FHFA Has Fraud on Its Mind
In recent days, Federal Housing Finance Agency (FHFA) Director Bill Pulte has made it clear that he believes fraud is a rampant problem at FHFA. In a stream of related activities, Pulte has called on the public to report fraud via email and a new Hotline, terminated over 100 FHFA employees for alleged fraud, and taken aim at a political rival for alleged mortgage fraud.
Fraud Hotline Encourages Reporting of Fraud Concerns
On April 15, 2025, Pulte posted an invitation on X for any person to “Please submit any alleged criminal mortgage tips or mortgage fraud tips to [email protected].” This message coincides with FHFA’s new Hotline for Reporting Alleged Fraud, Waste, Abuse, or Mismanagement at Hotline | FHFA-OIG. The hotline website encourages federal employees and the public to “report information about those, whether inside or outside of the federal government, who waste, steal, or abuse government funds in connection with the Agency, Fannie Mae and Freddie Mac (the Enterprises), any of the Federal Home Loan Banks (FHLBanks), or the FHLBanks’ Office of Finance, or about mismanagement within FHFA.” The Hotline website is now seeking information on any of the following:
Possible waste, fraud, abuse, mismanagement, or other misconduct involving FHFA employees, programs, operations, contracts or subcontracts;
Possible violations of Federal laws, regulations, rules, or policies pertaining to FHFA or to any of the regulated entities; or
Possible unethical activities involving employees of FHFA or of the regulated entities.
This effort marks a significant step in Pulte’s broader campaign to foster transparency, accountability, and a culture of integrity across the federal housing finance system.
FHFA Cleans House
Following an internal investigation launched under Pulte’s anti-fraud campaign, Fannie Mae recently terminated over 100 employees for unethical behavior, including involvement in fraud. This internal investigation reflects Pulte’s zero-tolerance stance on fraud and commitment to restoring integrity at government-sponsored enterprises like Fannie Mae and Freddie Mac.
In a release by the Federal Housing Finance Agency on April 8, 2025, Pulte stressed that “there is no room for fraud, mortgage fraud, or any other deceitful act that can jeopardize the safety and soundness of the housing industry.” Further, Fannie Mae CEO Priscilla Almodovar thanked Pulte for “empowering of Fannie Mae to root out unethical conduct,” emphasizing that “we hold our employees to the highest standards, and we will continue to do so.”
Although the agencies have not released further details about the terminations, Pulte reaffirmed his commitment to combating misconduct in a post on his personal X account, stating, “We are turning around Fannie Mae and Freddie Mac, slowly but surely.”
Referral of New York Attorney General Letitia James for Mortgage Fraud
As a part of Pulte’s crackdown on alleged mortgage fraud, he has referred New York Attorney General Letitia James for federal prosecution for her alleged mortgage fraud. Pulte alleges James “has, in multiple instances, falsified bank documents and property records to acquire government-backed assistance and loans and more favorable loan terms.” Director Pulte alleges that most recently, James committed fraud by claiming a Virginia home would be her primary residence in 2023, while James is the sitting Attorney General of New York. James’s office has maintained that the Virginia residence is the primary residence of her niece, with whom she purchased the property.
Pulte further alleges fraud connected to a home purchase in Brooklyn in 2001, where James used a loan that was only available to purchase four-unit properties to purchase an alleged five-unit property. However, popular real estate sites such as StreetEasy, Trulia, and Redfin have categorized the property as a four-unit building.
Lastly, Pulte has alleged fraud in connection with a 1983 home purchase by James’s father, where the mortgage states James is her father’s wife instead of his daughter. It is unclear whether or not this was a clerical error in drafting the Mortgage or whether it was an intentional act by James and her father. While the criminal referral references the 2001 and 1983 purchases, any alleged fraud in connection with these purchases appears to be well beyond the statute of limitations.
James has initially responded that the allegations are “baseless.” She has said the “allegations are nothing more than a revenge tour” related to his civil fraud case against President Trump, which resulted in a $454 judgment from a New York Court in 2024, which he is currently appealing.
