The Corporate Financial Accounting course from my MBA class at Lagos Business School covers reading Companies’ Annual Reports. The annual report provides information to shareholders. It frequently serves as a review of the previous year and features the election of new officials, a rundown of the company’s financial data, and any projects it was working on at the time. The annual report is typically published on the company’s website and sent to shareholders by mail. It may also contain other marketing materials and an opening letter from the CEO. Although the annual report must be accurate, it may also have subjective biases.
Despite the obvious advantages and clarity that annual reports offer, there are nevertheless instances where a company has performed poorly but it is not obvious in the annual report. In our MBA class, we examined the report of one of the financial institutions in Nigeria and discovered that, despite the report’s favourable appearance, the organization is not doing well and investors did not see this in the annual report.
In adverse economic conditions, managers utilize self-serving bias to show themselves in the best possible light in the annual report. Investors need to be wary of deceptive explanations of performance, particularly during external crises, given the prevalence of the letters to shareholders and the evidence that deliberate self-serving behaviour can be effective.
The goal of corporate leaders is to present their operations in the best possible light. The data in the annual report may indicate greater profits than transpired when prior years have not proven to be as profitable as anticipated. Both the general public and stockholders are aware that businesses frequently use marketing jargon to conceal unfavourable information. Even while the facts are accurate, they are frequently hidden beneath the positive remarks, polished photos, and fantastic future projections that the corporation emphasizes in its annual report.
Behind the Data
When annual reports mainly rely on the graphs and charts of their accountants to fill the report pages, investors who rely on them for information about companies frequently become lost in the statistics. Companies that lack straightforward goals and missions frequently present themselves as strong, expanding companies deserving of substantial investments. In actuality, they can be concealing themselves behind the figures, skewing perceptions of their management philosophy and capabilities. Smart investors frequently resort to more comprehensive income reports like the Standard and Poor’s stock reports and Value Line Investment Survey since annual reports have so much space for subjective interpretation.
The message from the CEO and the articles produced by the company’s managers may contain thoughts that the authors sincerely believe but that originate from a biased perspective, even though truthfulness in annual reports is expected and necessary. For instance, even though a company may be falling behind its rivals, its executives may still think it is thriving since it has been generating profits. The view from the executives’ chairs might not be based on the actual market trends, but rather on their genuine faith in the viability of their business. Optimism is prone to producing skewed perceptions of a company’s favour that aren’t necessarily incorrect but are instead founded on accidental fallacies that end up being self-serving.
Bias can conceal executive concerns about the direction of their companies. When crafting the narrative for an annual report, business writers frequently avoid addressing any potential problems out of fear of alienating investors or harming their reputation in the marketplace. Instead, a CEO who boldly talks about difficulties and worries about the company’s future will be more trusted by stockholders and customers who value candour.