Meta Platforms received an unusual warning from its auditor in its latest annual report. Ernst & Young identified the accounting treatment of the company's $27 billion data center project as a "critical audit matter," highlighting the complexity and risks involved in the assessment.
According to a Thursday report, while EY ultimately approved Meta's accounting approach, such a warning label is extremely rare for specific high-profile transactions at major audit clients. The project, named Hyperion, was moved off Meta's balance sheet through a joint venture established with Blue Owl Capital.
EY noted in its report that auditing Meta's conclusion was "particularly challenging, as it required significant judgment" to determine that Meta was not the "primary beneficiary" of the joint venture. This accounting arrangement has drawn scrutiny from investors and lawmakers.
Four Democratic senators, including Elizabeth Warren, wrote to the Financial Stability Oversight Council led by Treasury Secretary Janet Yellen on January 22. They requested an investigation into risks posed by AI-related debt to the financial system, specifically citing Meta's joint arrangement with Blue Owl as "exemplifying the characteristics of such arrangements."
**Off-Balance-Sheet Treatment of $27 Billion Project** Meta transferred the Hyperion data center project to a new joint venture with Blue Owl Capital last October. Meta holds a 20% stake in the venture, while funds managed by Blue Owl own the remaining 80%. A holding company named Beignet Investor holds partial ownership in Blue Owl and issued a then-record $27.3 billion in bonds to investors.
Under accounting standards, the joint venture is classified as a "variable interest entity." Meta determined it was not the "primary beneficiary" of this entity, thus not required to consolidate the venture's assets and liabilities onto its own balance sheet. The "primary beneficiary" is defined as the party with the power to direct activities that most significantly impact the joint venture's economic performance.
Meta had previously obtained an approval letter from the U.S. Securities and Exchange Commission regarding this accounting treatment.
**Auditor's Uncommon Warning** EY's designation of this as a "critical audit matter" signifies it was among the most difficult and highest-risk judgments the auditor had to make. EY stated that auditing Meta's conclusion that it was not the primary beneficiary was "especially challenging due to the significant judgment required to identify activities that most significantly affect the economic performance of the variable interest entity."
While EY did not express disagreement with Meta's approach, the labeling indicates the matter was one of the most complex aspects of the audit. Such a warning is uncommon for specific, high-profile transactions at major audit clients.
Meta's claim that it lacks control over the joint venture has sparked controversy and attracted attention from investors and lawmakers. As a hyperscale cloud services provider, Meta possesses the expertise for operating AI data centers, whereas Blue Owl is a financial institution. The joint venture's economic success will likely depend on Meta's decisions and specialized capabilities.
The senators noted in their letter, "An increasing portion of these financing arrangements is complex and opaque—making it easier for companies to obscure the true nature of their balance sheets." They argued that Meta's arrangement with Blue Owl "exemplifies the characteristics of such arrangements" and urged the oversight council to investigate risks from AI-related debt to the financial system.
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