Expect Fraud Related Repurchases
Pulte’s interest in fraud is also likely to trigger new repurchase demands to the industry. One of the critical representations and warranties that lenders make when selling loans to the GSEs is that the loan meets all the requirements of the Lender Contract, including that it has not been obtained via misrepresentation or fraud. “Because the selling warranties are not limited to matters within a seller/servicer’s knowledge… the action or inaction (including misrepresentation or fraud) of the borrower, or a third party, as well as the action or inaction (including misrepresentation or fraud) of the seller/servicer will constitute the seller/servicer’s breach of a selling warranty.” Fannie Mae Guide A1-1-02, Representation and Warranty Requirements (08/16/2017), see also Freddie Mac Guide 1301.8 – Warranties and representations by the Seller (8/2/2023).
The GSEs have always maintained the ability to demand repurchase of any mortgage loans that do not meet the many qualifications of their Seller Guidelines. See Freddie Mac Guide 3602.2 – Repurchases (8/17/2016) and Fannie Mae Guide A1-3-02, Fannie Mae-Initiated Repurchases, Indemnifications, Make Whole Payment Requests and Deferred Payment Obligations (10/11/2023). During the Biden Administration, the industry experienced a sharp uptick in repurchase demands from the GSEs. As a November 2023 white paper from the Urban Institute noted, the “GSEs have become more aggressive, forcing more repurchases earlier in the life of the loan than was the case in earlier vintages. In the first few years of the mortgages’ life, there have been more repurchases for the 2018–22 origination years than there were in the 2005–08 origination years.” GSE Repurchase Activity and its Chilling Effect on the Market. Overall, the GSEs have been proactive about their repurchase rights both in recent years and prior to the Trump Administration.
With that background in mind, Pulte’s April 16, 2025, post on X that “FHFA, Fannie Mae, and Freddie Mac will be evaluating ways to ‘recall loans’ that have been obtained fraudulently” is not groundbreaking news, but it does emphasize the recent focus on fraud. Pulte’s use of “recall” instead of “repurchase” may relate to his homebuilding background, but the intent is the same. Apparently, neither Pulte nor the FHFA have responded to the National Mortgage News’ request for clarification on the post. However, some believe the X post may directly relate to the FHFA referral to the U.S. Attorney General regarding Attorney General James.
This renewed emphasis on enforcing repurchase rights—particularly in cases involving fraud—signals that lenders should prepare for heightened scrutiny and further increase in repurchase demands as the FHFA doubles down on accountability under Pulte’s leadership.
Going Forward
Taken together, these actions paint a clear picture: under Bill Pulte’s leadership, the FHFA is aggressively pivoting toward a hardline stance on fraud, ethics, and accountability. From employee terminations and public tip lines to high-profile referrals and the reinforcement of repurchase remedies, Pulte is sending a strong message that misconduct at any level—whether inside the agency, among its regulated entities, or even among political figures—will be met with swift and serious consequences. As the housing finance system braces for increased oversight, stakeholders should expect this aggressive posture to define the agency’s direction for the foreseeable future.
Digital Financial Assets – Out Of The Frying Pan And Into The Fire?
The application of the securities laws to digital financial assets has been fraught for lawyers and their clients. After taking a hard line that many of these assets were securities under the federal securities laws, the Securities and Exchange Commission with the change of Administration now appears to be taking a less hostile approach. In January, Acting Commissioner Mark Uyeda announced the formation of a Crypto Task Force. Then in February, the Staff of the Division of Corporation Finance issued a statement that certain meme coins are not securities.
A conclusion that a digital financial asset is not a security may simply transfer regulation from one regulator (the SEC) to another (the California Department of Financial Protection & Innovation), or as Bilbo Baggins exclaimed: “Escaping goblins to be caught by wolves!”*
California’s Digital Financial Assets Law will require persons engaged in “digital financial asset business activity” to be licensed by the Department. Cal. Fin. Code § 3201. The DFAL defines “digital financial asset” as “a digital representation of value that is used as a medium of exchange, unit of account, or store of value, and that is not legal tender, whether or not denominated in legal tender.” Cal. Fin. Code § 3102(g)(1). One exclusion from this definition is a “security registered with or exempt from registration with the United States Securities and Exchange Commission or a security qualified with or exempt from qualifications with the department.” Cal. Fin. Code § 3102(g)(2). Accordingly, if the SEC determines that a digital financial asset is a security, someone exchanging, transferring, or storing that asset would be subject to the DFAL, unless exempt. Conversely, a determination that a particular digital financial asset is not a security would bring persons engaged in exchanging, transferring, or storing that asset within the ambit of the DFAL. Oddly, a security that is neither registered with nor exempt from registration would not be excluded from the definition of a “digital financial asset” for purposes of the DFAL.
