Secret Reserve


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Secret Reserve

The amount by which shareholder equity in a company exceeds the amount claimed on its financial statements. Secret reserves arise when a company overstates its liabilities or understates its assets, usually because its accounting practices depart from GAAP. In such cases, the company must declare that its accounting is different from that of most other companies. The secret reserve may eventually be converted to cash and distributed to shareholders. It is also called the hidden reserve.
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The secret reserve episode suggests that the BSA board acted largely as a self perpetuating oligarchy, to the extent that it took decisions which primarily satisfied itself.
We argue that the use of secret reserves was intended to extend directors' control over BSA's assets by preventing shareholders from monitoring the annual performance of the company.
Buckley, the presiding judge, endorsed the acceptability of internal or secret reserves. The creation of such reserves had the effect of producing a balance sheet that would "shew the financial position ...
Arthur Chamberlain's reasons for opposing secret reserves were reported in The Times on 2 August 1906.
The Directors' Defense: Rogers' case for the new policy on secret reserves was based on two arguments.
His other argument was that the creation of secret reserves was part of normal practice by respectable businesses.
BSA's Motives for Non-disclosure: One reason for the creation of secret reserves was the discretion they gave directors in disclosing performance: while useful because they could be used to prevent short-termists from bleeding the company dry, more importantly, as Chamberlain suggested, they allowed smoothing of income.
(14.) As a check for robustness of results to censoring associated with potential bidders avoiding auctions with secret reserves and high minimum bids, we estimated the models for the subsample of auctions with no reserve and a minimum opening bid less than the sample median of $25.
A less intrusive deterrent would be for auction houses to disclose the existence of a secret reserve at the end of the bidding, rather than the beginning, which encourages bidders to bid the true market value of the piece or risk not getting it.