Annual report graphic use: a review of the literature.

Corporate annual reports typically include a narrative section and a financial section. The narrative section is not scrutinized by auditors as the financial section is, yet many readers rely heavily on its graphs to estimate the firm "s financial situation. However, the graphs often misrepresent the financial data. To better understand annual report graphs' important role, this article examines more than 25 years of literature related to these four areas: (a) the ways financial graphs are prepared, used, and misinterpreted; (b) differences by country; (c) regulatory influences for accountants; and (d) the parts formatting and media selection decisions play in communication interpretation and persuasion. Across the literature, the author notes consensus that annual report graphs are widely used in many countries and that there is rampant disregard for the guidelines for their accurate, non-misleading presentation. The article concludes with seven proposed directions for future research.

Keywords: annual report; graphs; corporate reporting; visual misrepresentation

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An annual report is issued to stockholders and others by a corporation; it contains basic financial information and opinions from management about the prior year's operations and the firm's future prospects. One of the elements readers often use in assessing whether to buy, keep, or sell stock in the corporation is the annual report. Readers of annual reports place high credibility in corporate annual reports (Moskowitz, 2000).

In the United States, the narrative section by management often includes a letter from the chairman and may include photographs of management personnel and corporate products and graphics related to financial performance, industry niche, source of raw materials, locations of factories, and so on. Some opine that the narrative section is the most important aspect of the annual report (Canniffe, 2003). The financial section, which typically follows the narrative section, contains four statements: the income statement, the balance sheet, the statement of retained earnings, and the statement of cash flow (Brigham & Houston, 2004, p. 36).

Corporate auditors closely observe and apply exacting governmental standards to the accuracy of the data in the financial section. In the U.S. and for foreign countries trading in the U.S. market, in the U.S. in 2002 the government legislated that the Public Companies Accounting Oversight Board regulate the auditing process (Public Company Accounting Oversight Board, 2007). Little oversight is required, however, over what may or must appear in the narrative section or how it is delivered. This section ranges from no narrative section at all to a brief message from management to dozens of pages that can dwarf the financial section. In addition to varying in length, the narrative section may also vary by depth, type of content, and message format and physical appearance.

Because the corporate organizations make the decisions on whether to have a narrative section and what to put in it, their current financial situation may affect those decisions. For example, if the corporation is experiencing devastating financial conditions, it may opt to merely issue the government-mandated 10K annual financial report, or if the corporation is increasing revenues, expanding markets, increasing dividends, and making a profit, it may decide to shower the annual report with four-color artwork, attractive photographs, positive interpretations of the future, and graphics visualizing the enhanced situation.

One of the places where little control but ample latitude for interpretation may be involved in the narrative section is with the financial graphs. The graphic designer of the annual report can manipulate the perception of the data in a graph through selection of graph type, color, scale, emphasis, size, and other treatments. Some authors share suggestions on how to add elements of art to financial data with no apparent regard for data integrity (Beaudet, 1998) or just how to attain readership (Widman, 1998).

Equity investors range from skilled professionals who scrutinize every element of the corporation before making an investment decision to naive investors who may be influenced by exciting graphic design more than solid financial indicators. Indeed, users of annual reports and investors may spend only 15 minutes looking at a report during their decision making (David, 2001). Many investors look only at the annual report and only the narrative section of it (Fisher & Hu, 1989) and, furthermore, often look only at the financial graphs in making their decision (Zweig, 2000, p. 67). Financial analysts, who are trained professionals and whose jobs depend on making good evaluations, have learned to be cautious of the PR-oriented corporate hype front matter in annual reports and to rely instead on the financial matter ("What Analysts Want," 1999).

Financial graphics within annual reports play an important role in determining the perception of the corporation and in the interpretation of its financial health. However, there has been little systematic review of the literature related to both the graphics and the reports, especially not in one place. An analysis of the literature would identify how the graphics guide and potentially mislead the viewer, present the prevalence of the graphics, and collect and categorize what we know about graphics and annual reports in the business communication literature. The review that follows relies mainly on business communication-oriented literature and also includes articles from publications in accounting, information systems, social science, and international journals. Nine different electronic search engines and databases, including ProQuest, Lexis/Nexis Academic, and ABI/Inform, plus close attention to the bibliographies of published articles, were used to ensure thorough coverage. The scope of the literature reviewed here is limited to the overlap of graphics and hard copy annual reporting by organizations in American and non-American countries and includes the accounting profession's involvement with the topic because accountants are often charged with evaluating the accuracy of reports. Within the examination of graphics, we are primarily concerned with the use and misuse of these graphics in annual reports. We thus are not considering technologies to make graphics visually more appealing, electronic annual reporting, or the larger topic of corporate social responsibility.

This review benefits the reader by sharing consolidated literature to date on annual report graphic use in American and non-American countries, by identifying clusters of agreement and areas of disagreement, and by proposing directions for future research.

Although Lord (2002) reviews the literature of annual reports from 1989 to 2001 and groups it into nine clusters (p. 369), she does not extract information about graphs in annual reports. This article presents four substantially different major clusters of agreement of research related to annual reports as communication devices, especially as they use graphics to transmit messages: (a) selection, preparation, and manipulation of the visual support; (b) issues related to accountancy; (c) international applications; and (d) annual reports and communication. Many studies may be found in more than one category. When this overlap occurs, results of that research are placed in the primary theme.

Throughout the review process, meta-analyses are identified to direct the reader to reviews and discussion of substantially more depth than can be shared here. As the main thrust of this literature review is on correct and incorrect use of graphics, it is both the first and largest (in number of citations) area to be reviewed.

SELECTION. PREPARATION. AND MANIPULATION OF THE VISUAL REPRESENTATION

Graphic support (e.g., better comprehension or retention), comparisons of various graphic approaches, guidelines for selecting among types, and preparation suggestions date back to at least 1918 ("Report of Joint Committee," 1918), although some trace the origin to more than 200 years ago (Beattie & Jones, 1993, p. 38; Beattie & Jones, 2002b; Cochran, Albrecht, & Green, 1989, p. 25; Tufte, 1983, p. 9). The value and preparation of graphic support have been well documented in college business communication textbooks for at least the past 40 years (e.g., Bovee & Thill, 2000; Brown, 1961; Dawe & Lord, 1974; Himstreet & Baty, 1973; Lesikar, 1972; Locker, 1989; Menning & Wilkinson, 1963; Murphy & Peck, 1972; Penrose, Rasberry, & Myers, 2004; Sedlack, Shwom, & Keller, 2008).

Early, Important Work

Two major works in the early 1980s challenged readers to look more deeply than at the rather thin guidelines of the time for preparation and use of graphics. Edward R. Tufte's (1983) classic The Visual Display of Quantitative Information (one of Amazon.com's 100 best books of the 20th century) would have us cease to "[promulgate] 'graphic standards' indifferent to the nature of visual evidence and quantitative reasoning" (Tufte, 2001, p. 7) and instead seek graphic excellence and integrity. His book examines, in great detail, with history and example, how to achieve these goals. Among his suggestions are to avoid graphic mediocrity by applying substance, statistics, and artistry and to pay attention to the interplay between data density and aesthetics.