___________________J.R.R. Tolkien, The Hobbit, or There and Back Again.
New York AG Sues Earned Wage Access Companies for Allegedly Unlawful Payday Lending Practices
On April 14, New York Attorney General Letitia James announced two separate lawsuits against earned wage access providers—one against a company that issues advances directly to consumers, and another targeting a provider that operates through employer partnerships. Both actions allege that the companies engaged in illegal payday lending schemes, charging fees and tips that resulted in annual percentage rates (APRs) far in excess of New York’s civil and criminal usury caps.
The lawsuits assert violations of New York’s civil and criminal usury laws, which cap interest at 16% and 25%, respectively. According to the AG, the companies’ flat fees and “voluntary” tipping features amounted to de facto interest that routinely exceeded those thresholds. Both lawsuits also allege deceptive business practices and false advertising in violation of New York’s General Business Law, as well as abusive and deceptive acts and practices under the federal Consumer Financial Protection Act. In both cases, the AG alleges that the companies trap workers in cycles of dependency through frequent, recurring advances.
The lawsuit against the employer-partnered provider alleges that the company:
Imposed high fees on small-dollar, short-term advances. These fees allegedly resulted in effective APRs that often exceed 500%, despite claims that the advances are fee-free or interest-free.
Diverted wages through employer-facilitated repayment. The company allegedly required workers to assign wages and routed employer-issued paychecks directly to itself, ensuring collection before workers received their remaining pay.
Marketed the product as an employer-sponsored benefit. By leveraging exclusive partnerships, the company allegedly positioned its product as a no-cost financial wellness tool, downplaying costs and repayment risks.
The lawsuit against the direct-to-consumer provider alleges that the company:
Extracted revenue through manipulative tipping practices. Consumers were allegedly nudged to pay pre-set tips through guilt-driven prompts and fear-based messaging, which the company treated as interest income.
Automated repayment from linked bank accounts. The provider allegedly pulled funds as soon as wages were deposited, often before consumers could access them.
Used per-transaction caps to drive repeat usage. Consumers were allegedly forced to take out multiple advances and pay multiple fees to access their full available balance, magnifying the cost of each lending cycle.
Putting It Into Practice: These lawsuits reinforce a growing trend among states to impose consumer protection requirements—particularly around fee disclosures and repayment practices—regarding earned wage access products (previously discussed here). State regulators continue to increase their scrutiny of EWA providers’ business models and marketing tactics. In addition, this is perhaps the first case we have seen with a state attorney general bringing an action under the CFPA (see our related discussion here about this topic). Depending on how this case proceeds, we can expect to see more cases under the federal statute.
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Kansas City Federal Reserve Bank Explores Regulatory Risks in Gaming Ecosystems
On April 9, the Federal Reserve Bank of Kansas City published a research briefing examining how video game platforms are reshaping the digital payments landscape. As in-game purchases and platform-based transactions grow in volume and complexity, these developments are raising new regulatory concerns for both federal and state banking regulators.
The global video game industry generated nearly $190 billion in revenue in 2024, largely fueled by the increase in popularity of free-to-play models, in-game purchases, and subscription offerings. These approaches have fundamentally changed how the video game industry is monetized. Rather than relying on one-time game sales, many platforms are now relying on ongoing microtransactions, charging users small amounts for in-game content, upgrades, or access on a recurring basis. This shift has caught the attention of regulators, evidenced by the CFPB issuing an Issue Spotlight in April 2024, titled “Banking in Video Games and Virtual Worlds”, which analyzed the increased commercial activity within online video games and virtual worlds and the apparent risks to consumers—in this case, to online gamers (previously discussed here).
Overview of the Research Briefing
To support these business models, platforms have expanded the types of payments they accept, layering in credit and debit cards, digital wallets, and prepaid in-game currency. Many platforms also offer installment options at checkout. Most recently, some are exploring instant payments as a way to improve efficiency and reduce costs, especially for small-dollar transactions.
Unlike traditional card payments, instant payments settle in real time and often come with lower processing fees. That pricing difference could give platforms more flexibility in how they price in-game content. Instead of requiring players to buy a $10 bundle of in-game currency to access a $2 item, platforms could offer direct purchases—making prices more transparent and lowering the barrier for occasional or budget-conscious users. Faster payments may also help with subscription billing by reducing failed payments tied to expired cards or insufficient funds.
