Annual Reports

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Annual Reports
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The Annual Report

• A communications vehicle
• A sophisticated marketing tool
• Used to impart a particular organizational image

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The Annual Report

• Anthony Hopwood, an accounting professor and
  researcher asserts that the corporate annual
  report is a largely unresearched document,
  subject to little systematic investigation.

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The Annual Report

• He argues that it has become a highly
  sophisticated product of the corporate design
  environment, the main purpose of which is to
  proactively construct a particular visibility and
  meaning rather than revealing what was there.

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2002 Report to the Nation

• Occupational Fraud and Abuse Association of
  Certified Fraud Examiners

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Occupational Fraud

• The use of ones occupation for personal
  enrichment through the deliberate misuse or
  misapplication of the employing organizations
  resources or assets.

Association of Certified Fraud Examiners
2002 Report to the Nation
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Occupational Fraud

• Occupational fraud schemes can be
• as simple as pilferage of company supplies or
• as complex as sophisticated financial statement
  frauds.

Association of Certified Fraud Examiners
2002 Report to the Nation
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Occupational Fraud

• All have four elements
• Is clandestine
• Violates the perpetrators fiduciary duties to
  the victim organization
• Is committed for the purpose of direct or
  indirect financial benefit to the perpetrator.

Association of Certified Fraud Examiners
2002 Report to the Nation
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Occupational Fraud

1. Costs the employing organization assets, revenue,
   or reserves.

Association of Certified Fraud Examiners
2002 Report to the Nation
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Occupational Fraud

• Study covers 663 occupational fraud cases that
  caused over 7 billion in losses.
• An estimate of 6 of revenues will be lost in
  2002 to occupational fraud.

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Occupational Fraud
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Categories of Fraud

• Misappropriation of assets
• Account for 80 of frauds
• Cash is the targeted asset 90 of the time.
• Corruption Schemes
• Account for 13 of frauds
• Cause over 500,000 in losses on average.

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Categories of Fraud

• Fraudulent statements
• The most costly form of occupational fraud
• Median losses of 4.25 million per scheme

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Methods of Fraud
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Duration of Fraud
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Position of Perpetrator
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Gender of Perpetrator
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How did they succeed?

• Insufficient controls (49.2)
• Controls ignored (39.9)
• Couldnt have been prevented (10.8)
• None of the above (3.1)

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Now . . . Back to Annual Reports

• First . . .
  What are they?
  Why do we need them?

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What are they?

• It depends somewhat on how you define annual
  report!
• Annual report to SEC (Form 10-K)
• Annual report to shareholders

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Annual Report to the SEC

• Form 10-K

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Form 10-K . . .

• Who must file?
• Companies with more than 10 million in assets
• Whose securities are held by more than 500 owners

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Form 10-K . . .

• Available to the public via the EDGAR database
  (www.sec.gov).
• Almost a legalistic document
• Difficult to read
• Extremely long

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Form 10-K - Contents
Item 1 Business
Item 2 Properties
Item 3 Legal Proceedings
Item 4 Submission of matters to a vote of security holders.
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Form 10-K (EDGARSCAN)
Item 5 Market for the Registrants common Equity
Item 6 Selected financial data
Item 7 Quantitative and qualitative disclosures about market risk
Item 8 Financial statements and supplementary data.
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Form 10-K (EDGARSCAN)
Item 9 Changes in and disagreements with accountants
Item 10 Directors and Executive Officers of the Registrant
Item 11 Executive compensation
Item 12 Security ownership of beneficial owners and management
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Form 10-K (EDGARSCAN)
Item 13 Certain relationships and related transactions
Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K
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So . . . Does the 10-K have any real value to the
average investor?
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Annual Report to the Shareholders
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Two Schools of Thought

• The annual report is a thing of the past. It is
  a relic and nobody bothers to read it anymore.
• The annual report, while no longer occupying the
  same level of importance it once did, is
  nevertheless an important document that should be
  studied by investors.

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Picture
Every
Word
Every
Even the
Layout
Itself . . .
Management's
Is
Story!
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Annual Report
Its Cover Must Demand
Open me!
Read me!
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Annual Report

• Required by the SEC.
• Required by stock exchange listing.
• Required by public demand.

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Annual Report

• The first annual report was said to be issued by
  Baltimore Gas Electric in 1823
• One-page
• Handwritten by the Corporate Secretary

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Required Contents

• Report of management
• Auditors report
• Management discussion
• Financial statements and notes
• Selected financial data

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Optional Contents . . .

• Financial highlights
• Letter to stockholders
• Corporate message
• Board of directors and management
• Stockholder information

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Typical Contents . . .

• Impressive front cover
• Colored photographs on shiny paper
• Dazzling graphics demonstrating the companys
  success
• Letter to shareholders with positive spin
• Four financial statements

Understanding the Corporate Annual Report
Lyn Fraser and Aileen Ormiston
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Typical Contents . . .

• Notes to the financial statements
• Report of independent auditors
• Managements discussion and analysis
• Five-year summary of selected financial data
• Market data

Understanding the Corporate Annual Report
Lyn Fraser and Aileen Ormiston
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So, how are we doing?
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How about something more current!