Corporate Reporting Trends and Regulations

Lecture 2: Corporate Reporting

• Corporate reporting has evolved over the last 50 years.

• Corporate reports (annual and CSR reports) include voluntary information, alongside mandatory financial statements.

• Communication style is largely narrative.

• Motivations for providing voluntary information include legitimacy theory, stakeholder theory, institutional theory, and political cost hypothesis.

Background Reading

• Rankin et al. (2022), Chapter 6
• Crowther (2012): Chapter 1
• Uyar & Boyar (2015)

Overview

• History of corporate reporting
• Types of corporate reports: mandatory vs. voluntary
• Users of corporate reports
• Motivations of companies for voluntary corporate reporting

What is Financial Reporting?

• Collection and processing of financial information to assist internal and external decision-making.
• Consists of financial statements including: profit & loss account, statement of financial position, cash flow statement.

What is Corporate Reporting?

• Collection and processing of both financial and non-financial information for assisting internal and external decision-making.
• Forms of corporate reports include annual reports, CSR reports and Integrated Reports (IRs).

Corporate Reporting

• Financial statements: include profit & loss (P&L), statement of financial position, cash flow statement and notes to statements. These are audited documents and are regulated.

• Corporate narratives: include annual reports, chairman's statement, CEO review of operations, CSR report and website content. These are largely voluntary and unaudited documents.

Users of Corporate Reports

• Users have varied information needs.
• General purpose reports (annual, CSR, IRs) cater to broad needs.
• Investors & potential investors: Sophisticated (institutional) and unsophisticated (individual).
• Lenders: Interested in financial position and the ability to be repaid.
• Employees & trade unions: Interested in financial performance, employee benefits, job security.
• Suppliers: Need to know if they will get paid.
• Government agencies: Tax authorities assess tax payable and are interested in financial performance.
• Customers: Interested in the company’s financial performance to know if the company will provide goods/services in future.
• The public: Interested in financial performance, employment and business for local suppliers, CSR initiatives supporting the environment and community.

History of Financial Reporting Regulation

• USA: Regulation began in the 20th century due to the limited separation between ownership and management.

• Initial regulations (1930s) responded to the Wall Street Crash and the Great Depression.

• The 1933 Securities Act and later the 1934 Securities Exchange Commission resulted in the use of broadly accepted accounting principles (GAAP).

• USA: Sarbanes-Oxley Act of 2002 ("Corporate & Auditing Accountability, Responsibility, and Transparency Act") responded to accounting failures ( Enron, WorldCom)

• USA: The Dodd-Frank Act of 2010 ("Dodd-Frank Wall Street Reform and Consumer Protection Act") responded to the sub-prime banking crisis.

• USA (2000 onwards): CSR reporting, websites, social media, social and environmental performance, frequent and immediate news releases. This was largely voluntary and unaudited information.

• UK: Establishment of the Accounting Standards Steering Committee/ Accounting Standards Committee (1970); IASB (1973); International Accounting Standards (IASs) and International Financial Reporting Standards (IFRSs).

Changes in Corporate Reporting Over the Last 50 Years

• Pre-1980: primarily consisted of mandatory & audited financial statements.
• 1980-2000s: annual reports were common and include graphs, tables, pictures, and text. Only some elements were mandatory.
• 2000 onwards: CSR reporting, websites and social media have become a prominent part of the corporate reporting process and are mostly optional and unaudited.

Types of Corporate Reporting

• Narrative Reporting: Annual reports and unaudited parts of them, often narrative in style, with chairman’s statement, annual reports.

• Corporate Responsibility Reporting: Includes CSR reports and communications on a company's impact on people, clients, suppliers, society, environment, and other.

• Integrated Reporting (IR): This type of reporting considers the company's performance from various perspectives and is an attempt to show all impacts.

Annual Report

• Traditional communications tool between firms and shareholders & stakeholders.
• Includes mandatory reporting (e.g., financial statements), and voluntary reporting (e.g., chairman’s statement). Voluntary elements aren’t audited.

Why Firms Voluntarily Disclose Information

• Gain stakeholder support;
• Gain access to resources;
• Build legitimacy;
• Conform to industry practices;
• Prevent future regulations.

Legitimacy Theory

• Corporate reports are a tool for building and maintaining a company’s legitimacy in the eyes of the public in their industry.
• Particularly important for firms in the public eye (high-profile, public-facing, 'dirty' industries). Important factor in maintaining legitimacy after scandals, accidents, or other negative events (e.g. BP oil spill, financial crisis).

Stakeholder Theory

• Reports are used to manage relationships with stakeholders (shareholders, employees, suppliers, government, customers etc.) and respond to their concerns.
• Companies prioritize information needs of primary stakeholders, such as consumers, and utility companies.

Institutional Theory

• Companies abide by industry-wide norms and standards.
• This means they produce comprehensive reports and CSR reports.
• Companies use reporting to create a positive picture of the company and its performance (impression management).

Political Costs

• Voluntary corporate reporting reduces political costs (from regulators).
• Large, politically sensitive firms often disclose a lot of environmental information.

Summary

• Corporate reporting has evolved substantially over the last 50 years, growing beyond basic financial statements to more encompassing, broader reporting.
• This growth in reporting is due to different motivations such as creating legitimacy and satisfying stakeholder demands and managing political costs.

This quiz explores key aspects of corporate reporting, including the information needs of stakeholders, the evolution of financial reporting, and major regulatory changes. Test your knowledge on important events and acts that have shaped corporate reporting practices over the years.