Adoption of instant payments in the U.S. still lags behind other countries, where some platforms already support local real-time payment systems. As the use of instant payments grows, regulators may also take a closer look at whether existing consumer protection frameworks are keeping up.
Regulatory Concerns
The report notes that the CFPB has identified several risks tied to gaming payments, including lack of transparency around pricing, unauthorized charges, and aggressive use of consumer data. Some platforms personalize offers or pricing based on player behavior, raising concerns about fairness and consent. As the use of virtual currencies and recurring charges becomes more common, regulators are questioning whether existing consumer protections adequately apply to these models.
The report also highlights security as another area of concern. Platforms now use behavioral analytics, tokenization, two-factor authentication, and other tools to prevent fraud and protect payment data. While these measures reduce friction and improve user experience, they also raise questions about how personal data is collected, stored, and used—particularly as the line between gaming and financial services continues to blur.
The report also flags concerns surrounding money laundering. In-game items and currency can often be exchanged for real money, sometimes outside official channels. That has created openings for illicit finance, even though most gaming companies aren’t subject to AML or KYC requirements. As the flow of real funds through these platforms increases, regulators may revisit whether additional oversight is warranted.
Putting It Into Practice: The CFPB and state financial regulators are signaling a growing interest of the gaming industry, particularly where in-game economies begin to resemble consumer financial products. Gaming providers would be wise to proactively assess how their business models could create compliance risk.
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Digital Dollars, Not Investments: SEC Staff Weighs in on Stablecoins
On April 4, the Securities and Exchange Commission’s (SEC) Division of Corporation Finance issued a statement clarifying that reserve-backed U.S. dollar stablecoins are not securities, at least under current law and circumstances. The nonbinding guidance marks the latest effort by SEC staff to articulate the boundaries of the agency’s jurisdiction in an evolving crypto regulatory landscape.
Stablecoins are blockchain-based digital assets that are typically pegged to traditional currencies like the U.S. dollar (we previously discussed the stablecoin market here). The statement addresses “Covered Stablecoins”—those pegged to the U.S. dollar and backed by sufficient low-risk, liquid assets, so as to allow a Covered Stablecoin issuer to fully honor redemptions on demand. Covered Stablecoins are designed to maintain a stable value by being fully backed by reserves equal to or greater than the total amount of that stablecoin in circulation. The issuer allows users to mint or redeem these stablecoins at a fixed rate of $1 per coin (or the corresponding fraction), at any time and in any quantity.
The SEC staff noted that these tokens are marketed for use in payments, money transmission, or storing value, not as speculative investments. SEC staff reasoned that because buyers are not motivated by profit, and the tokens do not confer ownership rights or returns, the transactions involved in minting and redeeming such stablecoins do not require registration under federal securities law.
While the staff’s position offers some comfort to stablecoin issuers, it is not a formal rule and carries no legal force.
Putting It Into Practice: This development comes as Congress considers legislation to establish a regulatory framework for stablecoins. The House Financial Services Committee recently advanced the STABLE Act with bipartisan support (previously discussed here). The SEC’s also announcement comes amid a broader trend of various federal regulators recalibrating their approach to digital assets (previously discussed here, here, and here). As stablecoin regulation begins to take shape, market participants should continue to carefully monitor this space for further developments.
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CFPB Announces It Will Not Prioritize Oversight of Repeat Offender Registry
On April 11, the CFPB announced that it will not prioritize enforcement or supervision against nonbank financial companies that miss registration deadlines under its Repeat Offender Registry. The Bureau also stated that it is considering a notice of proposed rulemaking to rescind or narrow the scope of the rule, finalized in 2024, that established the registry.
Under the rule (previously discussed here) covered nonbanks subject to covered orders will be required to submit certain corporate identity information, administrative information, and information regarding the covered order (e.g., copies of the order, issuing agencies or courts, effective and expiration dates, and laws found to have been violated). In addition, the final rule will require covered nonbanks to file annual reports attesting to their compliance with the registered orders. The rule’s compliance deadlines are as follows:
April 14, 2025 for nonbanks already subject to CFPB supervision; and
July 14, 2025 for all other covered nonbanks.
In its press release, the Bureau stated that the temporary non-enforcement policy applies to these deadlines and that it will instead focus enforcement and supervision efforts on more pressing threats to consumers.
