Political Economy of Accounting - Coursework Example

 Corporate Annual Reports Corporations whose shares are traded publicly must issue an Annual Report at the end of each financial year for the perusal of its shareholders and other stakeholders. The stakeholders could be potential investors, creditors, employees, regulating agencies and competitors. In other words, Annual Reports indicate the financial health of a corporation to all concerned. It contains such information as financial statements, the Chairman's statement, and the management's assessment of prospects in the following years. The reports comprise a mix of charts, graphics and their descriptions. Some landmark events such as acquisitions or additional issue of stocks also find a place in these reports. The stock market crash of 1929 resulted in stringent standards applied to the preparation of Annual Reports. Hence the report has to be audited by a qualified accounting professional. The auditor's role is to check for any intentional or accidental errors in the company's accounts and give his/her stamp of approval if they are found truthful. In some countries it is mandatory for all publicly held companies to distribute their annual report to all shareholders. In addition to the annual report, shareholders can find more information about the corporation in their "10k" and "10Q" reports. 10K report is a detailed document on the corporation's services, products, market share, competition, industry, its customer base, etc. On the other hand the 10Q report gives an elaborate analysis of the company's quarterly earnings. These documents are made easily accessible through the Security and Exchange Commission's website. There are three important financial components to annual reports. They are the Income Statement, Balance Sheet and the Cash Flow Statement. Apart from these major financial components, other information of interest is also included. For example, the Chairman's Address to the Shareholders, Highlighting of major achievements over the year, Management's assessment of the year, an auditor's note and a summary of all financial information. Having said this, there is no universally accepted format for annual reports. This gives opportunity for corporations to show an impressive set of numbers, the reality of which can be deciphered only by reading the fine print. For example, some companies see annual reports as a marketing tool that projects the company in a kinder light. So much so that many corporations allocate huge quantities of money in adding frills to their annual reports, making the information look more attractive than what the truth would warrant. Hence, when shareholders read an annual report attention must be paid to the fine print and the accounting practices adopted by the company in order to get an accurate picture of the overall position of the firm. The first section of the report is almost always the "Letter to Shareholders" written by the Chairman or the Chief Executive Officer of the corporation. This letter comprises of the new strategies adopted by the management, a glimpse of prevailing market conditions, some high-points and low-points for the corporation over the course of the year, the signatory's interpretation of previous year's results, etc. Sometimes, the assessment of other competitors in the industry is presented in the form of a comparative analysis. These days the management tries to promote their preferred political party/candidate through these letters, making them a vehicle for public propaganda. There is no restriction of the size of these letters. Typically, however, they can vary from four pages to a dozen pages. Prudent investors always manage to read between the lines of the letter. With the use of vague or ambiguous language, unscrupulous readers can be led to form positive perceptions of the corporation and its future. So, attention to detail and a degree of skepticism are warranted while reading an annual report. Annual reports are now an accepted part of corporate functioning, but this was not always so. Let us take a look at the origins of annual reports. The regulations drawn up by the Securities and Exchange Commission clearly specifies the mandatory information to be included in the document. To avoid favorable interpretation of these regulations, the SEC had framed a detailed and comprehensive set of rules that gives no room for ambiguity. The defaulting companies can face legal proceedings against them. The lawsuits against corporations for breach of regulations have increased over the years. The 1970’s were a crucial decade with respect to the evolution of these regulations. The laws pertaining to corporate governance and accountability had grown in complexity from then on, although they build on the foundation laid by the Securities Act of 1933 and the Securities Exchange Act of 1934. In a way, the SEC transformed publication of annual reports from an accounting activity to a legal one. Companies that mislead the public through the usage of deceptive language and fudged up numbers face severe penalties. The annual reports are widely used by different categories of people. Let us delve into the kind of analysis that each of these groups do. Many employees eagerly look forward to the annual report for explicit and implicit information. Explicit information comes in the form of recognizing outstanding performers during the course of the year. Some of the innovations conceived