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Bridge over ocean
1 September 2011 Financial Analysts Journal Volume 67, Issue 5

Hidden Debt: From Enron’s Commodity Prepays to Lehman’s Repo 105s

  1. Donald J. Smith, PhD

Enron Corporation’s commodity prepays and Lehman Brothers’ Repo 105s are recent examples of hidden debt intended to improve the appearance of a company’s financial condition. Enron used derivatives to “transform” cash flow from financing to cash flow from operations; Lehman used sale-repurchase (repo) agreements to remove debt from its balance sheet for dates surrounding quarterly reporting periods. Both tactics relied on external auditors’ narrowly focusing on internal procedures and accounting rules.

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