Putting It Into Practice: The CFPB’s decision to deprioritize enforcement and consider rescinding the registry rule reflects a broader shift away from regulatory initiatives finalized under the prior administration (previously discussed here and here). While the move eases near-term compliance pressure, it may invite greater attention from state regulators and consumer advocates concerned about regulatory gaps. Nonbank financial institutions should prepare for a shifting landscape of federal and state supervision going forward.
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Private Market Talks: Navigating Turbulence with Adams Street Partners’ Bill Sacher [Podcast]
With over $62 billion of AUM, Adams Street is a global investor in private equity and private credit. It invests in over 450 global general partners in private equity and directly invests in private credit. As such, Adams Street has a unique window into these private markets. Bill Sacher sits on the firm’s Investment Committee and is Global Head of Private Credit. During our conversation, Bill discusses how Adams Street is navigating today’s rapidly changing market dynamics.
CFPB Memo Details Less Oversight on Fintechs, Shift to State-Led Enforcement
Go-To Guide:
On April 16, 2025, the Consumer Financial Protection Bureau (CFPB)’s chief legal officer issued a memorandum to CFPB staff that set out the agency’s 2025 supervision and enforcement priorities.
Per the memorandum, the CFPB is likely to only exercise authority it has expressly been granted via statute and then only for “actual” and “tangible” consumer harms to “identifiable victims with material and measurable consumer damages.”
Where permissible, the agency appears poised to defer to states and other federal agencies’ supervisory and enforcement activities.
The CFPB will shift focus away from fintechs and in favor of the largest banks and depository institutions.
On April 16, 2025, the CFPB’s Chief Legal Officer, Mark R. Paoletta, issued a memorandum to CFPB staff that sets out the agency’s 2025 supervision and enforcement priorities.
The memorandum, which the CFPB has not publicly released, provides that the CFPB “will focus its enforcement and supervision resources on pressing threats to consumers” and that, in order to focus on “tangible harms to consumers,” the CFPB will “shift resources away from enforcement and supervision that can be done by the States.”
The memorandum also rescinds all prior enforcement and supervision priority documents and explains the CFPB’s focus in 2025 will be on the following:
The CFPB will engage in fewer supervisory exams and focus on “collaborative efforts.” The memorandum states the number of supervisory exams is “ever-increasing” and directs the CFPB’s supervision staff to decrease the overall number of “events” by 50%. Going forward, supervision staff are also directed to focus on “conciliation, correction, and remediation of harms” identified in consumer complaints and “collaborative efforts” with supervised entities to resolve problems that will lead to measurable benefits to consumers.
The CFPB will focus more on the largest depository institutions, less on fintechs. The memorandum notes that, in 2012, the CFPB focused 70% of its supervision on banks and depository institutions and only 30% on nonbanks. It further notes that the proportion has “completely flipped,” such that 60% of the agency’s focus is directed at nonbanks. Going forward, the memorandum provides that the CFPB must “seek to return to the 2012 proportion” and “focus on the largest banks and depository institutions.”
The CFPB will focus less on key topics from the Biden administration. In a move away from some of the hot topics under the Biden administration and former Director Chopra’s leadership, the CFPB will “deprioritize” the following:
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loans or other initiatives for “justice involved” individuals, which the memorandum clarifies to mean “criminals”
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medical debt
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peer-to-peer platforms and lending
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student loans
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remittances
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consumer data
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digital payments
The CFPB will focus on “actual fraud” and “tangible harms” to consumers. Rather than focus on the CFPB’s “perception that consumers made ‘wrong’ choices,’” the CFPB will instead focus on “actual fraud” involving “identifiable victims with material and measurable consumer damages.” Moreover, instead of “imposing penalties on companies in order to simply fill the Bureau’s penalty fund,” the CFPB will focus on returning money directly back to consumers by redressing “tangible harms.” In doing so, the CFPB’s areas of priority will be:
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mortgages, as the highest priority
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the Fair Credit Reporting Act and Regulation V data furnishing violations
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the Fair Debt Collection Act and Regulation F violations relating to consumer contracts and debts
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fraudulent overcharges, fees, etc.
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inadequate controls to protect consumer information resulting in “actual loss” to consumers
The CFPB will focus on service members and veterans. Going forward, the CFPB will prioritize providing redress to service members and their families and veterans.