by the employees are showcased. Information that will have an indirect bearing on the work force include mergers and acquisitions, new policies toward efficiency and innovation, newly adopted procedures for improved cost-cutting, expanding business operations elsewhere in the geo-political landscape, etc. These announcements are neither good nor bad by themselves. Depending on the size of the company, its market sector, general economic and political conditions, etc, they could have varied implications. This is the sort of information that employees gather to stay ahead in the game. Some analysis of department-wise performance is also given. This can be an indicator of the future prospects of a department and its team members. Most employees also hold shares of the company they work for. So this makes it doubly important for them to have a sound grasp of the company's business prospects. The information disclosed in these documents is equally valuable to customers and suppliers. If the product or service offered by the corporation is of substantial monetary worth, then regular customers want assurance that they will receive quality after-sales service. By reading the annual report carefully, customers can decide whether their expenditure is worth it. Suppliers are another group whose business fortunes depend on a regular order of supplies from the corporation. Some small-scale suppliers can be solely dependent on a handful of companies for the bulk of their business. By elucidating to the suppliers the nature of processes adopted in transforming the supplies into the consumable products, the former can gain better understanding of what the company expects. In such scenarios the information gathered by a careful analysis of the report can be vital. The general public at large can also benefit because a corporation's health gives a snapshot of the industry's and the economy's strength in general. Also, when a company achieves a positive public image, communities from various political jurisdictions will compete and put pressure on their government representatives. In turn the politicians tend to offer subsidiaries and other concessions to the corporation, in the hope that it will translate into more job offers for the members of the constituency. In 1987, the SEC eased some of its regulatory requirements. Thereby it would suffice if corporations would present a "Summary Annual Report" instead of the traditional report which was more detailed. Transparency and accountability was still expected, but the procedure was simplified to filling a 10K Form. However, many corporations do not yet issue the "Summary Annual Report". They still adhere to the more detailed format. It is required of all publicly held corporations to declare quarterly results. These Financial Reports are not as elaborate as the Annual Reports. These reports are also different in that they try to capture the general trend of various transient performance indicators. Business corporations also release Operational Reports that delves into the technical aspects of revenue generation. These days more and more companies are addressing their potential customer base through "Reports to Communities", where the implications of the company's success to the welfare of different communities are dealt with. But since this report is not mandatory and does not fall under any regulatory laws, companies have come to treat them as Public Relations exercises. So the veracity of these reports can be dubious. Just as business corporations have a set of reports to publish, government agencies and public enterprises have their own standards. It is required of major government sector enterprises to comply by the Government Performance and Results Act (GRPA). Accordingly, GRPA Annual Performance Reports are issued. These days "environmental stewardship" and "corporate social responsibility" have become catch phrases in the business world. This is an acknowledgement of the fact that consumers nowadays expect high ethical standards from corporations. Partly to cater to this demand and partly to indulge in a Public Relations exercise, some multinational corporations over the last few years have issued reports covering these concepts. Again, these reports have to be read by keeping in mind the motivation behind all corporate action - "Boosting the Bottom-line". Apart from the 10Ks and 10Qs, corporations also prepare proxy statements, prospectuses, 20Fs and 6ks. Some of these reports are of formal nature and laymen may find it difficult to interpret or analyze. But of all the reports that a business corporation has to present during the course of its functioning, the Annual Reports are the most sought after and most comprehensive compilation of company information. Works Cited: Bettman, J.R., Weitz, B.A., Attributions in the Board Room: Causal Reasoning in Corporate Annual Reports, Administrative Science Quarterly, 1983 Chandler, R., Bartlett, S.A., The Corporate Report And The Private Shareholder, The British Accounting Review, 1997 Cooper, D.J., Sherer, M.J., The Value of Corporate Accounting Reports: Arguments for a Political Economy of Accounting, Accounting, Organizations and Society, 1984 United States Securities and Exchange Commission, , accessed on 19th October, 2007 Wheeler, D., Elkington, J., The end of the corporate environmental report?, Or the advent of cybernetic sustainability reporting, Business Strategy and the Environment, 2001. . Read More