Corporate annual report as a means of comprehensive

communication
The single source of getting information about any company whether it is the
past or present performance or for that matter, the future outlook, detailed
financial performance through the financial statements, corporate
governance or CSR activities, all is compiled in the Annual Report of the
company. It helps in assessing the year’s operations and provides the
company’s view of the upcoming year and future prospects. It is a report
that each company must provide to its shareholders at the end of the
financial year, rather it is a report that every investor must read. It is the
most comprehensive means of communication between a company and its
stakeholders, rightly called the pinnacle of corporate communications.

Component of annual report:

The major components of the annual report mirror the psyche of the
company, giving a fair idea on the sustainability of business and how sound
the business is.

Letter from the Chairman:

This part of the annual report mainly tells you how the company has
performed during the year.  It’s a place to find apologies and reasons if the
performance doesn’t meet the expectations. The goals and strategies for the
future are also laid down by the leading hands in this section of the annual
report.

Ten-year financial summary:

Assuming that a company is at least ten years old, many annual reports
contain a snapshot of the financial results over that period of time. This
helps in seeing the growth / de-growth trend of revenues and profits and
other leading indicators of a company’s financial success.
List of directors and other officers: 

All the data regarding the leading managers like the president, chief
executive officer (CEO), vice presidents, chief financial officer (CFO) is
provided here. Also, information pertaining to the other seniors who may
not be a part of the organization, but are present on the board of the
company, to help and guide the organization is available in this section of the
annual report.

Management discussion and analysis (MD&A):

This is the place where the company’s management has the opportunity to
present a discussion on the significant financial trends within the company
over the past couple of years. It also includes data on the industry of which
the company is a part of. Reading between the lines gives all the hints that
the management is trying to indicate regarding where the company is and
where is it expected to be. It also contains a brief SWOT analysis (strength,
weakness, opportunity and threat) and highlights the business strategy that
the management intends to follow for the coming fiscal.

Director’s report:

 The director’s report comprises of all the key events that happened during
the reporting period. It contains all the information like summary of
financial, operational performance analysis, details of new ventures,
partnerships and businesses, performance of subsidiaries, details of change
in share capital and details of dividends. In short, it provides a recap of the
fiscal year under consideration.

Corporate information:

Subsidiaries, brands, addresses: This section has all the information

regarding company locations (domestic and foreign), contact information, as
well as brand names and product lines.

General shareholders’ information and corporate governance: The report on

corporate governance covers all the aspects that are essential to the
shareholder of a company and are not a part of the daily operations of the
company. It provides all the details regarding the directors and management
of the company, for e.g. their background and remuneration. It also provides
data regarding board meetings as to how many directors attended how
many meetings. It also provides general shareholder information such as
correspondence details, details of annual general meetings, dividend
payment details, stock performance (stock history, stock price trends, listing
stock exchanges), details of registrar and transfer agents and the
shareholding pattern.

Financial statements and schedules: This section includes the financial

performance data of the company. It provides details regarding the
operational performance and financial strength of a company during the
reporting period through the income statement, balance sheet and cash flow
statement. The footnotes are equally important as they provide information
about the organization’s structure and financial status that has not been
covered anywhere else in the report given below is the component of
financial statement...

a) Profit and Loss statement: It is the financial statement that summarizes

the revenues, costs and expenses incurred during a specific period of time. It
clearly indicates how much was earned and what went into getting those
earnings.

b) Balance Sheet: This provides the summary of the assets and liabilities of a

company. It gives a fair idea of what the company owns and what it owes.

c) Cash Flow: Cash Flow Statement is the accounting statement that provides

the details of how much cash is generated and used by the company over a
specific period of time.

Purpose of annual report:

1)Provide Financial Information-
An annual report provides information on the company’s fiscal year. The
financial information provided in the annual reports helps determine the
current status of business, how the company is funding operations and
growth, and how good the company is placed at making money for its
investors.

2)Accountability-

Annual report is considered as the main accountability mechanism.

Accountability is a pre-requisite, as it gives an idea of how far the company
has met its responsibilities towards its owners, and fulfilled the role defined,
which through the financial reports should reflect the extent of performance
that are related to the entity.

3)Decision making-

The objective of reporting the financial statements is to inform about the

performance of the company that could be helpful to a wide range of
potential users for evaluating and making economic decisions.

4)Promote / Marketing the Company-

In addition to providing financial information, an annual report serves as a

marketing tool for the company. Inclusion of positive feedbacks from
employees and customers or key developments in the company worth
highlighting can increase the readership of the report and appeal to new
investors and customers.

