Annual Reports

The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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.

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.”

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

Occupational Fraud “The use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization’s resources or assets.” Association of Certified Fraud Examiners 2002 Report to the Nation

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

Occupational Fraud All have four elements: 1.Is clandestine 2.Violates the perpetrator’s fiduciary duties to the victim organization 3.Is committed for the purpose of direct or indirect financial benefit to the perpetrator. Association of Certified Fraud Examiners 2002 Report to the Nation

Occupational Fraud 4.Costs the employing organization assets, revenue, or reserves. Association of Certified Fraud Examiners 2002 Report to the Nation

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.

Occupational Fraud

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.

Categories of Fraud Fraudulent statements The most costly form of occupational fraud Median losses of $4.25 million per scheme

Methods of Fraud

Duration of Fraud

Position of Perpetrator

Gender of Perpetrator

How did they succeed? Insufficient controls (49.2%) Controls ignored (39.9%) Couldn’t have been prevented (10.8%) None of the above (3.1%)

Now... Back to Annual Reports First... What are they? Why do we need them?

What are they? It depends somewhat on how you define “annual report!” Annual report to SEC (Form 10-K) Annual report to shareholders

Annual Report to the SEC Form 10-K

Form 10-K... Who must file? Companies with more than $10 million in assets Whose securities are held by more than 500 owners

Form 10-K... Available to the public via the EDGAR database ( Almost a “legalistic” document Difficult to read Extremely long

Form 10-K - Contents Item 1Business Item 2Properties Item 3Legal Proceedings Item 4 Submission of matters to a vote of security holders.

Form 10-K (EDGARSCAN) Item 5 Market for the Registrant’s common Equity Item 6Selected financial data Item 7 Quantitative and qualitative disclosures about market risk Item 8 Financial statements and supplementary data.

Form 10-K (EDGARSCAN) Item 9 Changes in and disagreements with accountants Item 10 Directors and Executive Officers of the Registrant Item 11Executive compensation Item 12 Security ownership of beneficial owners and management

Form 10-K (EDGARSCAN) Item 13 Certain relationships and related transactions Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K

So... Does the 10-K have any real value to the average investor?

Annual Report to the Shareholders

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.

Every Even the Itself... IsStory!

Annual Report

Required by the SEC. Required by stock exchange listing. “Required” by public demand.

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

Required Contents Report of management Auditors’ report Management discussion Financial statements and notes Selected financial data

Optional Contents... Financial highlights Letter to stockholders Corporate message Board of directors and management Stockholder information

Typical Contents... Impressive front cover Colored photographs on shiny paper Dazzling graphics demonstrating the company’s success Letter to shareholders with positive spin Four financial statements Understanding the Corporate Annual Report Lyn Fraser and Aileen Ormiston

Typical Contents... Notes to the financial statements Report of independent auditors Management’s discussion and analysis Five-year summary of selected financial data Market data Understanding the Corporate Annual Report Lyn Fraser and Aileen Ormiston

So, how are we doing?

How about something more current!