PERCEPTION OF MALAYSIA SHAREHOLDERS ON THE USEFULNESS AND PERCEIVED INTERGRITY OF CORPORATE ANNUAL REPORTS

Introduction

Annual report is regarded as the main, traditional and statutory formal communication medium between public listed company and shareholders by which companies disseminate information about its operations to the external users (Firth, 1979). The users of the corporate financial information include shareholders, bankers, financial analysts, and governments. So, shareholders need annual reports information to evaluate the performance or creditworthiness of a company. The corporate compulsory disclosure stated that a listed company’s annual report should consist of income statements, balance sheets, statements of cash flow, statement of changes in equity, and notes to accounts. Major corporate scandals or crises, such as Enron in the USA and Equitable Life in the UK, prompts more transparency in financial reporting (Hooper & Kearins, 2007). Thus, the purpose of this study is to enhance the understanding on the emerging issues and practices of financial accounting and reporting. Hence, the annual report has considerable value to shareholders of a company’s operation, performance and financial information.


Literature Review

A number of research studies have studied the usefulness and understanding of corporate information to the users and annual report is found to be the primary source of information in making the investment decision. Thus, the users should have a reasonable right in order to access to information and their information requirements should be recognized in corporate reports (Joshi and Abdulla, 1994; Cook and Sutton, 1995).

There are varying needs for specific information by a particular user group on the use of annual reports by several user groups based on prior studies. Thus, corporate annual report should be designed in the form and content according to the needs of the external users (Pijper, 1993). Moreover, Cook and Sutton (1995) also emphasized on the fact that companies should focus on the information required by the shareholders so that the annual report satisfies their needs.

Sterling (1972) stated that the provision of useful information to the users is the objective of financial reporting. Zairi and Letza (1994) concluded that the purpose of the annual report is to distribute information that is useful for the shareholders who have an active interest in the organizations. However, it is being argued that a summary format of information produced by the companies rather than engaging into information overload by providing a detailed annual report will add to the shareholders (Cook and Sutton 1995). This is due to the shareholders often found it difficult to get time to sit down and read annual reports (Scott and Smith, 1992). Thus, in communicating company information to shareholders, companies should disclose main pieces of information in a clear and understandable format in a summary annual report that will increase the relevance and value of annual reports.

Even though the information is considered necessary and useful, Daniels and Daniels (1991) concluded that the information contained in the financial statements is not sufficient to evaluate the financial condition of a company Dye and Bowsher (1987) found that most users demand other information in the annual report in order to increase their understanding. Anderson (1981) found that users insistent information about future prospects, company’s products, divisional performance, the provision of management audit reports, and publication of quarterly reports. Moreover, Haslem (1973) found that individual investors placed a great importance to the information about the future expectations of the company. Epstein and Pava (1993) document the individual investors’ demand for more financial disclosure in the annual reports such as pending litigation, unasserted claims, budgeted income for the coming year, and restating statement using current value.

Moreover, transparency is considered important in modern financial reporting in helping users to understand and reach their own conclusions about business. A more transparent financial reporting is desired by the regulators, investors, and business executives so that a company’s financial results will be more readily transparent when viewed by someone outside the company. According to Blanchet (2002), transparent financial information has to reflect the underlying business economic reality, highlight the different risks and opportunities the company is facing, and has to be understandable and comparable.

Forward looking disclosure defines as the information that helps the investor to predict the company’s future performance based on the current plans and future forecast, including strategies goals, outlook or other non historical matters, or project revenue, income, returns or other financial measures. Clarkson et al. (1999) stated that changes in the level of forward looking information will directly change the future corporate performance. These forward looking statement are subject to risks and uncertainties that may cause actual results to differ materiality from those contained in the statements. Barron et al. (1999) stated that a more accurate analyst forecasts will result in higher levels of forward looking information. Schleicher and Walker (1999) and Hussainey et al. (2003) stated that the high levels of forward looking disclosure in annual report narrative sections will improve the stock market’s ability to anticipate future earnings changes. However, it may be difficult to predict with accuracy and firms might leverage their performance towards the level of their forecasts if the future is uncertain (Kasznik, 1999). Clarkson et al. (1992, 1994) argued that managers prefer to publish favorable forward looking information in the annual report.

In summary, the users of annual reports generally regarded annual financial reports as important sources of information as shown by the results from previous studies. In order to allow the information to be more understandable and adequate for potential users, the literature review reveals a necessity to introduce some changes to the annual reporting.


