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...continue. There 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.
Lee (1994) concludes that with a relative increase in nonfinancial, presentational, and voluntary disclosures and a relative decrease in financial and mandatory disclosures, companies are increasingly using the annual report "as a stylistic means of establishing corporate identity in a consumer-oriented world" (p. 215). These trends are particularly evident in the United Kingdom and the United States. For example, Valentine (1999) reports that by 1999, 94% of the U.K. Financial Times and London Stock Exchange (FTSE) 250 companies employed external design consultants, and Neu, Warsame, and Pedwell (1998) confirm that the annual report is being used to construct a particular image of the organization for relevant stakeholders.
Bartlett and Jones (1997) look at the disclosures of a single company, Bulmers plc, a U.K. listed company, from 1970 to 1990. They find that voluntary, mandatory, and total disclosures all rapidly rose during this time. The number of lines used to disclose voluntary disclosures rose by 142%, and mandatory disclosures rose by 84%. Over this period, the company also increasingly used alternative presentational formats such as pictures.
Beattie, McInnes, and Fearnley (2004, pp. 49-50) present evidence on the size and structure of the narrative sections in the 1999 annual reports of 27 listed U.K. companies in three industry sectors. The sampling is stratified across the entire company size range (measured by market capitalization). The mean number of annual report pages was 54.5. The mean number of narrative pages (defined to include tables, graphs, and pictures) was 14.4. The mean percentage of narrative was 22%, ranging from a minimum of 5% to a maximum of 41%.
D&S (2007) update certain aspects of Lee's study, based on a sample of the 2002 year-end reporting documents of the U.K. FTSE I00. The samples are not strictly comparable in that D&S focus on the very largest companies and include financial companies and industrial companies. D&S find the mean report length to be 98 pages in 2002--an increase of 81% over 14 years. (3) D&S also provide information on the relative balance of the voluntary and mandatory information. The proportion of voluntary material was found to be only 17% in 2002. This is a somewhat surprising result that is likely to be (at least in part) a function of the classification scheme adopted. (4) D&S analyze the format of the nonfinancial statement sections of the reports into three categories: words, pictures, and graphs. The proportions found are 77%, 20%, and 3%, respectively, which suggests a slight increase in the relative amount of words compared to Lee's (1994) findings.
Overall, prior research examining the structure and form of the annual report up until 1990 has indicated a substantial change in the reports over time as measured by the size of the reports, the volume of voluntary information provided, and the use of presentational materials such as pictures and graphs. In other words, there appears to have been a general trend away from a financially driven, statutory document toward a more design-oriented document. The more recent study by D&S (2007) covering the 2002 period, however, indicates a trend back toward a statutory document with a corporate focus principally on regulatory information.
Narratives in Annual Reports
Narratives are an important scene-setting device. In the United Kingdom, accounting narratives can be broadly divided into those that tell a story and those that present specific data. Storytelling narratives include the chairman's statement, the chief executive's review, and the operating and financial review. (5) Chairmen, chief executives, and senior management can use well-crafted accounting narratives to contextualize their results (Hyland. 1998; Smith & Taffler, 2000). More descriptive narratives include a directors' report, a statement of directors' responsibilities, a remuneration report, and a corporate governance report. (6) Accounting narratives can prove useful in that they can be used to manage the impression that a user will gain of the company's annual performance. Virtually all studies are partial in that they locus on either specific topics (e.g., social and environmental information) or specific sections of the annual report (e.g., chairman's statement). There are several types of analysis of accounting narratives: disclosure index studies, thematic content studies, syntactic readability studies, and attributional framing studies (for reviews and discussions of these different types of study, see Aerts, 2001, 2005; Jones & Shoemaker, 1994; Marston & Shrives, 1991). In addition, these studies are, in the main. cross-sectional and provide little meaningful, comparable information on trends over time.
Financial Graphs in Annual Reports
Graphs offer several potential advantages over the traditional alphanumeric table for the communication of financial information. Graphs, especially color graphs, are more likely to attract attention and stimulate interest. Our capacity to remember visual patterns is vastly superior to our memory for text or numerical tables, and graphs are particularly useful for highlighting trends. Company management is free to choose whether to use graphs or not (this is "selectivity": the primary graphical choice). If graphs are used, management can choose to present them in a fair and unbiased manner, complying with the principles of graph design and construction, or can distort the graph. The key defining feature of an accurate graph is that the physical measurement on the surface of the graph should correspond to the underlying numerical values--violations of this principle are termed "measurement distortion" (Beattie & Jones, 1992b). Other violations of design and construction principles are categorized as "presentational enhancement" (Beattie & Jones, 1992b). An underlying theme of many of the studies in accounting on graph usage is that annual report preparers may deliberately engage in graphical violations to convey a more favorable impression of the organization than may be warranted. A possible outcome of such behavior is impression management, in which the message conveyed is no longer neutral and unbiased.
In the first U.K. study undertaken to investigate graph use in annual reports, Beattie and Jones (1992a, 1992b) examine the graphical reporting practices of 240 top U.K. companies. They find that 79% use graphs, with 65% graphing at least one key financial variable--sales, income (i.e., profit) before taxes, earnings per share, and dividend per share. There was strong evidence of selectivity for key financial variables (i.e., companies with relatively good performance included graphs, those with relatively poor performance did not). The mean level of measurement distortion was +11%, and, consistent with impression management theory, a significantly greater proportion of distortions were favorable compared to unfavorable (both favorable and unfavorable distortions can arise because of graphical incompetence). Examples of presentational enhancement that were detected included the use of sloping graphs, the use of sloping columns, and the use of color, all designed to emphasize a rising trend. Beattie and Jones (2002) explore the impact on users' perceptions of aspects of graph distortion using an experimental approach. They show that measurement distortion in excess of 10% is just perceptible to users. Since 1992, there have been a succession of financial graphics studies (e.g., Beattie & Jones, 2000, 2001; Courtis, 1997; Frownfelter-Lohrke & Fulkerson, 2001; D. Mather, Mather, & Ramsay, 2005; P. Mather, Ramsay, & Serry, 1996; P. Mather, Ramsay, & Steen, 2000), all of which have developed, and reinforced, the earlier findings of selectivity, measurement distortion, and presentational enhancement.
Pictures in Annual Reports
A 1996 issue of Accounting, Organizations and Society contained a set of three seminal articles on the use of pictographic imagery in annual reports. Graves, Flesher, and Jordan (1996) examine the...
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