A ‘Round Table’ discussion recently, hosted in Melbourne by the Institute of Chartered Accountants in Australia and Melbourne University, brought together four of the nation’s leading authorities in the accounting and financial services profession for a guileless discussion on the litigious issue “Is the Annual Report Dead?”  
 
The annual report, once the primary communication tool for most companies has become a confusing and complex document, weighed down by red tape, corporate governance and greater regulation. Despite business professionals believing that the annual report is in dire need of an overhaul, it is certainly not obsolete. 
 
More than 150 accounting, academic and government representatives and other interested parties were in the gallery for the rare opportunity to listen to, and ask questions of, the panel made up of four experts including FRC Chairman Charles Macek, Group CFO of National Australia Bank Michael Ullmer, Partner in the Technical Consulting Group at Ernst and Young, Annette Kimmitt and Professor John Lyon of Melbourne University. 
 
The compelling discussion reviewed the purpose of an annual report, which is to provide financial information about an entity, in a transparent manner, that is useful to a wide range of stakeholders, including retail investors, institutional investors, potential investors, analysts, lenders, suppliers and government and their agencies, for the purpose of making economic decisions. 
 
Mr Macek said that the annual report has evolved over the past 30 years from a document with a framework based on accountability, to a compliance document over burdened by corporate governance, financial reporting and regulation and red tape.  
 
“As a result of this evolution, the annual report, which can now exceed 300 pages in some cases, no longer meets the needs of investors, whereby leaving smaller shareholders feeling disenfranchised and disconnected from the company,” Mr Macek said. 
 
Ms Kimmitt said that many CEOs are now lamenting that their concise annual report has more pages than the comprehensive annual report did before the “concise” was introduced. 
 
“What all this seems to suggest is that increasing complexity and volume of disclosures in financial reports has turned the preparation of the annual report into a compliance exercise, rather than also a mechanism for communicating the performance and financial position of companies,” Ms Kimmitt said. 
 
“Put another way, the one size fits all general purpose report is no longer a useful communication tool because it is not understood by the vast majority of its users,” she said. 
 
With the adoption of International Financial Reporting Standards (IFRS), the complexity and volume of disclosures now included in annual reports pose a major challenge for investors and capital markets. 
 
NAB recently conducted a survey of its retails investors about the effectiveness of their concise annual report and across the board; shareholders were critical of the length and complexity of the report. 
 
A third of respondents didn’t recall receiving the report. Of those that did remember it, only four per cent claimed to have read the report versus the 32 per cent who read some of the report and 46 per cent who only browsed the report. An overwhelming 72 per cent said they would prefer a short summary, but would expect the comprehensive report to be available.  
 
CFO for National Australia Bank, Michael Ullmer, said that the general belief held by their shareholders is that the annual report is prepared for professional users including financial advisors and stockbrokers, rather than retail investors. 
 
“This clearly states that the annual report is no longer communicating with its intended audience - the shareholders who want to understand how their money is being used,” Mr Ullmer said. 
 
Professor John Lyon of Melbourne University claimed that the annual report is more ‘undead’ than ‘dead’ - a bit like Frankenstein’s monster. Parts of it appear to work well, but other parts show room for improvement.  
 
The new Federal changes designed to cut red tape could see the end of the traditional annual report, with many companies now reviewing the possibility of posting their reports online, with the option of a print copy sent to those shareholders who request them. 
 
The panel postulated other changes that should be taken into consideration, including: 

• Engaging the standard setters to discuss what information the users are actually seeking rather than second-guessing what they believe the users consider relevant,
 

• Developing a more shareholder friendly report,
 

• Move to the new XBRL format, which is a language and taxonomy for capturing financial information for improved analysis abs communication and
 

• Moving the annual report to the company websites, which will be structured to assist people getting the headline news and the option of drilling down through detailed layers.