Nothing but the truth

PUBLISHED : Wednesday, 02 November, 2011, 12:00am
UPDATED : Wednesday, 02 November, 2011, 12:00am


As one of a public company's most important acts of financial disclosure and its major instrument for shareholder and investor communication, an annual report can make or break business reputations.

The Hong Kong Management Association (HKMA) Best Annual Reports Awards recognise and celebrate best practice in annual reporting. According to Professor Richard Petty, chairman of the panel of adjudicators, good annual reports are transparent in providing all the information that decision makers would find relevant to consider in making investment and other decisions.

'The annual report is an important document and it should help all stakeholders better understand the company, its performance, its strategy and its direction,' says Petty, a professor in accounting and finance at the Macquarie Graduate School of Management.

'Ultimately, a good annual report is one that effectively communicates what the company has done, what it plans on doing, the reasons and rationale underpinning its decisions and the future potential of the company to its stakeholders.'

He says by rewarding companies for excellence in reporting that goes beyond mere compliance with accounting standards and listing rules, the HKMA awards aim to encourage companies to pay even greater care and attention to the preparation of their annual reports.

The awards also aim to encourage companies to extend their reporting frameworks to include information on matters of interest to all stakeholder groups, including the general public. Examples include the provision of information on corporate social responsibility and on environmentally friendly initiatives undertaken by a firm. Among the 102 annual reports in this year's awards scheme, all but one is available online in addition to hard copy.

The adjudicators say the overall standard of the annual reports submitted for this year's review was high. Except for a few minor exceptions, Petty says most companies complied with mandatory disclosure requirements under the relevant financial reporting standards, the Companies Ordinance and the listing rules.

Petty says judges look for transparency in reporting, clear and concise communication, a clear corporate vision and mission and complete financial information. They also look for innovative reporting that supplements the usefulness of the annual report as a tool for understanding and evaluating the business, and information on business plans and prospects.

He says most stakeholders will be interested in how well the company will perform in financial terms. 'As a whole, Hong Kong companies could do much more in the way of providing information on a voluntary basis,' says Petty.

Judges also pay attention to the layout and design of the report, plus its overall readability. 'Sometimes an entity performs particularly well in one or more of these areas, but it doesn't win one of the other awards due to the fact that the entire package doesn't come up to scratch,' says Petty, who is the past chairman and president of CPA Australia.

He says increased turbulence in financial markets has hurt investor confidence and led to a situation in which there is great dysfunction. 'Companies should use their annual report to assist in communicating appropriate information that will help to continue to restore investor and creditor confidence, and confidence in the markets in general,' he says.

Going forward, Petty says stakeholders will be looking for even greater transparency and for more detailed information. Information on risk and how risk is being assessed and managed by companies is likely to be of particular interest. 'It is still the case that too few companies provide detailed information on how they manage risk. We expect more companies to report in greater detail on their approach to risk management in coming years,' he says.

Petty says that while the overall standard of disclosure was high, there were several instances where companies failed to satisfy all the requirements of the listing rules and accounting standards. Examples included failure to disclose information in respect of directors' emolument policy. Also, a consolidated balance sheet showed a group's financial activities but failed to include the balance sheet of the company itself. A minority of entries also failed to provide details of their credit policy or an ageing analysis of receivables.

Petty says the level of detail needed in each report varies with the nature and complexity of listed issuers' business activities. 'It is noticeable that, as in previous years, some annual reports only included information that complied with minimum disclosure requirements but the better annual reports provided additional information to enable shareholders to make more informed investment decisions,' he says.

Some entrants seem to think that providing visual images is a substitute for detailed written communication. However, this is not the case. 'The enhanced design features that have become characteristic of many reports are effective in making the financial statements more accessible, but companies still must comprehensively report on material items using simple language,' says Petty. 'Some companies, however, seemingly write their reports with the objective of impressing the reader rather than communicating meaning. This practice is to be discouraged.'

He says design was also used as a means of making the report more readable, engaging more stakeholders. 'Some of the designs conveyed clear messages and reflected precisely the way organisations are placing emphasis on sustainability, environmental conservation and management, culture, mission and philosophy,' says Petty.

While photographs are a useful way to provide a visual impression - for instance, to show a picture of board members to stakeholders - companies should avoid overusing photographs, which waste resources and can also give the impression that the report lacks content.