You’ve heard of the scandals: Enron, Michael Milken, the subprime mortgage fiasco. These and many more scandals over the last 30 years owe their success to a shady use of the SPE, special purpose entity. An SPE is a legal entity that is separate from its creator firm. SPEs don’t function as normal companies, but serve only to remove assets and liabilities from the parent company’s balance sheet. Although SPEs can be used for legitimate purposes, they are often exploited for illegal gain.
Regulators have recently targeted SPEs because of their widespread misuse. For example, The Financial Accounting Standards Board has adopted rules mandating that banks bring many of their SPEs onto their own balance sheets.
As regulators more fully understand how SPEs have been exploited, it looks like the days of the tax magicians’ sleight of hand with SPEs may be coming to a close.
