FINANCIAL REPORTING AND THE PUBLIC IMAGE.
Thomas B. Hogan Partner, Executive Office
Presented before the Verbandes der Chemischen Industrie, Berlin-May 1974
Those of us who are engaged in the preparation of the financial statements of large industrial enterprises today find ourselves in a curious—and uncomfortable—
posture. On the one hand, we have a larger and more critical readership than we have ever had. On the other hand, those who read our end product, the financial statements, are too often suspicious of their fairness and their accuracy. A security analyst in the United States once, only half humorously, described the operating statement of a large multinational conglomerate as being much like the miniskirt worn by his secretary: "What it reveals is interesting; what it conceals is essential!" He likened the balance sheet to the costume worn by the aging cabaret performer—the generous use of a corset to conceal the fat (the creation of secret reserves) and a little padding here and there to conceal the thin spots (reversals of reserves).
Unfortunately, in America the suspicion with which financial statements are viewed by the financial community has not been confined to semihu-morous comments. We have seen a substantial and frightening increase in the number and the severity of legal actions in which the management, the directors and the auditors have had to defend their financial judgments in the courts. Prior to 1940 there was little litigation that related to the accuracy of the financial statements. During the past thirty years there has been a substantial increase in this type of litigation in the United States. In some cases the defendants have had to pay substantial sums to disgruntled stockholders who claimed to have been misled by the financial statements; in some cases the defendants have been forced to resign their official positions; and in some cases they have been found guilty of criminal offenses. That this wave of litigation against corporate officers has to date been largely limited to the United States should give only scant comfort to businessmen in other countries. Lawsuits against corporations and their officers by shareholders (described by Americans as class actions or derivative suits) have proved to be extremely profitable to the attorneys who specialize in this type of litigation. I am sure their counterparts in Germany are carefully examining the possibilities.