Consideroneexample.Intheearly1990s,investmentbankers
createdasecuritycalledtrustpreferredstock.Thesesecurities
allowedfirmsto generatethetaxbenefitsofdebtbutwere
treatedasequitybytheratingsagencies.Thisfreedfirmsthat
otherwisewouldnothavebeenableto borrow(because of
bond ratings constraints) to use trust preferred stock for
expansionandinvestments.Whileratingsagenciesdidcatch
onovertimetothefactthatthesesecuritiesweremoredebt
than equity, creative bankers devised newer and more
complicated instruments to let companies borrow money
without having the tag “debt” attached to it. The process
culminatedinthecollapseofEnron,wheretheaccumulated
debt in hidden partnerships and entities eventually came
together to destroy the firm.
In Summary
Complexityinaccountingstatementsisareflectionofboth
broad trends in accounting that affect all companies and
consciouschoicesmadebyfirms.Differencesintransparency
across countries can be best explained by differences in
accounting,regulatory,andpoliticalenvironments,butthere
arealsosignificantdifferencesacrosscompanieswithinany
country.Thesedifferencescanbetracedtohowthefirmis
structured,thebusinessesitoperatesin,andhowitexercises
its discretionary power within existing accounting rules.
Thus,afirmthatisinasinglebusinesscanendupwithvery
complex (and difficult to understand) financial statements
becauseitusescomplexfinancialinstrumentstoraisefunds
and isaggressive inits accountingchoices. Afirmwith a
complex business mix can work to make its financial
statements transparent by going well beyond the legal
requirements of disclosure.