of off-balance-sheet registers:

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  Energy contract losses were all hidden under SPV accounts in a deliberately complicated way so as to abstain from any probable tracking which all burst at once later.

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  Creditors’ loans to Enron were all “parked” at SPEs of Enron thus the very own balance sheet of Enron was as clean as an unused baby diaper with its low levels of debt, high assets/debt ratio, etc.

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  The related party transactions were usually (in Enron’s case this means always) non-disclosed. The façade represented to the public and the entangled relations managed in the back alleys of financial/accounting registers still reminds me of “The Picture of Dorian Gray.”

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  Lack of consolidation of the limited partnerships led to an intentionally exaggerated aggregate profit figure that at least duplicated certain registrations, while off-balance sheet items were all shadowed by these knowingly half-witted conman-ship.

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  Improperly recorded notes receivables were on the balance sheet posing as assets.

All of these and much more are all related to the heading of this very post; dark side of the balance sheet in the sense of the dark side of the moon: We all know that it is there yet none of us has seen it. However, this can be no excuse for obtaining a stance of learned helplessness. There are some useful and adaptable guidelines concerning the issue. For instance, let me quote Lynn Turner, former SEC Chief Accountant, who suggests asking the following questions. Since most of the hidden risk are hidden beneath SPEs I think these questions are highly applicable to a lot of different cases:

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  Does the transaction have a legitimate business purpose other than avoiding presenting the financing as bank debt on the balance sheet?

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  Does the SPE engage in normal business operations?

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  Does the SPE have more than nominal capitalization? Could it operate on its own?

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  Does the SPE have officers and directors who function as they would in any normal trading company?

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  Does the sponsor of the SPE or the entity it enters into transactions with have all the risks and rewards of the transactions or does the SPE have them? Is there any economic substance to the SPE?

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  Do the transactions between [the business enterprises], an SPE, and the bank actually transfer risk from or to [the business enterprise], the SPE or bank?

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  Are the transactions linked in such a manner that risks or the ultimate obligations to repay financings are not really transferred?

To sum up, in order to get all the right answers we should ask the right questions. Luckily enough, going back to basics and acting on the above mentioned foundational pillars of the accounting business is sure to provide the correct answers and map the aforementioned financial dark side.