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The Financial Express

Significance of a company\'s annual report

| Updated: October 23, 2017 12:49:20


Significance of a company\'s annual report

An annual report of any business or company reflects the state of health of present business and its future prospects. The annual report contains statements of the company's chairman and those of directors to stakeholders. These statements have been made compulsory for inclusion in the annual report if the company concerned is a publicly-traded one. The statements of the chairman and directors explain what the company achieved and what it could not in the year that ended in the immediate past fiscal year. These reports also explain to the stakeholders why the company could not achieve something and what measures it will take in the coming days to overcome the problems which stood in the way. The stakeholders take keen interest in the issues the company's chairman and directors of the management board highlight in their statements. The stakeholders, especially shareholders, want to see who are on the board of management and how many board members are professionals and how much can they be trusted with what they are saying.
More importantly, a company's annual report contains the audited balance-sheet and the income statement with notes that explain what the items in the income statement say. The shareholders take more interest in the income statement of the annual report which states, in statistical figures, what the company achieved in the immediate past year or for the year the report was prepared for. This part of the annual report informs the stakeholders what the company's turnover was in the year concerned and at the end, what the company earned per share after paying taxes and appropriating charges against all other dues. The income statement compares the figures with those of the past year giving the shareholders a clear picture whether the company has made a progress in business.
Other contents of the annual reports of the companies, especially of a publicly-traded company, give out important earning-related figures for the preceding five years. The stakeholders take a look at these statistical figures to know which way the company's business is going. The balance-sheet, the income statement and that of cash flow are certified and signed by a licensed auditor or auditors. The certification and signing have been made compulsory by the regulator. That is why, these two parts of the annual report determine the trust the stakeholders, especially by the minority shareholders, can repose on the company. However, it is not that whatever has been certified by the auditors is all true: many turn out to be otherwise when scrutinised closely by the shareholders. Many figures are simply hyped or concocted depending on what the management want. 
The auditors are routinely blamed by the shareholders for taking side with the people who are on the management, but that does little to correct the behaviour of the auditors in Bangladesh. We hope, the newly formed FRC (Financial Reporting Council) will be able to ensure accountability of the auditors. The investors expect that there will be no manipulation of figures or juggling once the FRC sets the terms for the auditors. The notes to the income statement are very important in the sense that these explain what actually the regulatory requirement is and what the company fulfils. The shareholders go through these notes to understand the actual state of business in their company. 
The AGM (Annual General Meeting) of the shareholders is the most important event of any publicly-traded company where the shareholders raise many questions about its business. Shareholders also can pinpoint where the company has gone wrong and what measures the people in the management are taking for bringing more business to the company. The AGM can run for hours and also it can end up in a stalemate. The shareholders elect the members of the board of directors and also the auditor. Unfortunately in Bangladesh, this important event barely gets due importance because of the poor attendance of shareholders in the AGM. The AGM, in most cases, is very thinly attended by the shareholders. All the agenda items often get passed as quickly as the 'yes' hands are raised by some pre-selected shareholders.
However, the contents of an annual report are still very important as those are read seriously by shareholders and by other stakeholders like tax men who do not attend the AGM. An annual report, rich with information, can give the shareholders important clues to decision-making.  Depending on what has been said in the annual report, shareholders decide whether they will sell or buy the concerned company's shares. The annual report is the storehouse of information for the shareholders. 
Some companies go extra miles to supply the shareholders even with information not required under regulation. We thank these companies because they are honest to their shareholders. The companies which hide information from the public eventually lose the confidence of investors and they do not do good in business. For these companies, mopping up of capital becomes costly. Many other sources also contain vital information for decision-makers but none can match the annual report in supplying the necessary information to the shareholders.
This writer would strongly urge the new and young stock investors to examine the annual reports minutely and try to understand what has been said in those. To understand an annual report, one need not be an accountant. In fact, the report is meant for non-accountants. 
The writer is Professor of Economics University of Dhaka.  [email protected]
 

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