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.

The second major contribution from the early 1980s recognized the rapidly emerging field of computer graphics and how humans used those graphics at that time (DeSanctis, 1984). DeSanctis (1984) examined the literature related to human use of graphics, presented propositions on trends in the literature, and suggested future research directions. She summarized eight major dependent variables in graphic research: interpretation accuracy, problem comprehension, task performance, decision quality, memory of information, viewer preference, speed of comprehension, and decision speed. Many studies of business graphics since this 1984 article cite this seminal work. Also appearing at this time is a detailed review of graphics and human information from a cognitive psychology viewpoint found in five books (Kosslyn, 1985); this review nicely connects with DeSanctis's work.

Comparisons of Tables to Graphs

Concurrent with the work by Tufte and DeSanctis we find examinations of individual visual support types. These studies suggest that with accounting data, graphical formats are somewhat better than numerical data (DeSanctis & Jarvenpaa, 1989). Of little surprise is the finding that tables and graphs are processed more effectively than raw text (Kelly, 1993), that they can positively affect comprehension (Peterson, 1983), that there can be great value in visualization (Platts & Tan, 2004), and that the time variable is a good measure of the amount of effort that is needed to process the data, which is similar to DeSanctis's last two variables.

In a comparison of graphs to tables, Vessey (1991) proposes a theory that explains when one medium outperforms the other. Sixteen variables that affect both user preference for and user efficiency of tables and graphs (R. A. Coil & Coll, 1993) led to an experiment that tested both modes and found strengths and weaknesses for each (R. A. Coll, Coll, & Thakur, 1994). This latter finding is somewhat similar to those of Davis (1989), whose experiment determined no one form of presentation (among line graph, bar chart, pie chart, and table) to be best in all situations. Tables may be best for acquiring individual data values, whereas line and bar graphs are better for quick summaries (J. H. Coll, 1992; Jarvenpaa & Dickson, 1988). Still other research looks at the relative efficiency of line graphs, bar graphs, and tables and results in mixed results under various settings (Meyer, Shinar, & Leiser, 1997) but can favor graphs over tables when structured data and prior information are variables (Meyer, Shamo, & Gopher, 1999). An article that focused on theory development to explain graphs and tables concluded that matching the visual representation to the type of task to be solved yielded improved decision-making performance (Vessey, 1991).

Clusters of Information

Also related to the selection, preparation, and manipulation of the visual representation, but emerging after the 1980s studies, are three clusters of studies: (a) studies on how to prepare graphics that avoid distortion, (b) studies on how to identify and measure distortion, and (c) studies of such distortion in annual reports.

Preparing graphics. Regarding graphic preparation prescriptions, several books have been especially thorough. For suggestions on preparation, see Zelazny (2001), and for guidance specific to graphing accounting data and financial data, see Andersen (1983) and Jarett (1983), respectively.

Beyond books that guide readers on graphics preparation, several reports or studies have hit substantial depth. Rycker (2001) develops a worksheet that guides students to get the most out of quantitative data. Coles and Rowley (1997) identify the important parts of charts and share suggestions for preparing them. This relatively basic information parallels suggestions found in many current business communication textbooks.

Graphic distortion. The identification and measurement of distortion of illustrations, especially for financial data through graphs, are well documented.

The Canadian Institute of Chartered Accountants (1993) book on financial graphics details such variables as scales, spacing, color, and shading. It presents 15 different types of distortion (p. 125) and expands the list to 53 in its appendix (pp. 189-191). Other studies also touch on rate of change and problems predicting volume (Cochran et al., 1989); obscure negative numbers and order of time series reversed (Chevalier & Roy, 1993); scales and color (Bryan, 2003, 2004; Kosslyn, 1989); zero bases, 3-D effects, use of percentages, math tricks, brightness, and occlusion (Kosslyn, 1994); 3-D problems (Campbell, 1996); and cultural bias (Bestor, 1996). (For an additional discussion of the general effects of color and a thorough presentation of literature related to human reactions to it, see Zviran, Te'eni, & Gross, 2006; also see Beattie & Jones, 1992b.) G. E. Jones (1995) covers many of these variables in a less scholarly and more prescriptive fashion.

