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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