REASONS FOR COMPLEXITY
Firms with complicated financial statements have to bear
muchoftheresponsibilityforthecomplexity,nomatterhow
strongorweaktheaccountingstandardsare.Thisisbecause
accounting standards establish a floor on what has to be
revealedandnotaceiling.Firmsthatwanttorevealmoreto
theirinvestorscanalwaysdoso.Infosys,anIndiansoftware
firm, for example, has financial statements that are more
transparent thanthose provided by most U.S. firms, even
though Indian accounting requirements on disclosure are
much weaker than U.S. accounting standards.
13 Inthissection,weconsidersomeofthereasonswhyfirms
maychoosetomaketheirfinancialstatementsmorediffuse
and difficult to understand.
Control
Manyincumbentmanagersfearhostiletakeovers,andattempt
to preempt hostile acquirers by structuring a bewildering
array of subsidiaries and holding companies to hide their
assets, and by creating new financial securities—common
stockwithdifferentvotingrights,forexample.Howdothese
actionskeephostileacquirersaway?First,informationthatis
not available to investors is also unavailable to potential
hostileacquirers,makingitdifficultforthemtodetectwhena
firm’s assets are being poorly managed and undervalued.
Second, the complicated holding structure and financial
instruments usedby thefirmcan makeit difficultto gain
effectivecontrolofthefirm.It shouldcomeasnosurprise
thatfirmsthataretransparent abouttheirfinancialstanding
also tend to be transparent about corporate governance,