A taxonomy of types of distortion, and recommendations for avoiding them, includes manipulations of scale ratios, of the second dimension, of the third dimension, of color, of composition, of symbolism, and of affect (Bryan, 1995). Guidelines for accountants and others who place graphs in annual reports range from a simple discussion of ethical responsibility vis-a-vis distortion (Jackman, 1996) and planning for what will appear in the graph (Nachtwey, 2000) to using a zero base, avoiding rate-of-change graphs, cautiously using multiple-amount scales, placing the irregular stratum at the top, carefully choosing the years to be presented, not using the same order of time values that financial statements use, avoiding out-of-balance scales (Taylor & Anderson, 1986), and proposing specific principles to follow (Hill & Milner, 2003).

Measurement of distortion in graphic support has mostly focused on bar graphs, although there is discussion of such techniques as 3-D images, color, and titles. The general approach is to compare the data against the image (Beattie & Jones, 1992c; D. Mather, Mather, & Ramsay, 2005; Taylor & Anderson, 1986; Tufte, 1983).

Two main approaches to measuring graphic distortion, which overlap, are Tufte's (1983, p. 57) "lie factor" (which led to the development of the second approach) and the graph discrepancy index (GDI) by Steinbart (1989, p. 61). The GDI is a measure that compares the percentage change in a graph to the change in the supporting data. (A modification to the GDI that may produce slightly stronger results is the relative graph discrepancy index appearing in D. Mather et al., 2005.)

The term lie factor suggests intent to mislead by the author. Such intention may not exist and may instead be the result of the availability of current technologies, the lack of sufficient knowledge concerning effects from visual alterations, or the absence of sufficient background or missing guidelines (Allen, 1996, p. 93),

Terms referring to graphic distortion abound, including the lie factor (Tufte, 1983), misinformation graphics (Moen, 1990), graph discrepancy (Beattie & Jones, 1999b, 2000a, 2000b), measurement distortion (Beattie & Jones, 1992c), graphical infidelity (Beattie & Jones, 1992b), graphic deficiencies (Canadian Institute of Chartered Accountants, 1993), distortion (Beattie & Jones, 2002b; Bryan, 1995), manipulated numbers and misleading graphs (Kienzler, 1997), presentational enhancement (Beattie & Jones, 1999a), chart burn (Zweig, 2000), and impression management (Arunacbalam, Pei, & Steinbart, 2002a; Beattie & Jones, 1999a, 1999b, 2000a, 2000b). Superfluous, untidy, and bothersome treatments of graphs that may create distortion as well is called chartjunk (Tractinsky & Meyer, 1999; Tufte, 1983, pp. 107-121; Tufte, 1990, p. 34; Tufte, 1997, pp. 65, 74; Tufte, 2006, pp. 152-153, 174-175).

Graphs in annual reports. Especially germane to this review is the literature about use and abuse of financial graphics in annual reports.

Most annual reports include graphics. Three studies (Beattie & Jones, 1992a, 1992b, 1992c, 2000a; Frownfelter-Lohrke & Fulkerson, 2001; Steinbart, 1989) all found that 79% of annual reports use graphs. Another study calculated the frequency at 35% (Courtis, 1997). Across six countries, Beattie and Jones (1997, 2001) found graph usage above 80% and more than 92% for U.S. reports. Corollary research on graph use in annual reports shows a leaning toward selectivity as the primary graphical decision; that is, studies looked at whether companies did or did not use graphs. (See Beattie and Jones [1992a, pp. 1-2; 2000a, p. 216] for a helpful discussion of selectivity. Green, Kirk, and Rankin [1993] also discuss selectivity.)

Other empirical studies have measured financial graphics and compared the image to the actual data. We have learned that almost half of the reports in one study included at least one graph that was incorrectly prepared (Johnson, Rice, & Roemmich, 1980), that one in eight graphs in annual reports has errors in numbers and one in three has design errors that distort the numbers (Moen, 1990), that about one half of the graphs were misleading in the 35% of annual reports that had graphs (Courtis, 1997), that the manipulation is three times more likely to exaggerate, rather than underestimate, an upward trend (Beattie & Jones, 1992a, 1992c), that 30% of key financial graphs contain significant measurement distortion (Beattie & Jones, 1992a), and that at least 1 in 10 graphs in annual reports has an altered vertical scale that projects a more positive image than the real situation (Burgess, 2002). Somewhat similar to the Burgess findings, another study (Frownfelter-Lohrke & Fulkerson, 2001) determined that of 270 annual reports from 74 U.S. and non-U.S. companies, about one half did not include a scale and 17% did not begin with a zero baseline.

