Annual reports provided by companies contain critically important information that can be viewed by consumers, or other parties to understand the current state of the organization, its perspectives, and challenges it has to overcome to move forward and evolve. There is also a practice of narrative reporting presupposing that non-financial information will be disclosed to create the image of would-be projects, opportunities, and strategies that might be employed by the company to attain the leading position. However, these statements might be confusing or not accurate because of the increased importance of impression management and its role in attracting attention to a company. For this reason, the usefulness of the information provided in the narrative section remains disputable and should be checked by using real data.
One of the basic factors associated with narrative disclosures is the selectivity of information that is presented by companies. There are multiple cases when organizations include, or, on the contrary, conceal some data portions that might contribute to the creation of the positive image or deteriorate it (Garefalakis et al., 2016).
This concealment is achieved by manipulating the way the narrative disclosure is presented or by providing more attention to factors that will cultivate a better attitude to the firm among readers or potential partners. Under these conditions, using the available information and correctly realizing the existing trends, companies might avoid discussing problematic issues and focus on outlining the existence of multiple options for future development.
It means that the usefulness and relevance of the information provided in such reports become reduced. Because of the lack of numerical data and the use of narrative to describe the current state of a firm, managers can be more creative in their approaches to present a certain question (Abdelrehim, Maltby, and Toms, 2015). For non-specialists, or some other investigators, it might be confusing as the wrong vision of the company will be formed and used to make decisions about possible cooperation or use of its services. Regarding these factors, it is vital to avoid over-relying on these reports and narrative sections as usually they are designed to emphasize the existing successes of the company and to conceal some problematic areas.
Finally, excessive narrative disclosures can be seen as a part of the impression management strategy. The given approach presupposes the use of existing information about the company in the ways that will guarantee the best attitude to it among potential clients or partners (Campbell and Slack, 2008). Under these conditions, it becomes vital to select the best possible way to represent the existing information and, at the same time, avoid the provision of false data to parties as it can be viewed as a crime (Kibler et al., 2020). Manipulations with narrative disclosures help to achieve the goal and ensure that a positive image will be created.
Altogether, narrative disclosure can be considered a disputable issue. On one hand, it provides clients and partners with information about a firm’s future, its prospects, and opportunities for further evolution. However, from another hand, the information suggested in this section is often not complete as there are attempts to employ the impression management strategy to guarantee that all readers will be impressed by the current successes and disregard problems that might impact the evolution of the company in the future (Leung, Parker and Courtis, 2015). That is why the overreliance regarding these narratives can be dangerous and should not serve as the only factor for making final decisions.
Voluntary disclosure of accounting rations remains the issue that attracts significant attention of researchers as it is not fully understood at the moment. The benefits of this strategy along with its impact on the functioning of companies who employ this strategy remain unclear, and there are multiple theories related to the explanation of the basic implications and motifs presupposing the adherence to this practice.
At the same time, users of corporative annual reports can benefit from these disclosures due to the acquisition of additional information about the functioning of a particular company, its current state, and opportunities for further growth (Horrigan, 1968). For this reason, regardless of the factors impacting the adherence to this practice, it might be viewed as an effective way to collect additional information needed for decision making.
Today, some recommendations might encourage companies to provide additional information about the financial side of their functioning as one of the possible ways to align effective cooperation with analysis. For instance, evaluation and assessment of financial ratios can be used by individuals to determine their ability to pay their debts, evaluate the managerial success, and the opportunities available at the moment (Abdullah and Ismail, 2008).
From this perspective, users of corporate annual reports might benefit from the voluntary disclosure as it generates a better vision of the firm (Abdullah and Ismail, 2008). Another reason for encouraging companies to offer their financial statements to publicity is the reduction of uncertainty related to a particular industry and prediction of its further development (Hossain and Adams, 2008). The information provided by multiple companies operating within the same sector can be incorporated in a report offering its in-depth analysis and offering forecasts related to the future rise.
Another positive aspect of voluntary disclosure is the ability to use provided ratios to compare the functioning of different companies across the globe. This part of analytics is vital for the creation of forecasts about the evolution of global economics and its ability to achieve certain progress (Barnes, 1987).
For this reason, users of corporate annual reports, such as investigators, financial analysts, or other individuals, might employ financial data, statistics, and other facts to create their vision of the future rise and utilize it for various purposes (Abdullah and Ismail, 2008). It contributes to the increase of overall awareness related to the work of a particular industry and opportunities for investment or cooperation, which is also critical for decision-making.
At the same time, the information provided in such disclosures should be considered carefully as it might contribute to the formation of wrong images. There is a body of evidence showing that there is a dependence between the size of the company, the industry where it operates, and its current successes (Watson, Shrives, and Marston, 2002). In other words, beneficial and big companies are more willing to offer financial statements than smaller ones as voluntarily disclosure will demonstrate their power and the ability to compete at different levels, which might attract sponsors and partners.
Altogether, disclosure of accounting ratios to users of corporate annual reports might offer several benefits. First of all, it helps to analyze the state of corporations and their ability to continue the evolution. Second, the use of this financial data can determine the overall state of the sector and its future. Finally, they can help to improve the decision-making process and select appropriate options for cooperation and investment.
Abdelrehim, N., Maltby, J. and Toms, S. (2015) ‘Narrative reporting and crises: British Petroleum and Shell, 1950–1958’, Accounting History, 20(2), pp. 138–157.
Abdullah, A. and Ismail, K. (2008) ‘Disclosure of voluntary accounting ratios by Malaysian listed companies’, Journal of Financial Reporting and Accounting, 6(1), pp. 1-20.
Barnes, P. (1987) ‘The analysis and use of financial ratios: a review article’, Journal of Business Finance & Accounting, 14(4), pp. 449-461.
Campbell, D. and Slack, R. (2008) Narrative reporting: analysts’ perceptions of its value and relevance. Web.
Garefalakis, A. et al. (2016) ‘How narrative reporting changed the business world: providing a new measurement tool’, Corporate Ownership and Control, 13(4), pp. 317-334.
Hossain, M. and Adams, M. (2008) ‘Voluntary financial disclosure by Australian listed companies’, Australian Accounting Review, 5(10), pp. 45-55.
Horrigan, J. (1968) ‘A short history of financial ratio analysis’, The Accounting Review, 43(2), pp. 284-294.
Kibler, E. et al. (2020) ‘Post-failure impression management: a typology of entrepreneurs public narratives after business closure’. Human Relations. Web.
Leung, S., Parker, L. and Courtis, J. (2015) ‘Impression management through minimal narrative disclosure in annual reports’, The British Accounting Review, 47, pp. 275-289.
Watson, A., Shrives, P. and Marston, C. (2002) ‘Voluntary disclosure of accounting ratios in the UK’, British Accounting Review, 34, pp. 289-313.