Question

2. “The annual report is considered by some to be the single most important printed document that companies produce. In recent years, annual reports (10-K) have become large documents, time consuming and costly to produce…..”. (IMA/CMA)

Required: (20%)

a.) Identify and discuss the basic factors of communications that must be considered in the presentation of this information.

b.) Discuss the communication problems a company faces in preparing the annual report due to the diversity of the uses being addressed.

c.) Identify ways that the SEC uses to protect investors and maintain efficient stock markets in the United States.

d.) Would you encourage producing information if its expected costs exceeded benefits.

Answer 1

a) The information is a one-way communication device. This requires an emphasis on clarity and conciseness because there is no immediate feedback from the users as to what messages they are receiving.

The preparer must attempt to identify the users of the report, and to determine their values, beliefs, and needs. Then the preparer can determine the way of presentation, i.e., words and phrases that would be appropriate and familiar to the users.

The preparer must also consider the organization of the material in the report. Logical ordering and attractive formatting facilitate the transmission of ideas.

b) The different users of annual reports have differing information needs, backgrounds, and abilities. For some users, the annual report may serve as an introduction to the company and the only significant information about the company. By using the report to communicate to all users, the problems the corporation faces include the following:

• In an attempt to reach several audiences, a company may include information for each audience. Consequently, the annual report may grow in size and complexity to the point where it contains more information than many users want to receive or are able to comprehend, i.e., information overload. In some cases, technical concepts may be reduced to concepts that are more common; this reduces precision and conciseness thereby leading to more generalizations.
• Care must be taken in the presentation of information. Words and phrases familiar to one user group may not be understood by those in other user groups. Graphic displays that are meaningful to some may be meaningless to others.

c) The SEC's job is to protect investors by enforcing transparency between US companies. It does this by requiring exchange listed companies to display information and its financials to the public. The SEC also investigates on the market manipulation and insider trading.

d) Most organization produce information only if its value exceeds its cost. However, there are two situations where information may be produced even if its cost exceeds its value.

• It is often difficult to estimate accurately the value of information and the cost of producing it. Therefore, organizations may produce information that they expect will produce benefits in excess of its costs, only to be disappointed after the fact.
• Production of the information may be mandated by either a government agency or a private organization. Examples include the tax reports required by the IRS and disclosure requirements for financial reporting.

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