5)Achievements highlighted-

Annual reports provide information on the company’s mission and history

and summarize the company’s achievements in the past year. The
achievement section also includes information on aspects like sales increases
and factors related to growth in profitability and productivity. This serves the
purpose of making the shareholders and stakeholders feel good about their
investments or participation in the company.

6)TARGET AUDIENCE-

Current shareholders and potential investors are the primary audiences for
annual reports. By and large it is also required by lenders, banks and
potential employees for taking appropriate financially viable decisions.

Conclusion:

Although the annual report serves as a communication tool and determines

the reality of the organization in the public mind, it depends on the quality of
information provided in the annual reports. That is why, it is important to
filter the annual report for the information provided and gauge its relevance
before taking any investment decisions.

DIRECTORS REPORT

A directors’ report is a financial document that larger limited companies are

required to file at end of the financial year. A directors' report is a document
produced by the board of directors under the requirements of UK company
law, which details the state of the company and its compliance with a set of
financial, accounting and corporate social responsibility standards.

The companies which need to create directors' reports are-

Only large organizations are required to produce directors’ reports; small

companies or micro-entities are exempt. A private limited company is no
longer considered a small company, and must therefore submit a directors’
report to HMRC, once it fulfils at least two of the following criteria:
  A turnover of more than £10.2 million
 £5.1 million or more on the balance sheet
 50 employees or more.

Purpose of a directors’ report:

Under Section 415 of the Companies Act 2006, the directors of a company

are required to prepare a directors’ report at the end of each financial year.
This legislation is part of a general move towards greater corporate
transparency.

The information provided by the directors’ report helps shareholders

understand:

 Whether the company’s finances are in good health;

 Whether the company has the capacity to expand and grow;
 How well the company is performing within its market, and how well
the market is performing in general;
 How well the company is complying with financial regulations,
accounting standards and social responsibility requirements.
 By knowing this information, shareholders can make better informed
decisions and can hold the directors of the company to greater
account.

A directors’ report includes-

As a minimum, a director’s report should always state:

 The names of each director who served during the reporting year;
 A summary of the company’s trading activities;
 A summary of future prospects;
 The principle activities of the company and, if relevant, the principle
activities of its subsidiaries;
 Recommendations for dividends for the reporting year;
 Any financial events that occurred after the date on the balance sheet,
if these events could affect the company’s finances;
 Significant changes to the company’s fixed assets.
In previous law there was a separate section 217 of the Companies Act,
1956. The whole section was related to the Report of Directors. But in
the Companies Act 2013, a lot of sections make mandate to disclose the
facts in the Director Report.

Provisions Relating to Director’s Report:

A. Applicability of Provision of Section-134 of Director Report:

The provision of Director Report (u/s 134) is applicable only to financial year
commencing on or after 1st April, 2014.

B. Signing of Director’s Report:

As per Section 134(6) Board Report and annexure thereto shall be signed by

• Its ‘CHAIRPERSON’ if he is authorized by Board of director; where he is not

so authorized by,

• At least 2 (Two) Director, one of whom shall be a Managing Director.

• If there is no Managing Director then by Two Directors.

C. Basis of Board Report:

The Board’s Report shall be prepared based on “STAND ALONE FINANCIAL

STATEMENT OF THE COMPANY”

But the Board’s Report shall contain a Separate section wherein a report on

the performance and financial position of each:

• Subsidiary

• Associate

• Joint venture companies, including in the consolidated financial statement

is presented.

D. Approval of Board Report:

• Approval of Board’s Report shall be done in Meeting of the Board of
Director Only. {179(3)}

• Approval of Board’s Report shall not be done by “Circulation Resolution”,

or “by Committee”. {179(3)}

• Meeting of Board of directors can’t be done by “Video Conferencing”.

E. E-filling of Resolution for approving Board report:

The Board resolution for approval of Board Report required being file with
ROC in form “MGT-14” within 30 days of passing of Board Resolution.

AUDITOR REPORT

The auditor's report is a written letter from the auditor containing the
opinion of whether a company's financial statements comply with generally
accepted accounting principles (GAAP). The independent and external audit
report is typically published with the company's annual report. The auditor's
report is important because banks and creditors require an audit of a
company's financial statements before lending to them.

An audit report is a written opinion of an auditor regarding an entity's

financial statements. The report is written in a standard format, as
mandated by generally accepted auditing standards (GAAS). GAAS requires
or allows certain variations in the report, depending upon the
circumstances of the audit work in which the auditor engages. The
following report variations may be used:

A clean opinion, if the financial statements are a fair representation of an

entity's financial position, being free of material misstatements. This is
also known as an unqualified opinion.

A qualified opinion, if there were any scope limitations that were imposed
upon the auditor's work.

An adverse opinion, if the financial statements were materially misstated.