In addition to studies of the prevalence of graphs that contain distortion, we also see evidence that graph use may be contingent on favorable financial performance (Beattie & Jones, 1992c, 1999a, 2000b; M. J. Jones, 1994). Literature that expands the positive distortion of graphs beyond annual reports to other forms of financial reports includes IPO prospectuses (P. Mather, Ramsay, & Steen, 2000), CEO changes (Godfrey, Mather, & Ramsay, 2003), and proxy statements (Bannister & Newman, 2006).

Later in this article, following the Annual Reports and Communication section, is additional discussion of financial performance and how it relates to both writing and graphing.

Other experiments tested the effect of perception on various forms of graphs. Beattie and Jones (2002a) specifically focus on graph scale and how it affects the angle (the "slope parameter") of lines in line graphs. Their laboratory study concludes that the degree of the angle leads to bad judgments of corporate performance. They also experimentally test six levels of distortion in vertical bar graphs and find that no distortion in excess of 10% should be allowed (Beattie & Jones, 2002b). From a series of three experiments, we also learn that improperly designed graphs can mislead users and can cause them to make different decisions than they would have made if the graphs had been correctly prepared (Arunachalam, Pei, & Steinbart, 2002a: also see Arunachalam, Pei, & Steinbart, 2002b; Plumlee, 2002).

Some research examines just the dimensionality of graphs. When comparing two- and three-dimensional graphs, the two-dimensional graphs were more reliable--in both speed and accuracy--than were the three-dimensional graphs (Addo, 1994). Another study (Tractinsky & Meyer, 1999) draws a similar conclusion regarding the accuracy of two-dimensional graphs but also concludes that when the goal is to create a favorable impression, people preferred and created graphs with more three-dimensional depth.

Based on the considerable latitude graphic designers have in deciding how to present financial data in annual reports and its role in affecting readers' perceptions of the corporation, one might assume that public accounting auditors would measure and comment on such distortion. The next section looks at these issues.

ISSUES RELATED TO ACCOUNTANCY

Graphs in annual reports should accurately reflect data. Designers of annual reports may prepare graphs, and internal auditors may be involved as well. In the auditing function, accountants verify the accuracy of the data. Precisely how auditors treat or examine the graphs is an area that is still emerging, as we shall see.

Rather naively at one time, the National Association of Accountants (Andersen, 1983) proposed using graphs to represent accounting data because they can be reliable, can be understood, and can attract and hold attention (pp. 3-4), but the report barely mentions potential misunderstanding and misrepresentation of data. A 1978 Harvard Business Review article (Blake, Warner, & White, 1978) was not much more insightful. By 1995 (McCullar, 1995), 1999 (Fulkerson, Pitman, & Frownfelter-Lohrke, 1999), and 2000 (McNelis, 2000), the suggestions to accountants had improved substantially. An especially thorough review of guidelines for graphics in financial reports is directed toward accounting educators and their students (Hill & Milner, 2003).

Currently, auditors of U.S. annual reports are required to examine both the narrative and the financial sections, though the guidelines for review of the narrative section are brief and general. The Statement on Accounting Standards Number 8, "Other Information in Documents Containing Audited Financial Statements" ("AU Section 550," 1975), says the auditor must read "other information" to determine if it is "materially inconsistent" with the financial reports: this auditor's review includes the manner of presentation and the data. The "other information" includes graphs (Burgess, 2002). The Governmental Accounting Standards Board Statement 34 has parallel standards (Chase & Shoulders, 2003).

Articles with critiques of and suggestions for financial and accounting related graphs abound (e.g., Bannister & Newman, 2006; Lynch & Golen, 2002; Sugden, 1989; Werts, 2004; Wilson & Stanton, 1996).

The extent of the review of graphs in the narrative section is not well defined (Burgess, 2002, p. 52), but guidelines are emerging (Johnson et al., 1980: Taylor & Anderson, 1986). Auditors who are able to point out the existence of graphical alterations perform a real service to their clients (Burgess, 2002). Continuing research related to graph use and distortion in annual reports appears to be needed and important.

INTERNATIONAL IMPLICATIONS

The third major cluster of literature on graphs and annual reports includes international implications. Many articles review reports for a specific country or compare annual reports of different countries. (Numerous studies already cited fall into this category: Beattie & Jones, 1992a, 1992b, 1992c--United Kingdom; Beattie & Jones, 1999a, 1999b--Australia; Beattie & Jones, 2000a, 2000b--United Kingdom; Beattie & Jones, 2001--six countries; Beattie & Jones, 2002a, 2002b--United Kingdom: Canniffe, 2003--Ireland: Chevalier & Roy, 1993--Canada; Coles & Rowley, 1997--United Kingdom: Courtis, 1997--China; Frownfelter-Lohrke & Fulkerson, 2001--U.S. and non-U.S. companies: Godfrey et al., 2003--Australia; Green et al., 1993--Ireland; Platts & Tan, 2004--United Kingdom; Canadian Institute of Chartered Accountants, 1993--Canada.)

