Graphical Information in Annual Reports: a Literature Review Essay
The use of graphs in disclosing financial information in corporate annual reports represents a significant dimension of management’s disclosure strategy. This paper reviews previous research into financial graphs since the 1970s. The most commonly graphed financial variables are sales, profit, EPS and shareholders’ fund. Research evidence shows that graph use is contingent upon favourable performance. Prior studies also reveal that graphs are used extensively in the developed countries such as U.
S. A. , Canada, U. K. and Australia. Keywords: Corporate annual reports; Disclosure; Graphs; Graphical Information; signaling theory.
1. Introduction Research in financial reporting has mainly focussed on the disclosure issue in two main categories of information, namely mandatory and voluntary disclosure. The majority of researchers pursuing such research endeavours normally use the annual reports as their main sample of studying corporate behaviour or practices.
The use of annual reports in accounting research is also much more preferred due to its easy access or availability and also because it is the main output of a company’s financial accounting system.
Although information regarding a company can be obtained from various sources, one of the most important and valued sources is the annual report (Hines, 1982; Vergoossen, 1993; Naser and Nuseibah, 2003). It acts as a valued means of communication between an enterprise and its stakeholders. For example, shareholders would envisage that information conveyed to them is clear and precise.
In addition, annual reports also function as public relations tools which portray corporate image and signal specific messages. Furthermore, corporate reports serve as effective marketing tools as if they are brochures or leaflets describing the activities and performance of the companies concerned (Beattie and Jones, 1993; Holliday, 1994). In order to carry out their functions effectively, the contents of the annual reports should be presented to users of financial reports in a precise and understandable manner.
Prior research studies have shown that users with no accounting background find it difficult to understand the financial statements and have to rely on the director’s report or chairman’s statement as the alternative source of financial information (Lee and Tweedie, 1976). This report is normally presented in a narrative manner, and prior studies have also found that the readability level of this type of information depended upon the performance of the companies concerned.
In other words, the higher the financial performance of a company, the higher (more readable) the readability level of its annual report (Subramaniam et al. , 1993). As an alternative, Wilson and Stanton (1996) suggest that the use of graphical information would be able to enhance the communication process in a more precise and effective manner. One of the most widely used pictorial methods in annual reports is the graph.  However, the use of graphical method can only enhance the communication process effectively if it is designed according to the principles of graphical design and construction (Schmid, 1983).
Beattie and Jones (1999, 2000a) state that the use of graphs by management represents part of the ‘impression management’ process. Prior research by Neu (1991) and Neu and Wright (1992) explain how the Canadian accounting profession has used impression management techniques to convince users of financial statements that accountants are trusted and legitimate. In the same token, management use ‘impression management’, including financial graphs, to create the schema of trustworthy management. Beattie and Jones (1999, pp. 6-47) further argue that financial graphs display select information and present information in set ways to legitimise to the user of the annual report the management’s right to run the company. As part of this legitimisation process, management attempts to convince shareholders that the company is being run competently and efficiently.
In order to enhance corporate achievements, company managers have incentives to represent their company’s performance in the best possible manner, potentially resulting in selective financial representation (Tweedie and Whittington, 1990; Revsine, 1991). ———————-  A graph is defined as a chart that graphically displays quantitative relationships between two or more groups of information – for example, the relationship between cities and their populations, a car’s speed and its efficiency, or the buying power of a dollar over time. Graphs have combination of one, two, or three straight or circular areas utilizing one or more quantitative scales (Harris, 1999).