Investigating presentational change in U.K. annual reports: a longitudinal perspective.

This article examines structural and format changes in annual reports of U.K. listed companies from 1965 to 2004 with a particular focus on graph use. The article compares a new sample of 2004 annual reports with preexisting samples by Lee and by Beattie and Jones. Lee's identified trends continue. There has been a sharp increase in page length, voluntary information, and narrative information, particularly among large listed companies. A detailed analysis of voluntary disclosure indicates changes in the incidence and pattern of generic sections. Graph usage is now universal. However, key financial graph use has slightly declined, replaced by graphs depicting other operating issues. Impression management through selectivity, graphical measurement distortion, and manipulation of the length of time series graphed are common. Overall, annual reports continue to exhibit many features of public relations documents rather than financially driven, statutory documents, and the analysis of graph usage suggests a need for policy guidelines to protect users.

Keywords: annual report; graphs; impression management; longitudinal study; narratives; pictures

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During the past few decades, the corporate annual report has, for many modem corporations, been transformed from a rather dull financial document to a colorful marketing and public relations document in which the financial statements are relegated to a technical "appendix." This transformation, it appears, is a result of the changing corporate reporting environment, in terms of technological, legislative, and regulatory change, and changing business management practices. The change in the form and structure of U.K. annual reports is, however, relatively unstudied (Bartlett and Jones, 1997, and Lee, 1994, are notable exceptions). In a significant editorial, Hopwood (1996) observes that the "changing form of the report as a whole has been subject to relatively little systematic investigation" (p. 55). Furthermore, Hopwood contends that the focus on accounting methods is a very partial one that "largely ignores the wider influences on the document within which the accounting components are embedded" (p. 55).

Very few studies document change in the annual report as a whole (Stanton & Stanton, 2002). To gain any depth of analysis, studies must have a common focus such as a particular section of the annual report, a particular format, or a particular subject matter. A variety of theoretical lens and analytical tools have been employed. However, there has been a particular neglect of the presentational aspects of the annual report, such as graphs and pictures (Beattie, 2005, pp. 103-104).

This article is set against the background of the increased significance of the presentational aspects of the annual report. It provides new evidence that documents the changes in the structure and broad content of annual reports over time, particularly the changes in the amounts of nonfinancial, voluntary, narrative, graphical, and pictorial information. These changes are interpreted using the lens of impression management, whereby managers are conceptualized as "having incentives to represent their company's performance in the best possible light" (Tweedie & Whittington, 1990, p. 97). In this study, we focus on one particular presentational format (graphs), given the prior research conducted in this area. There are three specific objectives that relate to the changing content of annual reports and of graph usage:

* First, to replicate the key elements of Lee (1994) for a sample of large-listed U.K. companies in 2004 to assess how the structure and form of annual reports have changed. In particular, this study seeks to assess whether there has been a continuing growth in nonfinancial, voluntary, and presentational disclosures. These findings provide additional evidence to that of Davison and Skerratt (2007: hereafter, D&S), who replicate some aspects of Lee's study with some surprising results.

* Second, to compare the 2004 sample to new unpublished information extracted from the sample used by Beattie and Jones (1992b) that looks, in detail, at the structure and form of annual reports. These findings throw some light on whether the annual report is continuing to evolve as a presentation-led document.

* Third, to replicate Beattie and Jones's (1992b) study to establish how graph use has changed by 2004. These findings help to establish whether impression management, as identified by Beattie and Jones in terms of selectivity, impression management, and presentational enhancement, continues to thrive.

In addition, the research as a whole provides new evidence on change processes within external financial reporting, drawing on the theoretical propositions of Rogers (1983), Gibbins, Richardson, and Waterhouse (1990), and Camfferman (1997). In particular, it sheds some light on the process of the diffusion of financial reporting practices and looks at how financial practices gradually become adopted by the majority of companies over time (we term this latter process normalization).

The remainder of this article is structured as follows. The second section offers a review of the relevant literature. We examine four strands of empirical research into the form of the annual report: the changing overall structure and form of the annual reporting package, studies of the narrative sections, studies of financial graphs, and studies of pictures. We then look at theoretical propositions regarding the change processes of diffusion and normalization in accounting. The third section outlines the method adopted. The results are presented and discussed in the fourth section. A final section summarizes and concludes.

LITERATURE REVIEW

Because company management has discretion (of varying degrees) in relation to the form and content of the annual report, the financial reporting process has been described as "selective financial misrepresentation" (Revsine, 1991). An underlying theme here is that annual report preparers engage in impression management (i.e., seek to convey a more favorable impression of the organization than is warranted). A possible outcome of such behavior is that the message conveyed is no longer neutral or unbiased. The impression management thesis has been adopted to explain observed accounting practices across the entire range of formats (e.g., earnings management literature, narratives, graphs, and pictures).

Although accounting standards seek to ensure that reported accounting numbers are neutral, there is very little regulation regarding other presentational formats. The U.K. standard setting body, the Accounting Standards Board (ASB), in a discussion paper that examines ways of improving communication with private shareholders, identifies graphs as a powerful medium of communication and makes recommendations about the use of graphs in annual reports, including selectivity (which refers to the decision to include or exclude performance graphs in annual reports) and measurement distortion (ASB, 2000, pp. 28-29).

Structure and Form of the Annual Report

Lee (1994) represents one of the first attempts to systematically examine the changing form of the modern corporate annual report. Drawing on Ewan's (1988) thesis of corporate image management in corporate business, in a seminal article, Lee argues that visual images are used powerfully to influence a range of external stakeholders. Analyzing the annual reports of a small sample of 25 large U.K. industrial companies over 23 years at three points in time (1965, 1978, and 1988), (1) Lee examines report characteristics that include, inter alia, total volume of annual report, split into voluntary and mandatory material: relative size of voluntary versus mandatory content; the use of narrative and pictorial material; the ordering of voluntary and mandatory content; and the incidence of specific image management techniques (e.g., employment of design consultants, existence of a corporate logo).

Lee (1994) finds clear trends in the reports, as follows:

* The total volume of the annual report increased by 108% (a mean of 54 pages in 1988 compared to 26 pages in 1965).

* The proportion of voluntary material rose from 42% in 1965 to 54% in 1988 (although there was a dip to 39% in 1978).

* The amount of voluntary material increased faster than the regulatory material (164% vs. 67%). (2)

* The proportion of pictorial material in voluntary material rose slightly from 27% to 34%.

* The percentage of companies placing the voluntary material before the regulatory accounting material rose from a minority of 36% in 1965 to 100% in 1988.

* Finally, there was a very rapid increase in the use of specific image management techniques. In 1965, 12% of companies acknowledged their use of design consultants in their annual report, compared to 80% in 1988, and in 1965 28% of companies used prominent logos in the annual report to assist in corporate identification and association, compared to 96% in 1988.