Wehavesavedthemostodiousofthereasonsforcomplexity
forlast.Firmssometimes createcomplex structurestofool
investorsintobelievingthatthey(thefirms)areworthmore
thantheyreally areorthattheyowelessmoneythanthey
truly do. In many cases, what starts as a small evasion
mushroomsovertimetobecomealargeone,andwhenthe
truthcomesout,asitinevitablywill,therearelargeeconomic
andsocialcosts.Theexecutivesatthesefirmswillcomplain
mightilyabouttheaccusationsofdeceit,andtheywillusually
find ways to rationalize their actions.
17 Note, though, thatinvestors and analystsshouldnot be
relievedoftheirresponsibilitywhenfirmspulloffthesecon
games.Forthedeceittowork,weoftenneedanalystswho
look the other way and do not ask tough questions of
managers,andinvestorswhobasetheirinvestmentchoiceson
past history and little analysis.
MEASURING COMPLEXITY
While investors and analystsmayincreasinglybemoan the
increasing complexity of financial statements, there is no
simpleoreasymeasureofcomplexity.Therearesomewho
wouldarguethattheyknowcomplexitywhentheyseeit,but
this is not a very satisfying or objective measure of
complexity.Inthissection,weconsidersomewaysinwhich
we can measure the complexity of a firm’s financial
statements.
Volume of Data in Financial Statement
A simplistic (but surprisingly effective) measure of
complexityisthevolumeofdatainafinancialstatement.For
instance,the10-KfilingsmadebyfirmswiththeSecurities