Similarities and Differences in Annual Reports of Wal-Mart Stores Inc and J Sainsbury Plc - Case Study Example

Corporate Annual Reporting Financial and other performances and positions of corporations in different countries are reported annually as per respective legal, regulatory and cultural/ customary requirements of those countries. Legal requirements emerge out of enacted corporate legislations and also from regulations issued by stock exchanges where securities are listed from trading. Regulatory procedures and requirements of financial reporting are the institutional rules, procedures, and methods such as GAAP as developed and adopted by different countries. Cultural regulations are conventions developed over period of time to impress upon future investors and other stakeholders. In this study two companies are selected, one each from two different and contrasting backgrounds for the purpose of comparative analysis of application of legal, institutional, and cultural regulations in annual reporting of such companies. The companies are Wal-Mart Stores Inc from U.S and J Sainsbury Plc from UK. These companies belong to same grocery and food chain stores industry. Published annual reports of any company are normally divided into different categories to provide financial and other reporting in varying degree and styles as per customs and legal requirements of the respective nation. Annual report of J.Sainsbury Plc is divided into the categories of Annual Review, Governance, and Financial Statements & additional information. Wal- Mart Stores Inc has applied the broad categories of Presidents & CEO Report, Directors Reporting (including Management and Discussion analysis), and Financial Statements. It will be observed that categorization of reporting of J.Sainsbury Plc is more logical and appropriate though both published annual reports carry information and reviews as per established norms in each country. However, in the write up the analysis of presentation of information in selected annual reports is carried out under following categories: Financial Statements and related information Governance reporting, and Annual business reviews. Financial Statements and related information Legal and institutional requirements of financial reporting in US are mostly contained under the Security Exchange Act 1934, Sarbanes Oxley Act of 2002, and US GAAP (covering accounting standards issued by Financial Accounting Standard Board (FASB) among other sources of US GAAP). Every year listed companies have to file an annual report in form No. 10- K with Securities and Exchange Commission containing financial statements, business reviews and other information sought in 10- K as per the Securities Exchange Act 19341. It is seen that printed annual reports, issued to investors, stakeholders, and public at large through websites of companies not only include the information required for 10- K reporting but also additional information and reviews of performances that attract investors and stakeholders . The information sought for financial reporting in Form 10 K is as under: 1. Financial statements and supplementary data as under: Consolidated Statement of Income, Balance sheet, Statement of Shareholders’ Equity, Statement of Cash Flows, Notes to the Consolidated Financial Statements, and Report of Independent Registered Public Accounting Firm 2. Changes in and disagreements with accountants on accounting and financial disclosures. The financial statements included in the printed 2008 annual report of Wal- Mart meant for stakeholders and public at large duly include the above information as well some other information into the notes to its consolidated financial statements. Though the financial statements of Wal- Mart have been prepared using US GAAP (that is standards (SFASs) issued by FASB among other GAAP), but this fact has not been acknowledged or declared in the notes to financial statements to published financial statements or elsewhere in the annual report. In UK companies prepare their financial accounts as per the provisions of the Companies Act, 2006 and UK GAPP covered by FRSs issued by Accounting Standard Board (ASB). Moreover listed companies in the United Kingdom have to follow International Financial Reporting Standards (IFRSs) issued by International Accounting Standard Board (IASB). Sections 385 and 286 of Companies Act, 2006, seek individual financial statements (i.e., balance sheet and profit and loss account) of the quoted companies to be prepared in accordance with International Accounting Standards (IASs) (now known as IFRSs). Further, the quoted companies are now also required to prepare group financial statements as per sections 399 to 402 of CA 2006 unless those companies are exempted under the provisions of the companies act to maintain group accounts. These group accounts are also required to be kept in accordance with IFRSs. Moreover, a quoted company has to declare in the notes that financial statements have been prepared following international accounting standards. J Sainsbury Plc annual report 2008 under category of ‘Financial Statements and additional information includes the following information: Independent Auditor’s report, Group income statement, Statement of recognized income and expenses, Balance Sheets, Cash flow statements, Notes to the financial statements, Five years financial record, and Additional shareholder information. It may noted that companies act treats only the balance sheet and profit and loss account as the parts of financial statements but as per GAAP cash flow statements and notes to financial statements are also compulsory parts of the financial statements. Also the printed annual report contains more information than required under companies act and the applicable GAAP. The additional information like five years financial record and additional shareholder information is cultural or customary requirement of the annual report. Note 2 to group financial statements states clearly that ‘the group financial statements have been prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union and International Financial Reporting Interpretation Committee (IFRIC) interpretations and with those parts of the Companies Act 1985 applicable to companies reporting under IFRS (page 39)2 Accordingly J Sainsbury Plc has duly complied with the legal provision by declaring the accounting standards being followed for preparation of financial statements. Sarbanes and Oxley Act 2002 of US provide for certain regulations to be followed by listed companies with regard to internal controls and other matters. The regulations are as under: 1. CEO and CFO of the listed companies have to certify that the financial statements fairly and accurately represent the financial position of the company. 