Finding and Analysis

These questionnaires have been distributed to 10 shareholders of Malaysian Company. From the shareholders’ perspectives, they are more concerned about adequacy, transparency and predictive ability of information contained in annual reports. In the questionnaire, we found that most of the shareholders are male and are in age between 18-29 and 30-39 years old. Besides, most of them have accounting and financial work experience and involved in different types of occupation which included investment manager, IT customer support, tuition teacher, lecturer, secretary, bank officer and etc. Furthermore, most of the shareholders are willing to utilize 10-19% portion of their gross annual income for investment purpose. In addition, most of the shareholders are passive participation in share market and not a regular trader due to they are monitoring the shares movements less than 5 times a year.

Part A of the questionnaire examines the usefulness of information in the annual report. There are four shareholders who viewed less than 5 annual reports in a year, five shareholders have gone through less than 10 annual reports in a year and one shareholder viewed on an average of 20 annual reports in a year. Most of the annual reports which seen by the shareholders are in electronic format rather than published hard copy documents. However, most of the shareholders read both the concise and full annual reports. On the other hand, there are 6 shareholders prefer to obtain a concise annual report which is presented in a less technical term and shorter than the normal annual reports while another 4 shareholders have no preference. According to the data collected, there are 6 shareholders indicate only a little level of reliance on the annual report as a source of information for their investment and another 4 shareholders indicate some degree level of reliance on the annual report. Epstein and Pava (1993) found that individual investor rely more heavily on the annual reports more than they did about 20 years ago.

Additionally, most of the shareholders tend to read the front narrative section only in the annual reports and followed by 2 shareholders who tend to read the financial section only. Subject to the information in annual reports sufficiently informative to access, the shareholders think that the compliance with regulation are more informative to assess compared with another 4 types of information in the annual report and some shareholders think the information of future development are less informative to assess. Furthermore, shareholders rank business review to be the most useful section in annual reports for predicting the future performance of the company while the other sections of annual report show less useful for predicting the future performance of the company. Contrary to the studies conducted by Ahmad (1998) and Hassan and Christopher (1999), the result shown that three most important parts of annual reports to the investment analysts were balance sheet, the profit and loss account, and the notes to account while the least important parts were the auditor’s report, profiles of the members of the board of directors, and profiles of senior management staff. Moreover, the shareholders are normally referred Business News aired over television and radio as other source of information in making the investment decisions, followed by the financial related literatures and the financial database. The informal or unverified information which is obtained through casual discussion with relatives and friend is the least source of information being referred in making investment decisions. Contrary to the attempts by Baker and Haslem (1973) in discovering the information needs and sources of such information, they found that the majority of the individual investors rely heavily on stockbroker’s advice as their main source of the company’s information.

Part B of the questionnaire assesses the integrity of the information in annual report. Most of the shareholders are not quite so confident with the information provided in the annual report of listed companies. In addition, most of the shareholders do not really have changed the level of confidence in the annual reports of listed companies compared with 12-18 months ago. However, it was found that one of the shareholders’ levels of confidence is decreased and another shareholder’s level of confidence is not at all confident. Furthermore, majority of the shareholders are agreed a little about annual reports are just another piece of company advertising. Half of the shareholders are neither agree nor disagree about the annual reports are too complex to be useful.

The last part of the questionnaire examines the adequacy of the information in annual report. Some of the shareholders suggest that the company should disclose more about the risk of the company may face, reasons of increases or decreases of revenue, details of company’s product and project, company lawsuit, details of company’s cash flow planning, non-financial information such as social responsibility, and more information being disclosed in the financial highlight. Based on the shareholder’s opinion about the annual report, they also commented that it should be more simple and easier to understand, more transparent, more disclosure of the bad aspect of the company, more attractive and more creative. However, they also demand for information about the term and condition of remuneration committee, information overload, corporate governance statement and outdated information to be eliminated in the annual reports. Anderson (1981) also stated that additional information such as company’s product, current value of long-term assets, and remuneration of directors to be provided in the annual report as desired by the external users. Epstein and Pava (1993) document the individual investors’ demand for more financial disclosure in the annual reports such as pending litigation, unasserted claims, budgeted income for the coming year, and restating statement using current value.


Conclusion

As a conclusion, annual reports have been considered to be the medium of communication between companies and shareholders (Stanton et al., 2004; Ahmed, 1994; Joshi and Abdulla, 1994; Cook and Sutton, 1995). Hence, it is suggested that, in order to make the annual report more useful, companies should disclose those information that are perceived significant by shareholders. The adequacy, transparency, predictive analysis information contain in annual report will enhance the usefulness of annual report and enhance the shareholders’ understanding. Based on our findings, most of the shareholders required annual report to be in summary, more concise and easier to understand since they often found it difficult to get time to sit down and read the annual reports (Scott and Smith, 1992). Finally, examining a larger sample of shareholders will further enhance our understanding as to whether the companies’ annual reports meet the needs of other shareholders.