Annual Report in Corporate America Today - Research Paper Example

Annual Report in Corporate America Today Table of Contents Annual Report 2 History 2 Purpose 3 Merits and Demerits 4 Information Available in Annual Report 4 Planning the Annual Report 6 References 8 Annual Report Annual reports are prepared by the companies to cater the needs of its various stakeholders like the shareholders, investors, creditors, suppliers, etc (Friedlob, and Welton, 2008, p. 3). The financial statements present in the annual reports of the publicly listed company are the major segments which provide the financial information of the company to the investors (Thomsett, 2007, p. 5). The annual report is an annual publication which the corporations or companies should provide to their shareholders describing their financial conditions and detailed operational functions. The reports of different companies differ in style, graphics and design. They are well designed with the pictures of the organization, the business it is into and other graphical representations of the financial data. History Securities Exchange Commission (SEC) was established in the year 1929 after the Great Depression and market crash of 1929-1930. The SEC Act in 1934 was passed in order to meet the fears of the investors and encourage them to invest in the stocks again. In this scenario companies started preparing annual reports. SEC filings contain only the financial part, but annual report also includes the non-financial performance of the company. It describes the organizational structure and the other internal aspects of the company, so that the investors and shareholders can get a transparent picture of the company. Annual report was a push for corporate accountability. Purpose Annual report is a powerful tool for the shareholders and the investors because the information available in the annual report gives them a complete picture regarding the financial and the financial condition of the company. The shareholders can view every minute detail in an annual report and can analyze the profit or loss that they are going to incur by the performance of the company at present or in near future. Even the prices of the shares of the company can be assumed by viewing the financial information available in the annual reports. The purpose of annual reports is to present the true picture of the company in the external environment, so that the results of the internal business functions are clear in front of the investors. In the turbulent economic situation, when most of the companies are becoming victims to insolvency, investors are apprehensive to take decisions. In such a situation it becomes important for a company to publish a detailed annual report. Significant amount of research studies have been conducted in the field of accounting information conveyed through the prices of securities of a company (Gonedes, and Dopuch, 1974). However, not much research studies have been undergone regarding the usefulness of financial statements for facilitating the decision making process of investors of a company. In one of the research studies, it has been argued by Chang, Most, and Brain (1983) that the information that are present in the financial statements published by a company assist the investors for their investment decision purposes in a significant way. Merits and Demerits Annual report is an important document issued by the company to reveal its financials at the end of the year. So this signifies that purpose of preparing the report is positive and for the advantage of the investors and shareholders. Moreover, there are lots of other information that play significant role in analyzing the marketing aspect of the company such as the market share, position among the competitors, target customers of the company, etc. The report also includes a sustainability analysis of the company. Other than this, the community programs designed for delivering the social responsibility is also described with statistics, so that solid proof can be provided to the shareholders regarding the spending of the company. Demerits can be only considered from the company’s side because they have to fully disclose all the financial data and cash flows for the company. So even if the company wants to hide some of its unnecessary spending, it cannot do so because it has to reveal the true facts and figures in the annual report, SEC filings on the basis of the accounting standards set by the regulatory bodies. Information Available in Annual Report Annual reports of a company are found to contain both its non-financial and financial information (Jones, 2007, p. 258). In recent years, there has been an increase in the volume of information that is produced in the annual reports of listed companies. It is mainly attributed towards the increased disclosure requirements as a result of various recent developments in the field of corporate governance mechanisms followed in the organizations (Gowthorpe, 2005, p. 247). Local authorities prepare annual reports to discharge their public accountability responsibilities. In whatever style the annual report of a company is designed, but the structure and the information remains the same. The heart of the annual report is the accounting statements of the company. The financial statement is the most important ingredient of annual report. It is a comprehensive report which includes the accounting policies, auditors’ reports, balance sheet, financial and operating review, cash-flow statement, profit and loss account, and other non-audited information. There are other information present in the annual report which are relevant for the stakeholders, such as the report corporate social responsibility, and the operations reports of the manufacturing firm. The financial statements in the annual report are prepared in compliance to the GAAP or IFRS standards. In United States the annual report is issued in more detail. This is called that Form 10-K that needs to be submitted to the US Securities and Exchange Commission. The publically listed companies issue a more limited version of the annual report. This is called the wrap report. The wrap report contains an annual report wrapped around the Form 10-K. The other information that can be acquired from the annual report is the letter of the CEO to the shareholders, corporate information, photos related to the business, management’s analysis and discussions, etc. The annual reports and its contents differ according to the industry and the nature of the company. The directors of the company are the responsible for the preparation of the annual report and the accounting statements according to the GAAP. The directors confirm the complied information and the report contains their signature signifying their consent to the mentioned information in the report. The Form 10 K is a black and white version of the financials of the companies, which is submitted to SEC, while Annual report is a decorative and descriptive version of such report. Many investors are unable to understand and interpret the performance of the company just by going through the form 10 K, so for the investors to understand the quantitative version of the report better companies issue a descriptive version. The major items that an investor must pay attention to in the annual report are the business functions of the company that is the operational functions. They must also carefully study the legal proceedings of the company, risk factors that the company considers, the accounting statements to check the revenue generation of the company, etc. The annual report must be formulated keeping in mind the stock exchange requirements, legal standards designed by International Accounting Standards (IAS), IFRS or GAAP. Planning the Annual Report One of the most important thing that can be said for annual report planning and designing, that though the structure of the annual reports are similar but each report produced by every company are unique and different from the other. The annual report should be prepared and delivered to the interested parties every year on time and no excuses should be given for not issuing the annual report. There are few significant criteria which the management of the company must keep in mind while planning their annual reports, they are: Delivering the report without fail: Any limited company failing to deliver its annual report on time suffers serious consequences, like legal regulatory problems and also unfavorable public relations. This may also tag the company as disorganized, or incompetent among the shareholders and investors. The media analysts are always suspicious of such companies and the excuses they offer for not issuing an annual report. Annual report is very vital for the company, so it must be planned throughout the whole year. Responsibility: The responsibility of preparing the annual report not only lies with the director but it is shared by the other members in the management too. The managers in the company, the senior executives, and the finance department play a major role in the company to prepare the financial statements. Avoid publishing indifferent reports: Indifferent reports are those which are incomplete. A report may be considered incomplete when they only contain insufficient information, such as only the financial statements but not the other non-financial reports, etc. These reports may be considered indifferent because neither those reports are investor friendly, or the actual purpose of preparing the annual report is served through it. Learn from previous mistakes: Sometimes companies modify their annual report pattern or design. This is done to avoid the common mistakes or errors of the previous report. The management may identify them or may take the option of outsiders such as prospective investors or shareholders (Stittle, 2003, p. 207-208). References Friedlob, G. T., Welton, R. E. (2008). Keys to reading an annual report. New York: Barron's Educational Series. Gonedes, N. J., & Dopuch, N. (1974). Capital Market Equilibrium, Information Production and Selecting Accounting Techniques: Theoretical Framework and Review of Empirical Work. Journal of Accounting Research, 12, pp. 48-129. Gowthorpe, C. (2005). Business accounting and finance for Non-specialists. (2nd ed.). Connecticut: Cengage Learning. Jones, M. (2007). Accounting for Non-specialists. New Jersey: John Wiley & Sons. Stittle, J. (2003). Annual reports: Delivering Your Corporate Message to Stakeholders. Burlington, Vermont: Gower Publishing, Ltd. Thomsett, M. C. (2007). Annual reports one hundred one. New York: AMACOM. Read More