The CFPB will “respect Federalism” and defer to the states. The CFPB will, where permissible, defer to the states to exercise regulatory and supervisory authority. It will do so by (a) deprioritizing participation in multi-state exams unless participation is required by statute, (b) deprioritizing supervision where states “have and exercise ample authority” unless such supervision is required by statute, and (c) minimizing enforcement where State regulators or law enforcement are engaged or have investigated.
The CFPB will “respect other federal agencies’ regulatory ambit.” The CFPB will, where permissible, defer to other federal regulators. It will do so by (a) eliminating “duplicative supervision” and “supervision outside of the Bureau’s authority” (e.g., supervision of mergers and acquisitions), (b) coordinating exam timing with “other/primary” federal regulators, and (c) “minimize duplicative enforcement” where another federal agency is engaged or has investigated.
The CFPB will not rely on “novel” legal theories. The memorandum provides that the CFPB will focus “on areas that are clearly within its statutory authority” and will not look to “novel” legal theories, including about its authority, to pursue supervision.
The CFPB will not engage in or facilitate “unconstitutional racial classification or discrimination.” With respect to its enforcement of fair lending law, the CFPB will pursue only matters with “proven actual intentional racial discrimination and actual identified victims,” for which “maximum penalties” will be sought. Accordingly, the CFPB will not engage in redlining or bias assessment supervisions or enforcement “based solely on statistical evidence and/or stray remarks that may be susceptible to adverse inferences.”
The CFPB will not attempt to “create price controls.” The memorandum provides that the CFPB’s “primary enforcement tools are its disclosure statutes” and that it will not engage in attempts “to create price controls.”
Key Takeaways
The memorandum represents what is likely to be a drastic reduction in CFPB supervision and enforcement activity and encouragement for some state agencies to increase their oversight.
Instead of an agency that utilizes an expansive view of its authority to redress what it perceives as consumer harms, the memorandum suggests that the CFPB under the Trump administration will instead only look to exercise powers that it is explicitly granted via statute and, even then, only to address “actual” and “tangible” consumer harms. And, where permissible, the CFPB appears poised to defer to other federal agencies and the state regulators.
The reduced focus on fintechs, P2P platforms, consumer data, and digital payments will likely be well received by nonbanks, but all in the industry should be vigilant for state regulators to step into the space vacated by the CFPB.
How To Read a Balance Sheet – And Why You Care
Think of a balance sheet like a financial selfie — it won’t tell you everything, but it captures a lot in one frame. For business owners and investors, it’s a starting point: a snapshot of what a company owns, what it owes, and what’s left over. It won’t reveal the full value of a business (that’s a more complex portrait), but it’s a critical tool for spotting red flags, gauging stability, and making smarter decisions.
Understanding the Basics
A balance sheet is one of the key financial statements used by businesses, investors, and professionals to assess financial health. Unlike the income statement, which tracks revenue and expenses over time, a balance sheet provides a snapshot of a company’s financial condition at a specific moment. A balance sheet outlines what a company owns, what it owes, and the net worth left over.
What’s in a Balance Sheet?
Balance sheets are typically comprised of three main sections:
Assets: What the company owns, including cash, accounts receivable, inventory, and long-term assets like equipment and property.
Liabilities: What the company owes, such as accounts payable, loans, and long-term debt.
Equity: The difference between assets and liabilities, representing the owner’s or shareholders’ stake in the company.
Who Needs To Read a Balance Sheet?
Understanding a balance sheet is vital for various stakeholders, including:
Business Owners: Use balance sheets to track financial stability, make informed operational decisions, and plan for future growth.
Investors: Assess risk and return potential before investing in a company by analyzing its financial health and performance.
Lenders: Determine creditworthiness before approving loans, ensuring the company can meet its debt obligations.
Attorneys and Accountants: Analyze financial disputes, ensure compliance with regulations, and provide accurate financial reporting.
Legal and Financial Terms Explained
Understanding specific legal and financial terms is crucial when analyzing a balance sheet. Key terms include:
Contingent Liabilities: These are potential obligations that may arise depending on the outcome of a future event. For instance, if a company is facing a lawsuit, the potential financial loss is considered a contingent liability. Recognizing these liabilities is essential for assessing the company’s financial health accurately.
Deferred Tax Liabilities: These arise when there’s a difference between the company’s accounting earnings and taxable income, leading to taxes owed in the future. It’s important to account for these to understand the company’s future tax obligations.
