Discuss: "Arguably the Annual General Reports are a poor aid to economic decision making".

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Discuss: “Arguably the Annual General Reports are a poor aid to economic decision making”


Catherine Syder

“Arguably the Annual General Reports are a poor aid to economic decision making”

The annual report is the most important way of communicating with the share-holders to let them know the financial situation of the company. It is also used by management and employees to help decision making about the strategic goals of the firm. The annual report usually consists of a Profit and Loss account and a Balance Sheet, but can also contain other reports and items of financial information that the users may find helpful. It is governed by the Accounting Standards Steering Committee to make sure that the Standard Accounting Processes (S.A.P.’s) are adhered to and there is the possibility of disciplinary action if these are not followed strictly. This is to standardise each company’s reports and eliminate bias as much as possible.

Specific groups of people will use the reports for different purposes. Share holders will use the reports to help them make investment decisions on whether to buy, hold or sell the shares of a particular company. Managers will use the reports to aid decision making about the future of the company and which strategy will make the firm the most profit in the long run. Employees will use the reports to make sure the firm is running with their best interests in mind.

A questionnaire survey was conducted by Bryan Carsberg, Anthony Hope and R.W. Scapens in which 600 members of British professional accounting bodies were asked to rank the importance they thought should be attached to a set of objectives for published accounts. The results were that, of the 121 replies they received, assisting shareholders investment decision making was perceived to be the second most important objective. Another stated objective for the reports was to assist managers in managing the company. This was perceived to be less important with an average rank given at approximately the mid point of the scale. This suggests that members of the accounting profession would class the reports as more useful for shareholders to aid decision making than for managers.

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The same people also conducted an unstructured interview survey in which of the 26 representatives of six large firms of chartered accountants “Several interviewees stressed the difference between investors of small sums and investors of large sums. The small investor was characterized as ignorant of accounting, dependent on financial advisors, incapable of getting information elsewhere and unlikely to switch investments because of apathy or loyalty.” (Carsberg, Hope and Scapens, The Objectives of Published Accounting Reports. Accounting and Business Research.) This indicates that Annual Reports may be useful as an aid for economic decision making of investors of large sums, ...

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