2. All material changes with regard to financial position of the company are requited to be disclosed. 3. Each annual report must contain a report on controls established by the company. “This report states the responsibility of management for establishing and implementing adequate procedures for financial reporting. This report must include: assessment of effectiveness of internal control structure and procedures, any code of ethics and contents of that code. ‘(Brief Summary of Sox Act)3 4. Management is also required to report upon the effectiveness of internal controls over financial reporting. 5. Similarly the independent auditor has to examine the effectiveness of the controls established by the management and report on such examination. The auditor’s report must also contain an opinion on the assessment made by the management on the effectiveness of internal controls. The annual report of Wal Mart for the year 2008 duly contains the management report to shareholders wherein management has reported on effectiveness of internal controls over financial reporting, using the criteria set forth by the Committee of Sponsoring Organization (COSO) of the Treadway Commission in Internal Control- Integrated Framework. (page 50)4 Further, the independent auditor’s opinion over the assessment of the management assessment of internal controls is also included in the auditor’s report. Governance Reporting Broadly the governance reporting in an annual report of company is reflected under the category containing directors’ reporting. The legal reporting requirements as per Part I and Part II of instruction for filing Form 10- K issued by SEC under the Security Exchange Act, 1934 (page 7,8, 9)5 are as under: 1. Information about development of the business to be provided since the start of fiscal year under consideration and not since inception of the business. 2 A discussion on the risk factors, where applicable, is to be included in the return. 3. Information about properties and any legal proceedings as required under provisions of Security Exchange Act, 1934. 4. Information about equity securities sold and repurchased by the company during the year. 5. Selected Financial data as per regulation 301 of Regulation S-K, 2006 6. Management Discussion and Analysis (MD &A) of financial conditions and results of operations., 7. Information about quantitative and qualitative market risks. 8. Information about Controls and Procedures as per Items 307 and 308 of Regulation S-K. Wal- Mart 2008 annual printed report includes the following information and reports in this regard: List of present directors, Financial reviews containing eleven year financial summary, and Management discussion and analysis of financial conditions and results of operations (including review of market risks and summary of critical accounting policies). UK CA 2006 seeks the directors’ report to include the following information under sections 415 to 422: Names and other particulars of persons who were directors during the year under consideration, Recommendation of the amount to be declared as dividend, Business Review, Comprehensive analysis of development and performance of the company during the year and its position as at end of the year, Information about environmental matters, company employees, and social and community issues, Contractual and other arrangements essential for the business of the company, Directors’ remuneration report, and Statement of directors’ responsibilities Companies in UK also have to comply with requirements of ‘combined code of corporate governance 2006’ by issuing a corporate governance report in the annual return. 2008 annual report of J Sainsbury has included the under mentioned information and reports that comply with above stated legal requirements: Directors report, Statement of corporate governance (that includes among others the review of performances of different committee of board, statement of responsibility of board for internal controls including risk management, and statement of compliance of ‘Combined code on corporate governance 2006), Remuneration report, and Statement of directors’ responsibilities. Annual Reviews It is seen that annual returns also contain annual reviews of performances of varying degree in the statement of chairman as well as in report of CEO in order to attract future investors and impress the existing stakeholders. These reviews and in particular the presentation of Chairman’s statement or CEO’s report are more customary in nature, as there are no legal requirements for their presentations in the annual report. Chairman’s statement is generally to the point and impressively worded. It “will normally be a brief statement giving an overview of the state of affairs of the company and principal commercial factors affecting it during the financial year ended, and those likely to affect it in the future.”(John Glynn and others, page 382)6 The chairman’s statement in J Sainsbury Plc 2008 annual report is of one page only and contains no highlighted information. It is very informative and covers a wide range of current issues affecting the business of J Sainsbury Plc. On the other hand, President and CEO’s statement in 2008 annual report of Wal- Mart is decorated with a chart highlighting financial achievements of the company. CEO’s statement (as in J Sainsbury annual report), also called operational and financial review, ‘will normally be a more detailed review of the company’s operations, providing information about the performance of the principal operating units/ segments and may run to several pages.”(John Glynn and others, page 382)7. CEO’s statement in J Sainsbury annual report contains corporate objectives as well as operational and financial reviews of the company. Annual report of Wal- Mart Stores Inc contains highlights and achievements of the company under different segments, particularly on international circuit, after the statement of Chairman cum CEO. These reviews of business are presented in a fashion to attract future investors and also to make stakeholders proud of their association with Wal- Mart. In nutshell the printed annual returns of J Sainsbury Plc and Wal- Mart Stores Inc are not only informative about achievements of respective companies but also serve as documents promoting the growth of these companies. References: Read More