You are on the board of directors of a large German corporation. You are in the years before 2008 when the SEC required all U.S.-listed companies to prepare reports using U.S. GAAP. For several years, the board has been discussing the possibility of listing the company’s shares on the New York Stock Exchange. The CEO has approached the SEC several times asking for permission to list in the United States without also being required to reconcile its reported income to U.S. GAAP. So far, the SEC has refused to compromise. As a result, the CEO has decreed that the company will not list its shares in the United States.
You know that the reason the CEO is so vehemently opposed to reporting net income under U.S. GAAP is that doing so would reveal the income manipulation that your company has engaged in during the past few years. Historically, your company has overstated expenses, thereby creating a large amount of “hidden reserves.” During the past two years, those hidden reserves have been reversed, increasing reported income and covering up mounting operating losses.
You are fearful of the company’s survivability in the long run as long as operating losses are being covered up instead of addressed head on. The board of directors meets tomorrow, and one of the items on the agenda is yet another proposal to list shares on the New York Stock Exchange. What points should you bring up during that discussion?