The Fundamentals of an Annual Report

An annual report functions to satisfy the informational needs of a variety of entities. Stockholders, economists, financial analysts, suppliers, customers, creditors, even potential stockholders and potential creditors use the published annual report for their particular purposes. Central to every annual report is the company’s financial statements.

These financial statements have been standardized through regulations set by the Financial Accounting Standards Board, the Securities and Exchange Commission, and a variety of committees in the American Institute of Certified Public Accountants. Interestingly, the formulation and publication of annual reports can be a big business in itself.

A large corporation may pay an independent CPA over half a million to audit its financial statements. In addition, another large sum in invested in the publication of the report electronically and in full-color for distribution to shareholders. An annual report is compiled with the financial statements toward the back of the publication. In the front, impressive graphs, artwork and photographs are featured.

Management oversees the publication of the first section of the annual report while accountants control the last section.

The management section includes…

  • Annual Report Highlights

Often, these include the positive trends to which management wants to draw attention. It also covers highlights of the company’s operations, financial statements, stock performance, sales and profits etc.

  • Letter to Shareholders

This letter is from the president or both the president and the chairman of the board. It is often a flowery presentation of optimism about the company. It takes discernment to read between the lines in attempt to discover the true position of the company.

  • Management Discussion and Analysis

This section is required by the Securities and Exchange Commission. It’s purpose it to analyze the company’s performance. Management is required to disclose the company’s results of operations, the adequacy of liquid capital resources, and capital resources needed to fund operations.

  • Report Required by the Sarbanes-Oxley Act

The company must summarize its assessment of the adequacy of its internal controls system over financial reporting in this section.