16.5. MEASURING COMPLEXITY

While investors and analysts may increasingly bemoan the increasing complexity of financial statements, there is no simple or easy measure of complexity. There are some who would argue that they know complexity when they see it, but this is not a very satisfying or objective measure of complexity. In this section, we consider some ways in which we can measure the complexity of a firm's financial statements.

16.5.1. Volume of Data in Financial Statement

A simplistic (but surprisingly effective) measure of complexity is the volume of data in a financial statement. For instance, the 10-K filings made by firms with the Securities and Exchange Commission (SEC) range in size from less than 200 pages to in excess of 1,000 pages. In Table 16.1, we summarize the length of the filings for the 2004 financial year for 10 large market capitalization firms in the United States.

Using this measure, Citigroup and AIG have the most complex financial statements, whereas Microsoft, Intel, and Johnson & Johnson have the least complex statements of the 10 firms listed. The reason it is a simplistic measure, of course, is because a short 10-K can reflect a simple business and financial structure or just indicate an absence of information about the firm's operations. However, looking at differences across firms on the length of the 10-K does provide some interesting insights into why some companies become more complex (at least in terms of the 10-K length):

  • Nonfinancial service ...

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