Corporate Reports Act As The Traditional And Statutory Formal Communication Accounting Essay


Corporate reports act as the traditional and statutory formal communication intermediate between a publicly listed company and its interested parties (Stanton, Stanton and Pires, 2004). The main users of corporate reports and their needs which are classified and detailed as follows:

Present and potential investors

They desire increased quality, quantity, and information communicated in an understandable language in annual report disclosures. Additional disclosures such as pending litigation, budgeted income statements, management audits, and segment information are needed by numerous investors (Pava, Moses L., 1993).

Investors perceive cash flow as a measure for performance rather than profits reasons being cash flow statement is more widely read, more readily understood, and is becoming substantially more useful than funds flow and investors have refocused that cash flow is 'king' (Pava, Moses L., 1993).

Besides, the main approach to share valuation was fundamental analysis. Investors are most attempted to forecast earnings for a company by estimating a 'true' P/E ratio to assess over or under priced shares. This involves calculation of 'revised' EPS (Arnold and Moizer, 1984).

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Shareholders believed the corporate report is significantly useful (Pava, Moses L., 1993). However, the Management Discussion and Analysis (MD&A) section of the annual report is not perceived as very useful because it has not included the forward-looking information that investors want and the Securities and Exchange Commission (SEC) requires (Hooks and Moon, 1991). More than 87 percent of respondents want MD&A section expanded to include more accurate information (Pava, Moses L., 1993).


Corporate report provides management with an opportunity to praise employee innovation, teamwork, quality and commitment, which are important in overall business success. Employees need information in making collective bargaining agreements (CBA) with the management, in the case of trade unions or for individuals in discussing matters of compensation, promotion, rankings and salary hike .

They may use corporate report as a vehicle to relate those company successes such as entering into a new contract, a new product, cost-saving initiative, expansions into new geographical areas, which have an impact on their work force and job security.

Corporate report can help increase employee understanding of the different areas of the company. It can be a source for learning about each of a company's product lines, and who is leading the various operations as well as showing employees how they fit into the overall picture of the company.


They are providers of funds (whether short term or long term loans), information about the liquidity and cash flow position is crucial for them to assess whether a company is able to pay them back.

They may in circumstances request personal guarantees of loan repayment. They need information concerning the assets (serve as a mortgage or security) of company available to satisfy their claims in case of default (Michael S. Luehlfing).

Different stakeholders have different needs (see Appendix A). Based on the research, it is unlikely that corporate reports meet the users' needs in the current business environment particularly the investors as the level of confidence to corporate reporting has reduced gradually from 2008 to 2010 (see Appendix B).


Annual report and accounts should be prepared to increase consistency, comparability, relevance and reliability so as to provide quality information to users in making decisions (IASB Framework). However, research shows that there are circumstances and pressures motivate managers to manipulate their reported earnings including:

Income smoothing

They tend to inflate current earnings when facing small losses or earnings declines. Also, record overly conservative accruals for future costs such as warranties or corporate restructuring to enhance subsequent earnings and maximise companies' share prices (Copeland, R.M., 1968).

Market expectations

Managers have undue pressure to inflate short-term earnings when companies' earnings are in danger of declining below analysts' forecasts. During the 1990s, many companies suffered huge share price drops following profits announcements that narrowly missed forecasted amounts (Clikeman, Paul M., 2003).

Contractual motives

Many contracts such as bonus plans and debt agreements are based on accounting information. Managers occasionally are motivated to manipulate reported earnings to maximise their compensation or avoid violating debt covenants (Clikeman, Paul M., 2003).

Informational perspective

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Information asymmetry can create conflicts that exist in complex corporate structures between a privileged management and a more remote body of stakeholders which underpins the study of the creative accounting phenomenon (Schipper, 1989).

According to Paul M. Clikeman, managers can delay or accelerate reported profits through their accrual estimates and accounting choices by practicing creative accounting. For instance:

They can influence reported profits by controlling the timing of purchases and sales of assets. Sales can be pulled from a future period into the current period by offering price concessions or more favorable credit terms on deliveries or postponing discretionary expenses such as maintenance and employee training (Clikeman, Paul M., 2003).

Company's choice of depreciation method and accounting for employee share options method can influence reported income significantly (Clikeman, Paul M., 2003).

They can influence reported expenses through assumed rate of return on pension plan assets and the estimated useful life of fixed assets by capitalizing the expenses instead of writing them off (Griffiths, Ian, 1992).

Clikeman argued that many operating decisions that are made for the primary purpose of influencing short-term earnings can harm the company's long-term economic wellbeing. Thus, reduced company value and lead to agency problems.

Creative accounting is not against the law (Jameson, 1988). It can only impress investors over short time periods as the financial position goes worse, this cannot be hide anymore (Schiff, David, 1993).

There are over 200 cases of fraudulent financial reporting identified that fraud often involved the overstatement of revenues and assets (Fraudulent Financial Reporting, 1987-1997) such as the collapse of Enron Corp. (Dec. 2, 2001), due to dubious accounting practices, inflated profits, and fraud (BBC News, 2002).

2.8 In conclusion, study shows that management can influence the figures in the corporate reports and accounts.