The countries most often reviewed (after the United States) are Canada, the United Kingdom, Australia. China. and other countries in Europe, and often the companies are multinational and/or employ English as a major language for their reports.

Graphic use and distortion appear to vary by country. In 1996, a study of 300 reports from top companies in Australia, Europe, and the United States found that French companies are inclined to exaggerate instead of underestimate trends, that in the United Kingdom graphs violate basic design principles, and that in the United States reports are more likely to include key performance variables in graphs if their financial situation is positive (Roy, 1998). Additional discussion of the effects of positive financial performance appears following the next section.

In 1997, the Institute of Chartered Accountants in England and Wales determined that graphs in annual reports in six countries are often poorly designed; the graphs with the most distortions were from France, the United Kingdom, and the United States (cited in Burgess, 2002, p. 45). Also using six countries (Australia, France, Germany, the Netherlands, the United Kingdom, and the United States), Beattie and Jones (2001) looked at 50 companies and concluded that there were substantial differences by country, with Germany being an outlier with noticeably fewer graphs of earnings per share (EPS) variables and a greater raw number of graphs.

Focusing on just Canadian annual reports, a thorough review of graphs concluded that a vast majority of Canadian companies use financial graphics and that a substantial number of the annual report graphics were potentially misleading because of their construction and design (Canadian Institute of Chartered Accountants, 1993, p. 124). The monograph compares eight studies of graphic distortion and then presents a list of 53 graphic discrepancies supported by the literature (p. 190). This Canadian extensive review of potential misrepresentation is often cited as it details the variety of distortion techniques.

Two surveys of reports from Hong Kong public companies concluded that 38% and 35% of the companies included graphics and that, in the latter survey, about one half of all the graphs violated sound principles (Courtis, 1997). This article extends earlier work by Beattie and Jones (1992c) but reports less graphic use than in the United States (as cited earlier).

Surveys of graphs used in Irish annual financial statements were used to selectively highlight specific areas where performance had improved (Green et al., 1993). As is often the case, the question is raised whether this positive distortion is intentional or a passive by-product of the publication process.

A study of annual report graphs that reviewed U.S. and non-U.S. company reports found that both groups included misleading graphs but that the non-U.S. companies had a greater incidence of distortion (Frownfelter-Lohrke & Fulkerson, 2001).

Other studies of U.S. and non-U.S. companies that found distortion in annual reports, summarized in Beattie and Jones (2002b), include Johnson et al. (1980), Steinbart (1989), Beattie and Jones (1992c), P. Mather, Ramsay, and Serry (1996), Beattie and Jones (1997), Frownfelter and Fulkerson (1998), P. Mather et al. (2000), and Beattie and Jones (2000b). No obvious conclusion emerges from these studies other than that there is frequent graphical distortion and that reports from the South American and African continents, the Middle East, and India, for example, are neglected in the studies.

ANNUAL REPORTS AND COMMUNICATION

The fourth main pool of literature regarding annual reports and graphics connects annual reports to communication. Lord's (2002) analysis of the literature associated with annual reports from 1989 to 2001 generates nine groupings, of which four directly relate to communication: rhetorical analysis, methods of conveying negative information, effectiveness of writing, and readability and accessibility. Several studies during this same period stand out as examples of one or more of these four categories.

Overlapping with these four groupings are the "acceptability principles" that emerge from the communication-oriented categories of syntax, semantics, and pragmatic analysis (Kosslyn, 1989). Violations of these principles may lead to difficulties in interpreting a display.

Also studying communication, through narrative analysis, Jameson (2000) examines shareholder reports for structure, narration, and verbal and visual discourse. She concludes that the way readers respond depends on intelligence and emotional interaction with the narrator and the visual symbolism.