Goodwill: An intangible asset that arises when a company acquires another business for more than the fair value of its net identifiable assets. Goodwill reflects factors like brand reputation and customer relationships. Regular assessment for impairment is necessary to ensure the balance sheet reflects the true value of this asset.
Intangible Assets: Non-physical assets such as patents, trademarks, and copyrights that provide economic benefits. Proper valuation and amortization of these assets are crucial for accurate financial reporting.
Minority Interest (Non-Controlling Interest): Represents the portion of a subsidiary not owned by the parent company. It’s shown in the equity section of the balance sheet, indicating the claim of minority shareholders on the subsidiary’s net assets.
Treasury Stock: Refers to shares that were issued and later reacquired by the issuing company. These shares are deducted from shareholders’ equity, as they are no longer outstanding and do not confer voting rights or dividends.
Why It Matters
Liquidity and Solvency
Steven Stralser, author of MBA in a Day, highlights that balance sheets reveal a company’s ability to meet its short-term and long-term obligations. He points out that if a company struggles to cover its debts with available assets, it signals financial instability. Investors, lenders, and vendors frequently rely on balance sheets to assess risk.
Key Financial Ratios
Professionals often use balance sheets to calculate essential financial ratios, including:
Current Ratio (Current Assets / Current Liabilities): This evaluates a company’s ability to cover short-term liabilities.
Debt-to-Equity Ratio (Total Liabilities / Shareholders’ Equity): This measures the extent to which a company relies on debt to finance its operations.
Working Capital (Current Assets – Current Liabilities): This reflects available operating liquidity.
Terry Orr, a forensic accountant, explains that these ratios are used by investors, analysts, lenders, and legal professionals to make predictions and decisions about how a company can continue to operate.
Common Balance Sheet Mistakes
Misclassifying Assets or Liabilities
John Levitske, a valuation expert, notes that incorrectly classifying assets or liabilities can distort financial statements. He explains that while accounts receivable is considered an asset, adjustments should be made if those receivables are unlikely to be collected to ensure accurate financial reporting.
Overlooking Off-Balance Sheet Items
Candice Kline, a bankruptcy attorney and professor, notes that some liabilities, such as lease obligations or contingent liabilities, may not appear on the balance sheet. Kline advises looking beyond the numbers and reviewing financial footnotes for a clearer picture.
Final Thoughts
Reading a balance sheet isn’t just about numbers — it’s about understanding a company’s financial story. Whether advising clients, making investment decisions, or running a business, a strong grasp of balance sheets leads to more informed financial choices.
To learn more about this topic view MBA Bootcamp / How to Read a Balance Sheet – And Why You Care! The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about accounting and finance principles for business owners and investors.
This article was originally published here.
©2025. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.
Incoming Defense Contract Audit Agency Reorganization
On April 7, 2025, the Defense Contract Audit Agency (DCAA) announced a comprehensive reorganization plan aimed at consolidating its Region and Corporate Audit Directorates (CAD) into three primary Directorates in response to increased pressures to reduce costs and improve efficiency. For context, the DCAA provides audit and financial services to the Department of Defense (DoD) and certain other federal government agencies. The DCAA plans to complete the reorganization by September 30, 2025, if not sooner.
As an overview, the proposed reorganization plan aims to reduce the number of DCAA field offices, streamline administrative structures and refocus operations to better align with DoD needs. DCAA plans to close and consolidate 40 offices, immediately impacting approximately 160 employees. Further, there will be a new organizational structure including a central headquarters and three primary Directorates – Land, Sea and Air. The audit offices of the CADs will be merged into one of the aforementioned primary Directorates.
Although the DCAA’s reorganization is meant to result in greater efficiencies, the impact is unclear at this time but may influence audit processes and potentially the frequency of audits. Contractors should stay informed and remain proactive to ensure compliance with future DCAA changes.
Deference Denied to the South Carolina Department of Revenue
The South Carolina Court of Appeals determined that Duke Energy Corporation (“Duke”) was entitled to claim nearly $25 million in investment tax credits on its 1996 to 2014 South Carolina income tax returns, as the investment tax credit’s five-million-dollar statutory limitation was an annual—not a lifetime—limitation. Duke Energy Corp. v. S.C. Dep’t of Rev., No. 2020-001542 (S.C. Ct. App. Mar. 26, 2025).
