Annual Financial Report

There is probably no investor communications tool discussed and “cussed” more in corporate American boardrooms today than the annual report. Beyond the document's historical baggage, evoking many to describe it as the “Rodney Dangerfield” of financial publications, today's intense disclosure environment—due in large part to the Sarbanes-Oxley Act—has prompted a whole new role for the annual report.

But first things first. What is the annual report, and why are 12,000-plus U.S. public companies spending literally billions of dollars each year to produce such a document?

Simply stated, and as defined by the New York Stock Exchange, the annual report is the formal financial statement issued yearly by a publicly owned corporation. The report shows assets, liabilities, revenues, expenses, and earnings. The report also shows the company's financial condition at the close of the business year and other basic information of interest to shareholders.

Although there is no prescribed format for the annual report, most companies organize their report in four main sections: the president's letter to the shareholders, the “pretty pictures” section or operations review, the management discussion and analysis, and the really boring but most important stuff—the financials and footnotes. In his Investor Relations: The Professional's Guide to Financial Marketing and Communications, author William F. Mahoney likened the annual report to a multicourse gourmet dinner.

Although the genesis of the corporate annual report can be traced as far back as oral presentations made at annual meetings of medieval craft guilds, its modern form emerged from the Securities and Exchange Act of 1934, which required all publicly traded companies to provide yearly financial reports to investors. But there has never been a legal requirement for annual reports to become the showplace publications many are today. This landmark legislation specified only that publicly held companies make full financial disclosure of details relevant to the current and future value of the company to shareholders on a yearly basis. It did not say that companies could turn their annual report process into a beauty contest, spending billions yearly on lavish graphics while being less than candid about their financial doings.

Somehow, over the decades, Congress's seemingly clear and reasonable expectation has been lost on corporate America. Whereas the remainder of the 1930s and the 1940s brought cautious, colorless reporting, the 1950s marked the Renaissance, when “make it pretty” became the standard in annual report design. The 1960s produced annual report Impressionism. “Use color,” one designer would say. “Just a little dab will do it.” The annuals of the 1960s brought drama and zest in design, but they were blatantly shy of what the SEC Act mandated: facts, figures, and analysis.

The 1970s and 1980s—the age of seriousness—saw financial market turmoil and a corresponding impact on annual reports, forcing companies to become more cautious and thrifty in their spending. The 1990s and opening years of the new decade may well become known as the new age of corporate governance and transparency, as corporate America was brought to its knees by an unprecedented flurry of accounting and reporting scandals.

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