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

* First, the corporate annual reports of large listed U.K. companies continue to grow in size (a mean of 26 pages in 1965 vs. 75 pages in 2004), with the amount of voluntary material growing at a marginally faster rate than regulatory material (190% vs. 186%), despite the progressive regulatory capture of voluntary material.

* Second, the amount of narrative material increased by 375% (a mean of 8 pages in 1965 vs. 38 pages in 2004), whereas the amount of pictorial material increased by 100% (a mean of 3 pages in 1965 vs. 6 pages in 2004). This increase in textual material is principally accounted for by new factual, descriptive sections such as the remuneration report and corporate governance.

* Third, by 2004, all of the companies studied presented their financial statements at the back of the annual report, thereby giving prominence to the mainly voluntary material.

* Fourth, the extent of use of prominent corporate logos and external design consultants shifted from a minority in 1965 to a majority by 2004. * Fifth, when the large company subset was compared to Lee (1994), these trends were even more pronounced, particularly for voluntary and narrative information.

A more detailed analysis of structure and format based on the comparison of 1989 with 2004 (a 15-year period) was possible. Nineteen generic annual report sections (excluding the financial statements and related notes) were identified, and the incidence, positioning (before or after the financial accounts), use of non-text formats (pictures, graphs, charts, and tables), and size of each section were examined. Changes in the incidence of generic sections were variously attributed to the anticipation of legislation (the rise in operating and financial review sections), changing social attitudes (the rise in the corporate social responsibility section), actual legislation, and advances in technology (the decline in annual general meeting and financial calendar sections). In general, the diversity of positioning of individual sections has declined. Of note was the finding that the majority positioning of the auditors' report has moved from after the financial statements to before them. It is likely that this result has been a consequence of the loss of credibility caused by, inter alia, the Enron scandal and reflects an attempt by companies to restore confidence in the financial statements by increasing the prominence of the assurance statement.

Pictures were concentrated in the chairman's statement, chief executive's statement, operating and financial review (combined and separate), and board of directors and corporate social responsibility sections. Graphs were commonly featured in the financial highlights section and the newly mandated remuneration report section (2004- only). Relatively few charts were found. Tables, a commonly used format, appeared frequently in the historical record, remuneration report (2004 only), directors' report, and operating and financial reviews (combined and separate). In both years, the combined operating and financial review and the separate operating review were the two sections having the highest mean size (in terms of pages). By 2004, the newly mandated remuneration report ranked third in terms of size. Overall, however, there was a clear decline in the amount of storytelling narratives.

Key findings in relation to graph usage in 2004 compared to 1989 were as follows:

* First, the use of graphs among the population of large listed companies has become universal, and the mean number of graphs has risen from 5.9 to 6.9. This growth in graph use is accounted for by graphs of non-key financial variables, such as the newly mandated performance graph, other profitability graphs, and corporate social responsibility graphs.

* Second, the incidence of each of the four key financial variable graphs (sales, income before taxes, earnings per share, and dividend per share) has declined slightly, perhaps attributable to the less favorable stage in the economic cycle in 2004, compared to 1989. The incidence of segmental graphs has also declined markedly.

* Third, the type of graph used for key financial variables has normalized further toward the column or bar graph.

There is continued evidence that financial graphs are used, in a variety of ways, for impression management purposes, First, there has been a decline (from 72% in 1989 to 63% in 2004) in the number of companies using the 5-year norm for length of time series portrayed. The doubling of key financial variable graphs showing less than 5-year trends appears to reflect judicious choices to avoid highlighting adverse financial trends. This indicates that the incentives for management to impression manage in some cases overrode the desire to comply with reporting norms. Second, the selective inclusion of key financial variable graphs continues to be found in 2004, although the evidence is less strong than in 1989. Third, the incidence of material distortion in key financial variable graphs has risen markedly (from 20% to 49% using a 10% cutoff). These forms of impression management are alternatives, as the fact of adverse performance can be softened either by simply not including a graph or by distorting the graph. Of interest, the easily detectable causes of distortion (e.g., a nonzero axis) had disappeared by 2004.

The findings of the present study have two important implications for the nature and content of the annual report itself and more broadly for the nature of accounting change. First, the annual report has clearly continued the trend, identified by Lee (1994) and McKinstry (1996), away from a financially driven, statutory document toward a more design-orientated document. This trend is shown by the increase in size of the annual report, the increase in voluntary aspects, the increase in general design, and the increase in graph use. Particularly impressive since Lee is the increase in narrative information. Collectively, these trends have changed the nature of the annual report during the past 30 years from a financially driven document in which the financial results dominated to one in which design and presentational aspects appear to motivate the content and presentation. These broad-based changes across the population are attributed to gradual shifts in social, cultural, and technological factors, which are reflected in the annual reports.

Second, and more broadly, there is evidence of a "normalization" process at work in relation to the annual report. This result confirms the findings of Camfferman (1997) and conforms to the generic pattern of diffusion of new ideas proposed by Rogers (1983). The diversity that was present in early experimentation has narrowed as companies adopt similar reporting practices in order to adhere to emergent reporting norms. This norming is manifested in several ways. First, there has been a marked standardization in the positioning of the sections in the annual report--either before or after the financial statements. Second, all companies now use graphs--it is a universal, voluntary phenomenon. Third, almost all key financial variables are presented using one basic graph type--the column or bar graph. Finally, graphs for a 5-year period are the norm, although the selectivity process takes precedence in situations of unfavorable trends in performance.

A limitation of the study is that the sampling frame used by Lee (1994) in relation to the earlier period is different from the sampling frame used by Beattie and Jones (1992a, 1992b) and the present study. There may, therefore, be methodological problems when comparing the findings of these studies. However, the findings from all of the studies are generally consistent, complementary, and robust. In the overall patterns and trends identified, there appears to be little doubt that significant change has occurred, with the general patterns of change over the three decades being clear.

A major policy implication of this research relates to the use of graphs in annual reports. Given the popularity of graphical presentation and its use as an impression management tool, users would benefit from preparers' adherence to a set of graphical guidelines. These guidelines could be prepared by appropriate standard-setting bodies (e.g., the U.K.'s ASB, the U.S.'s Financial Accounting Standards Board, or the International Accounting Standards Board) or by regulatory bodies (e.g., the Securities and Exchange Commission in the United States). A step in this direction has already been made by the ASB (2000) in a discussion paper that examined ways of improving communication with private shareholders. This article has emphasized the need for graphs to convey information in an objective and balanced manner. However, our results indicate that much more remains to be done to take the agenda forward. One possible set of recommendations to overcome problems related to selectivity, measurement distortion, and length of time series graphed would be a requirement for companies to include all four key financial variable graphs, accurately constructed and covering five years. Once included in annual reports, these graphs should not be discontinued (nor should the length of time series be varied) without adequate explanation.