Content analysis is another way of reviewing annual reports' communication strategy. An examination of letters from presidents to stockholders in annual reports from companies faring either well or poorly financially leads to the conclusion that it is generally possible to correctly classify companies' financial situation based on their use of certain themes (Kohut & Segars, 1992). (This article also delivers a thorough review of the literature related to writing and annual reports.) In a different spin on letters in annual reports (and a study that also falls in the international category because it studies annual report samples from Hong Kong, the United States, and the United Kingdom), Hyland (1998) uses metadiscourse to examine CEOs' writing in 137 annual reports. He finds that rhetorical devices are being used to establish both personal and corporate positive images.

Readability is another direction of various communication studies. One study examined readability of annual report narrative sections rather than presidents' letters for well- and poor-performing companies--both similarly and in contrast to the study mentioned immediately above--and concluded that companies that are performing well financially produce annual reports that are easier to read and have a stronger writing style (Subramanian, Insley, & Blackwell, 1993). The researchers also point out that their results contradict two earlier studies. This study elicited a response (M. J. Jones, 1994) that suggests the findings of the study are likely part of a wider tendency for management of companies to present views in as favorable a light as possible. This response also valuably positioned research to that date on the larger category of corporate performance and its relationship to readability. Subramanian, Insley, and Blackwell (1994) respond to M. J. Jones (1994) that differences in culture may have been in play between their study and ones cited by Jones and that those differences may have contributed to their own findings. For an alternative approach to measuring readability, see Bormuth (1977).

A second (and internationally oriented) readability study (Courtis & Hassan, 2002) looks at letters from chairmen in annual reports for 65 Hong Kong and 53 Malay companies with reports written in both English and their native language. The study finds differences as the letters crossed languages and cautiously recommends attention when preparing bilingual disclosure.

Somewhat similar to studying readability is a genre analysis of U.K. accounting narratives that determined a positive bias via word frequencies despite authoritative guidance that language must be neutral (Rutherford, 2005). An earlier and related study of executives' public and private statements finds no significant difference between the two sets of documents but does find a positive and significant correlation for perception of control (Fiol, 1995).

Other studies look at how males and females are portrayed in annual reports, including through photographs (Anderson & Imperia, 1992: Kuiper, 1986, 1988) and generally note the underrepresentation of women.

In sum, we see many connections across studies of annual reports and communication, including the emergence of guidelines for use of graphs and charts, the relationship between reader and narrator, the use of readability analysis to evaluate annual reports (including multiple international studies), and the underrepresentation of women in annual report photos.

PROFITABILITY AND ANNUAL REPORT GRAPHS

Thus far we have seen results of research about (a) the selection, preparation, and manipulation of the visual representation; (b) accountancy-related issues: (c) international implications; and (d) annual reports and communication. These results have included corporate demographic variables such as size, industry, and financial health and have compared them to graph use and misuse. In this section, I isolate and comment on corporate profitability as a variable because it appears to have significant influence on graphic representation.

Style analysis as measured by a readability score shows a strong writing style among companies that perform well financially but no difference in their use of jargon or modifiers (Subramanian et al., 1993).

Other studies examine the relationship of good and bad financial performance to visual support. Using EPS and profit before tax as financial indicators of performance, Beattie and Jones find that companies with "good performance" ( 1992a, 1992c) and "favorable performance" ( 1999a, 1999b) are significantly more likely to use financial graphs. Most studies of annual reports and graphs look at the positive and neglect the negative direction of financial; Beatty and Jones (1992c) is an exception. Roy (1998) reports, among others, on the positive direction and favorable distortion.

The shortcoming of Beattie and Jones' (1992a, 1992c, 1993, 1999a, 1999b, 2002a) conclusions is that their sample is 240 companies from the U.K. stock exchange based on their market capitalization; thus, the sample exclusively

of "large" companies. The use of large companies has not always been consistent. A company with sizeable worth may not perform well financially, for example. Beattie and Jones (1999a, 1999b) continue their reliance on large companies when they select the 100 top companies from the Australian Stock Exchange by market capitalization and use the 89 that responded. Others have also relied on large or high-performance companies, such as from the Fortune 500 (Johnson et al., 1980; Steinbart, 1989) or a mix of large and "smaller" companies (Burgess, 2002).

Although Beattie and Jones (1992c, 1999a) support their similar hypotheses regarding graph presence in favorable versus unfavorable performance, the number of companies and extent of the favorable and unfavorable performance are somewhat sketchy, as is the role of these "leading companies" (Beattie & Jones, 2002a, p. 180). The unanswered question is, is there a difference by company size (e.g., capitalization) and the inclusion or abuse graphs in their annual reports?

