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Annual Reports

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Page 1: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Annual Reports

Page 2: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

The Annual Report

A communications vehicle

A sophisticated marketing tool

Used to impart a particular organizational image

Page 3: 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.

Page 4: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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.”

Page 5: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

2002 Report to the Nation

Occupational Fraud and Abuse Association of Certified Fraud Examiners

Page 6: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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

Page 7: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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

Page 8: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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

Page 9: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Occupational Fraud

4. Costs the employing organization assets, revenue, or reserves.

Association of Certified Fraud Examiners 2002 Report to the Nation

Page 10: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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.

Page 11: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Occupational Fraud

Page 12: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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.

Page 13: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Categories of Fraud

Fraudulent statements

The most costly form of occupational fraud

Median losses of $4.25 million per scheme

Page 14: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Methods of Fraud

Page 15: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Duration of Fraud

Page 16: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Position of Perpetrator

Page 17: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Gender of Perpetrator

Page 18: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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%)

Page 19: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Now . . . Back to Annual Reports

First . . . What are they? Why do we need them?

Page 20: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

What are they?

It depends somewhat on how you define “annual report!”

Annual report to SEC (Form 10-K)

Annual report to shareholders

Page 21: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Annual Report to the SEC

Form 10-K

Page 22: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Form 10-K . . .

Who must file?

Companies with more than $10 million in assets

Whose securities are held by more than 500 owners

Page 23: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Form 10-K . . .

Available to the public via the EDGAR database (www.sec.gov).

Almost a “legalistic” document

Difficult to read

Extremely long

Page 24: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Form 10-K - Contents

Item 1 Business

Item 2 Properties

Item 3 Legal Proceedings

Item 4Submission of matters to a vote of security holders.

Page 25: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Form 10-K (EDGARSCAN)

Item 5Market for the Registrant’s common Equity

Item 6 Selected financial data

Item 7Quantitative and qualitative disclosures about market risk

Item 8Financial statements and supplementary data.

Page 26: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Form 10-K (EDGARSCAN)

Item 9Changes in and disagreements with accountants

Item 10Directors and Executive Officers of the Registrant

Item 11 Executive compensation

Item 12Security ownership of beneficial owners and management

Page 27: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Form 10-K (EDGARSCAN)

Item 13Certain relationships and related transactions

Item 14Exhibits, Financial Statement Schedules and Reports on Form 8-K

Page 28: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

So . . . Does the 10-K

have any real value to the

average investor?

Page 29: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Annual Report to the Shareholders

Page 30: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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.

Page 31: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Every

Every

Even the

Itself . . .

Is Story!

Page 32: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Annual Report

Page 33: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Annual Report

Required by the SEC.

Required by stock exchange listing.

“Required” by public demand.

Page 34: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Annual Report

The first annual report was said to be issued by Baltimore Gas & Electric in 1823

One-page

Handwritten by the Corporate Secretary

Page 35: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Required Contents

Report of management

Auditors’ report

Management discussion

Financial statements and notes

Selected financial data

Page 36: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

Optional Contents . . .

Financial highlights

Letter to stockholders

Corporate message

Board of directors and management

Stockholder information

Page 37: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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

Page 38: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

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

Page 39: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

So, how

are we doing?

Page 40: Annual Reports. The Annual Report A communications vehicle A sophisticated marketing tool Used to impart a particular organizational image

How about

something more current!