Explain how a firm might use a special purpose entity (SPE) to subvert the standard-setting process.
What will be an ideal response?
ANSWER:
SPEs are arrangements whereby the firm and an outside equity investor jointly own an entity which may largely be a shell enterprise. SPEs allow firms to “park” liabilities on the SPE’s balance sheet if the outside equity investor owns as little as 3% of the SPE. Leaving the liability off its own balance sheet improves the firm’s debt-equity ratio.
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