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.

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