University of California
Type of paper: Thesis/Dissertation Chapter
Case Analysis: The Annual Report
1. The basic factors of communication that must be considered in the presentation of the Annual Report are compliance with accounting principles and regulations, accuracy of the information presented, and how much information you are going to disclose. The management has a lot of control over what and how much information it wants to disclose to the users of their financial report. Users can be shareholders, investors, customers, or if you want it or not, competitors. Therefore management doesn’t want to disclose too much strategic details about their future plans. However, it also has to attract prospective investors and therefore needs to give them enough information about the companies’ health. 2. One part of the Annual Report that is very interesting for investors is the Management’s Discussion and Analysis section. It gives the user of the financial report more specific details about how the company has done that year and contains information that cannot be found in the financial data. This section can include coverage over any favorable or unfavorable trends and any significant events or uncertainties in the areas of liquidity, capital resources, and results of operations (Ormiston, 2013).
Another section of the Annual Report is the Proxy Statement. It is required by the SEC and solicits shareholder votes as many shareholders don’t attend shareholder meetings. This section also contains voting procedures, background information about nominated directors, executive compensation, etc. This information helps investors and creditors by providing information about the longevity and compensation of the companies’ top management as well as corporate governance (Ormiston, 2013). 3. One advantage of stating well-defined corporate strategies in the Annual Report is to attract investors. Prospective investors in your company want to see that your company is healthy and that you are generating cash flows from operations. They want to know if you are going to be able to pay out dividends. Therefore stating a well-defined strategy for the future can possible attract more investors. Another advantage of stating your strategy is that current investors remain investing in your company when they see that your company has a bright future. Investors like to plan ahead and therefore want to know your corporate strategy in advance.
A disadvantage of stating well-defined strategies in the Annual Report is that you also disclose critical information to your competitors. By doing so, your competitors know what your plans are and can try to position them better to compete with you. Another disadvantage of stating your corporate strategy in the Annual Report is that your customers might not like a change in your strategy and switch to your competitors. An example for this might be deciding to outsource all manufacturing to China. This corporate strategy might outrage your customers and lead them away from your company. 4. The effectiveness of annual reports in fulfilling the information needs for current and potential shareholders is usually good because management tailors the Annual Report as much as possible to the needs of investors in order to attract more investment into its company. Items like the MD&A or Pandora, which includes additional material to attract current and prospective investors, are specifically designed to attract more investment while giving the shareholder enough useful information to make a decision.
Creditors of the company find the cash flow from operations statement useful because it provides them with information about how much money the company is making to determine their ability to pay their debt back to you. For most employees of the company the Annual Report is probably hard to read and understand because of the complexity and volume of information that it contains. They would most likely suffer from information overload and therefore the Annual Report is in my opinion not very effective in fulfilling their information needs. Most customers of a company are not going to be much interested in reading the financial statements of the company where they buy products.
However, if important information about the company’s practices leaks to the public, the customers may switch to a competitor if they strongly disagree with said practice or strategy. Financial Analysts are probably going to find the information disclosed in the Annual Report very effective because they are used to reading these reports and know where to find useful information. However, because management has some control over what information to disclose or not to disclose, there is also some hard-to-find or missing information for Financial Analysts. This information can be employer relations with management, morale and efficiency of employees, or the firm’s prestige in the community.
5. Management knows when creating the Annual Report that competitors are going to analyze their strategy as well as shareholders and other users. Therefore it needs to be careful about what information they want to disclose. The dilemma here is that you want to disclose enough information in order to attract investments, but cannot disclose too much information because otherwise your competitors are going to position themselves against you. This dilemma affects the decision about what information managers provide in their annual reports. 6. The sustainability report gives information about the environmental, social, and governance performance of a company and is a non-financial report. Many companies utilize this report to create a better image of their company in the public.
This report is intended to show the companies’ performance and compliance with environmental standards and ratings. Sustainability reporting started in the 1980s by companies in the chemical industry who had image problems because of their negative impact on the environment. Nowadays, many companies use sustainability reports to improve internal processes, persuade investors, and improve their image in the public. This information can be helpful to investors because it portrays transparency and accountability and assures the investor of a good public image of the company.
Ormiston, A., & Fraser, L. M. (2013). Financial Statements. Understanding financial statements
(10th ed., p. 12). New York, NY: Pearson Education.