The Facts: Duke provides electrical power to millions of customers in the United States, including to residents of South Carolina. To encourage business formation, retention, and expansion, South Carolina provides a tax credit to businesses that invest in certain property in South Carolina, provided specific requirements are met (the “Investment Tax Credit” or the “Credit”).
On its 1996 through 2014 South Carolina corporate income tax returns, Duke claimed a total aggregate Investment Tax Credit of $24,850,727. The South Carolina Department of Revenue (“Department”) audited Duke’s tax returns and disallowed $19,850,727 (approximately 80 percent) of the Credit that Duke claimed. The Department determined that Duke was entitled to claim only five million dollars of Investment Tax Credit—not because Duke did not meet the statutory requirements of the Credit but because the Department believed the statute imposed a five-million-dollar lifetime limitation on the Credit.
Duke protested the Department’s determination, arguing that the five-million-dollar limitation applied on an annual basis. The South Carolina Administrative Law Court (“ALC”) found the statute to be ambiguous and interpreted the Investment Tax Credit’s five-million-dollar limitation to be a lifetime limit. Duke appealed the ALC’s order to the South Carolina Court of Appeals.
The Law: South Carolina’s Investment Tax Credit is available “for any taxable year” in which corporate taxpayers meet the statutory requirements. The statute states, “[t]here is allowed an investment tax credit against the tax imposed pursuant to [the South Carolina Income Tax Act] for any taxable year in which the taxpayer places in service qualified manufacturing and productive equipment property.”
At issue here was the statute’s subsection imposing a five-million-dollar limit amount on the Credit for utility and electric cooperative companies—“[t]he credit allowed by this section for investments made after June 30, 1998, is limited to no more than five million dollars for an entity subject to the [South Carolina] license tax [on utilities and electric cooperatives].”
The Decision: The South Carolina Court of Appeals found that the statute was not ambiguous, reversed the ALC’s order, and held that Duke was entitled to the $19,850,727 of Investment Tax Credits disallowed by the Department.
In making its determination, the Court analyzed the statute as a whole, indicating that while the five- million-dollar limitation subsection does not contain any time-specific language, it refers to the Investment Tax Credit provision that explicitly defines the Credit as being available in “any taxable year.” The Court also looked to the statute’s purpose provision, which indicates that the Credit was designed to “revitalize capital investment in [South Carolina], primarily by encouraging the formation of new businesses and the retention and expansion of existing businesses . . . .” Reading these provisions together, the Court concluded that because taxpayers can claim the Credit each year the statutory requirements are met, and because the Credit’s purpose is not limited to initial business formation, the Legislature intended to encourage continued investment in South Carolina and a lifetime limit of five million dollars does not comply with that intent.
The Court indicated that while it is deferential to the Department’s interpretation of its laws, it could not give deference to an interpretation that conflicts with the Court’s own reading of a statute’s plain language. This is a nice reminder that even in states where courts are deferential to an agency’s statutory interpretation, deference will not always be provided.
Europe: Central Bank of Ireland updates its UCITS Q&A on Portfolio Transparency for ETFs
In a move that will be welcomed by asset managers conducting ETF business in Ireland, or those who are hoping to move into the Irish ETF space, the Central Bank of Ireland has moved to allow for the establishment of semi-transparent ETFs by amending its requirements for portfolio transparency.
Previously, the Central Bank’s UCITS Q&A 1012 provided that the Central Bank would not authorise an ETF unless arrangements were put in place to ensure that information is provided on a daily basis regarding the identities and quantities of portfolio holdings.
The revised Q&A however, while retaining the ability for ETFs to publish holdings on a daily basis, now provides flexibility in that “periodic disclosures” are now permissible, once the following conditions are adhered to:
appropriate information is disclosed on a daily basis to facilitate an effective arbitrage mechanism;
the prospectus discloses the type of information that is provided in point (1);
this information is made available on a non-discriminatory basis to authorised participants (APs) and market makers (MMs);
there are documented procedures to address circumstances where the arbitrage mechanism of the ETF is impaired;
there is a documented procedure for investors to request portfolio information; and
the portfolio holdings as at the end of each calendar quarter are disclosed publicly within 30 business days of the end of the quarter.
These new semi-transparent ETFs will be most attractive for active asset managers who have previously been dissuaded from establishing an ETF in Ireland due to their reluctance to share their proprietary information.