Banks are PROHIBITED from setting aside for future loan losses.

[SlipperySlope]

Looks like an ugly storm coming in the banking industry. Under the Sarbanes-Oxley accounting reform rules, the banks are being prohibited from setting aside funds now (while times are good) to cover loan defaults that are sure to come (when times are bad).

This is going to make the shit storm that is coming even more shittier...

http://moneycentral.msn.com/content/P127636.asp?Printer

[philosophie_en_rose]

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[philosophie_en_rose]

1. Another sign of fiscal prudence from our glorious federal leaders.

:eyes:

[indepat]

2. Unless loss reserves portray risk in portfolio, financials are fraudulent

IMHO.

[sybylla]

3. That is one of the dumbest things I've ever seen

They are telling a for profit business how much profit they can keep? Yet they've never met a usury law they liked?

WTF? :eyes:

[leveymg]

4. No reserves for unforeseen losses? That's an insane interpretation

To my understanding, the 2002 Sarbanes-Oxley Act (SOX) does not eliminate reserves for losses due to defaults. What it does is require banks to project potential losses in a realistic manner, and disallows unlimited reserve accounts that were little more than operating slush funds that could be dipped into to keep the bottom-line clean and shareholders happy.

Provided that US banks maintain reserves according to accepted standards for risk, such as the Basel II accords, they should be fine in a downturn.

The financial and auditing industries do not like SOX, because it forced the two to reestablish separate lines of business. That was done because of the huge accounting scandals a few years ago, when accounting firms had essentially become partners with financial companies in risky ventures, such as Enron, and auditors routinely cooked the books to protect their stake in speculative joint-ventures.

It was a sweeping law that increases management accountability, mandates a variety of internal controls at firms, and strengthens the role of auditors. Accounting firms are largely prohibited from simultaneously auditing and consulting to any given client. A new federal agency, called the Public Company Accounting Oversight Board, (PCAOB or Peek-a-Boo), is to oversee accounting firms. Corporations must test internal controls regularly. To avoid conflicts, those tests must be performed by an outside firm other than the external auditor. Sarbanes-Oxley has been variously described as ineffective, overly costly to corporations, or too demanding.

[SlipperySlope]

5. It may be insane, bu that is how it is being applied.