In summary, the literature establishes (a) a high level of concern for delivering visual support correctly and thoroughly, (b) involvement by accounting scholars to examine and prescribe visual support use in annual reports, (c) the role of annual reports and accuracy of information in annual reports in the United States and in other countries as well, and (d) the relationship of different aspects of communication to annual reports. We also see that company size or financial performance ("profitability") can affect graph use and misuse.

DIRECTIONS FOR FUTURE RESEARCH

This review of the literature of annual reports and financial graph usage has identified clusters of knowledge, areas of disagreement, and places for new research. Based on this review, the following seven topics, in no particular order, need additional examination and study.

More Study of the Attributes of Graphic Types

Most of the research regarding how recipients use (interpret, understand, recall, etc.) information from graphics is rather basic. We still need more information on when to use which types of financial graphs to make what point. Just how big a role do the graphs play in decision making? Anecdotal suggestions aside, we need research-based guidelines on graphic choice, treatment, and influence. Little current research looks at these issues. Furthermore, the existing research looks at relatively simple graphs and neglects more complex treatments--and their value--such as double y-axes graphs, 3-D pie graphs, bar and line treatments in one graph, color choice with treatments, spider graphs, and so on. Where is the "sweet spot" between sterile, two-dimensional, highly precise but visually boring graphs and striking, colorful, entertaining treatments intended to acquire viewership?

Further Study of Narrative Versus Financial Report Sections

The financial section of annual reports has a lengthy history of review, especially by accounting, governmental, and financial disciplines; however, the thorough definition of the role of the narrative section is still emerging. Furthermore, comparisons and contrasts between the two sections have received little attention. Some research examines the regulated graphics of financial sections and mostly unregulated graphics in the narrative sections, but we know little about which types of companies, and under what circumstances, the differences are employed. Areas of future research that would be beneficial include differences by journalistic and design treatment (e.g., color use, placement, relative attention to different topics, preferences for types of graphics, general length, etc.). Finally, how does profitability affect the decision of whether to include a narrative section? The next item relates here as well.

Profitability as a Variable Affecting Graphic Use

Because almost all studies of annual reports and graphics use for-profit organizations, profitability seems to be an important variable. When it is included, there is much reliance on the largest companies (measured in revenues or other criteria). The question becomes, what we do know about annual report graphs usage when the company has a history of poor financial performance or when recent positive performance is followed by negative performance (or vice versa)? A related methodological question is, how do we best measure financial performance (EPS, dividends, net income)? For those nonprofit organizations that annually report on their performance, is there also misuse of graphs?

Communication Variables

Research findings thus fax are rather sketchy regarding the role financial graphics in narrative sections play in persuasiveness. That is, we have seen on frequent occasions that the graphics are a common element of the narrative section and that they are often poorly presented. Is that presentation intentional or unintentional, and is it a persuasive ploy? How competently do viewers discern faulty design, and do they perceive it as covert information? In other words, just how tar can an annual report designer go with misrepresentation without eliciting the wrath of the viewer?

The Role of Accounting and Regulation in Graphic Choices

Research to guide corporate auditors in their examination of narrative section financial graphics is not yet mature. Because the graphs are (supposed to be) reporting factual financial data, one would think that guidelines would be more rapidly emerging. However, this is not the case. Ample opportunities exist for researching the current practices of visual treatments of financial information and extending the results to guide auditors in the future.

International Annual Reporting

We have seen results of many studies of annual report delivery across various countries and have noted some differences by countries (e.g., France and Germany). The countries most studied are the United States, Canada, England, France, Germany, China, Taiwan, Ireland, and Australia. Generally neglected thus far are descriptive and comparative studies of annual reporting techniques in Africa, India, and Central and South America. In times of global business and increasing internationalism, we need more information about other countries' practices.

Electronic Annual Reporting

This review has purposefully avoided entering the fray between hard-copy annual reports and their electronic counterparts. Such an examination was beyond the limits of space. Nevertheless, quite obviously electronic reporting is rapidly gaining support and acceptance. Beyond just the speed with which changes can be made and the low cost of distribution that are part of electronic reporting, there is also the increasing preference by an electronically savvy clientele.

In addition to seeking similarities, differences, and preferences for hard-copy versus electronic annual reporting, the future research focus should be on financial graphic usage between the two media. For example, one might ask, are electronic financial graphs more persuasive than their hard copy counterparts, and if so, why?

Continuing and extended research into the use of graphs in annual reports is needed, desirable, and timely. The purpose of this review has been to provide guidance and direction.

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