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Whymightthisaddtothecomplexityoffinancialstatements?
Depending on what assets they invest in and how they
structurethese investments,firms canhide assetsand debt
from investors. To be fairto accountants,there is usually
enough information provided in the footnotes to financial
statementstocorrectformanyoftheinconsistenciesinthe
United States.
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Fuzzy Accounting Standards
In the past few years, we have acquired a sense of the
discretionarypowerpossessedbyfirmsinthemeasurementof
income and capital. During the 1990s, for instance, more
aggressivefirmsusedtheleewaythatwasavailabletothemin
the accounting standards to report higher earnings, lower
capitalinvested,andmuchhigherreturnsoncapital.Consider
three examples:
1.One-timecharges.Firmshavebeenincreasinglyinventive
in theiruse of onetimeand nonoperating chargesto move
normaloperatingexpensesbelowtheoperatingincomeline.
In fact, the appearance of these charges year after year
essentially overstates operating income and can
simultaneously reduce the book value of capital invested.
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2.Hiddenassets.Firmshavealsousedthewiggleroomin
accountingstandardstomoveassetsanddebtofftheirbooks,
using special purpose entities and partnerships.