Lecture 2 Corporate Reporting PDF

Corporate reporting 1  Rankin et al. (2022), Chapter 6  Crowther (2012): Chapter 1  Uyar & Boyar (2015) 2  History of corporate reporting  Types of corporate reports ◦ Mandatory vs. voluntary  Users of corporate reports  Motiv...

Corporate reporting 1  Rankin et al. (2022), Chapter 6  Crowther (2012): Chapter 1  Uyar & Boyar (2015) 2  History of corporate reporting  Types of corporate reports ◦ Mandatory vs. voluntary  Users of corporate reports  Motivations of companies to engage in voluntary corporate reporting 3  A process involving the collection and processing of information of a financial nature for the purpose of assisting various decisions to be made by internal and external parties to the organisation  Financial statements ◦ Profit & loss account ◦ Statement of financial position ◦ Cash flow statement 4  A process involving the collection and processing of information of both a financial and non-financial nature for the purpose of assisting various decisions to be made by internal and external parties to the organisation  Corporate reports ◦ Annual report ◦ CSR report ◦ Integrated Report () 5  Financial statements Corporate narratives P&L Annual reports Statement of financial position Chairman’s statement Cash flow statement CEO review of operations Notes to financial statements CSR report Mandatory & Regulated Press releases Audited Website content (Largely) voluntary & unregulated Unaudited 6  Users have different information needs so it is not possible to generate reports to meet individual needs  General purpose reports ◦ Annual report ◦ CSR report ◦ Integrated report () 7  Investors and potential investors ◦ Sophisticated investors (institutional investors, such as pension funds and unit trusts) ◦ Unsophisticated investors (individual investors) ◦ Interested in financial performance and prospects  Lenders ◦ Banks, etc. ◦ Interested in financial position ◦ Interested in solvency (Need to know if they will be repaid)  Employees and trade union representatives ◦ Interested in financial performance and prospects & salaries & benefits of senior management ◦ Need to know if an employer can offer secure employment and pay rises. 8  Suppliers ◦ Interested in financial performance ◦ Need to know if they will be paid  Government agencies ◦ Tax authority (assessing amount of tax payable) ◦ Interested in financial performance  Customers ◦ Interested in financial performance ◦ Need to know that a company will provide them with goods or services in the future  The public ◦ Financial performance & prospects ◦ Employment and business for local suppliers ◦ CSR initiatives supporting the environment and community (e.g., recycling, education programs, sponsorship, etc.) 9  Regulation did not commence until 20th century ◦ Previously limited separation between ownership and management of business entities ◦ Systems of accounting were therefore designed to provide information to the owner/manager 10  Initially financial reporting regulations were introduced following the Wall Street Crash of 1929 and the Great Depression in the 1930s ◦ Response to perceived market failure arising from the lack of adequate disclosure of information resulting in poor and uninformed investment decisions 11 USA: 1930: US profession and NYSE developed list of broadly used accounting principles 1933: US Securities Act prescribed the form and contents of financial statements for listed firms 1934: Formation of Securities Exchange Commission (SEC) ◦ US Securities Exchange Act required the full disclosure of information to the SEC by companies seeking to trade securities 1938: SEC only accepted financial statements prepared in accordance with GAAP of the accounting profession 12 USA: Financial reporting to shareholders and the wider public remained largely unregulated until the mid-1960s Companies were not required to use the same reporting requirements to shareholders via annual reports as they did in their filings with the SEC! ◦ Led to the failure of the Atlantic Research Corporation which failed to report large loss to shareholders in its 1968 annual report while reporting it in its filings to the SEC! 1973: Formation of US Financial Accounting Standards Board (FASB) ◦ Later produced mandatory standards 13 UK: Accounting Standards Steering Committee established in UK in 1970 (later Accounting Standards Committee) that mandatory standards developed IASB: Established in 1973 IAS & IFRS 14  High profile accounting and audit failures in the United States in 2001 and 2002 such as Enron and WorldCom led to significant change in the accounting regulatory framework in many countries ◦ US: Sarbanes-Oxley Act 2002 (“Corporate and Auditing Accountability, Responsibility, and Transparency Act”)  Political pressure for changes in accounting regulation was again exerted in 2007/8 after the sub-prime banking crisis ◦ US: Dodd-Frank Act 2010 (“Dodd–Frank Wall Street Reform and Consumer Protection Act”) 15  Pre-1980: financial reports (financial statements) Mandatory & audited 1980-2000: annual reports (corporate reporting) Graphs, tables, pictures, text Only financial statements and some sections (directors’ remuneration) mandatory & regulated 2000 onwards: CSR reporting, websites, social media Social and environmental performance Frequent and immediate news releases Largely voluntary and unaudited A lot more scope for PR/impression management! See: Uyar & Boyar(2015) 16  Narrative reporting ◦ Annual report (e.g., chairman’s statement) ◦ Voluntary & unregulated sections of annual report whose purpose is to provide a broader, more meaningful understanding of a company’s business, its market position, strategy, performance and future prospects  Corporate responsibility reporting ◦ CSR report ◦ Communication about how companies understand and manage their impact on people, clients, suppliers, society, and the environment in order to deliver increased value to all their stakeholders  Integrated Reporting ◦ https://www.youtube.com/watch?v=Hx4dvrIunpw 17  Traditional statutory communication vehicle between firm and shareholders and stakeholders  It includes: ◦ Mandatory information  e.g., financial statements & notes, report of remuneration committee ◦ Voluntary information  “information that is not required by laws or regulations” (Clarke Williams, 2008: 233).  e.g., chairman’s statement  Not audited! 18  Organisations require and desire broad support from stakeholders ◦ Access to resources ◦ Variety of information is necessary to satisfy and inform range of stakeholders  To establish, maintain, or repair organisational legitimacy  To conform to accepted disclosure practices of a particular industry  To copy the disclosure practices by successful companies or industry leaders  To forestall regulations (by governments or standard- setters) 19  Corporate reports are often used as a legitimation mechanism ◦ To establish, maintain, or repair organisational legitimacy  Particularly for firms ‘in the public eye’ ◦ Operating in ‘dirty industries’, with high street presence, multi-national firms with recognisable brands  Particularly after scandals, accidents, incidents affecting a particular firm or an industry ◦ e.g., BP oil spill ◦ e.g., financial crisis (banks) 20  Corporate reports are a means of managing stakeholders  e.g., shareholders, employees, suppliers, government, banks, customers, etc.  They are used ◦ To satisfy information demands of stakeholders ◦ As a tool with which management signals its reactions to the concerns of particular stakeholders  Companies will particularly focus on the information needs of primary (key) stakeholders  Depends on industry the company is operating in  E.g., consumer goods  consumers; utility companies  regulatory agencies 21  Focus on institutionalisation of corporate reporting  Firms abide by industry norms and standards  Comprehensive annual reports and free-standing CSR reports have become standard practice  Firms have to provide them to appear legitimate (see Crowther, 2000) ◦ To create a positive image of the company ◦ To create the impression of positive financial performance & prospects 22  Voluntary corporate reporting is a means to decrease political costs ◦ In the form of increased regulation of corporate reporting ◦ To prevent drawing attention to the firm by regulatory bodies  Large and/or politically sensitive firms ◦ e.g., firms in utility and mining sector make large amounts of voluntary environmental disclosures 23  Corporate reporting has evolved & grown over the last 50 years  Corporate reports (annual reports, CSR reports) contain substantial amounts of voluntary information in addition to mandatory financial statements ◦ Largely narrative  Various motivations for providing them ◦ Explanations from legitimacy theory, stakeholder theory, institutional theory & political cost hypothesis 24