A disclaimer of opinion, which can be triggered by several situations. For
example, the auditor may not be independent, or there is a going concern
issue with the audited.

An auditor, should as a far as possible, follow the provisions of companies

act 1956 relation to the intent of the report.

An auditor should state in his report weather

In his opinion and to the best of his information and according to the
explanation given to him, the account gives the information required by
him.

The balance sheet and profit and loss account give a true and fair view of
the state of company affair as at the end of financial year.

He has obtained all information and explanation which to the set of his
knowledge and belief where necessary for the purpose of his audit.

The balance sheet and profit and loss statement dealt with by the report
are in agreement with the books of account and returns.

Weather, in his opinion, the balance sheet and profit and loss statement
comply with accounting standard.

The auditor’s report shall include a statement on such matters as

specified by central government under clause 4A of section 277 of
companies act 1956: -

The accounts examined by him

Every balance sheet and profit and loss statement.

Every other document declared by the act to be part of or annexed to the

balance sheet and profit and loss statement which are laid before the
company in general meeting during the tenure of his office.
The unqualified report consists of:-

Title: The title must include the word independent, such as “Report of

Independent Public Accounting Firm.”

Addressee: This line identifies the people who will receive the report.

Introduction: This paragraph indicates what financial statements you audited

and includes a statement that the financial statements are the responsibility
of management.

Scope: This paragraph contains the nature of the audit, covering such

matters as the standards in use and the fact that you didn’t look at 100
percent of the records — rather, you sampled and tested. It also notes that
your audit included an assessment of management’s accounting policies and
any significant estimates management made.

Opinion: Here you go! This paragraph contains your assessment that the
financial statements are presented fairly in all material respects.

Auditor’s name: The name of the auditor that appears on the report is the
name of the CPA firm.

Date: The report is normally dated based on when you believe you have
sufficient competent audit evidence to support your opinion; for example,
the date can reflect the last day of fieldwork at the client’s office.
Explanatory paragraph: You add an extra paragraph addressing the audit of
internal controls.

Structure /format of audit report

1 – Title

The title of the report mentions it is ‘independent auditors’ report’.

2 – Addressee

Addressee is the person/group of persons to whom the report is addressed

to. In the case of the statutory audit report, the addressee is the
shareholders of the company. Also, addressee refers to the person
appointing the auditors. Since the auditors are appointed by the
shareholders of the company, the report is addressed to them.

3 – The responsibility of the auditor and the management of the company

This paragraph gives the responsibility of the auditor and the management
of the company. It defines that the responsibility of the auditor is to perform
an unbiased audit of financial statements and give their unbiased opinion.

4 – The scope of the audit

This paragraph describes the scope of the audit conducted by the auditor by
specifically mentioning that the audit was conducted as per the generally
accepted auditing standards in the country. It refers to the ability of the
auditor to perform an audit and provides assurance to the shareholders and
investors that audit was done as per auditing standard. It should include that
the audit examination of the company’s financial reports was done and there
are no material misstatements. The auditor shall assess the internal controls
and perform tests, inquiries, and verifications of the company’s accounts.
Any, limitations on the scope of work done by the auditor are provided in
this section of the auditor’s report.

5 – The opinion of the auditor

This is the main paragraph of the audit report content. The auditors give
their opinion on the financial reporting by the company. There are four
different types of opinions:

Unqualified opinion: an unqualified opinion also called a clean opinion is

issued when the auditor determines that the financial records are free of any
misrepresentations. An unqualified opinion is the best opinion given to the
company and the management. Unqualified opinion represents that the
financial reports are in accordance with generally accepted accounting
principles (gap)

Qualified opinion: qualified opinion is given by the auditor in case the

financial records are not maintained in accordance with gap but the auditors
do not find any misrepresentation in the financial reports. A qualified
opinion highlights the reason for the audit report being qualified. A qualified
opinion is also given in the case when adequate disclosures are not made to
the financial statements.

Adverse opinion: adverse opinion on the financial report is the worst type of

financial report issued to the company. An adverse opinion is given in case
the financial reports do not conform to the GAAP and the financial records
are grossly misrepresented. Adverse opinion may refer to the onset of fraud
in the company. In this case, the company has to correct its financial reports
and financial statements. The company will have to get the statement re-
audited as investors and lenders would require the company to give financial
reports free of any errors and misrepresentation.

Disclaimer of opinion: in cases when the auditor is unable to complete the

audit of the company due to details not provided by the company it will give
a disclaimer of opinion. This means that the status of the financial status of
the company cannot be determined.

6 – Basis of opinion

The paragraph gives the basis on which the opinion was based on. It should
mention the facts of the basis in the report.

7 – Signature of auditor
The partner of the auditor must sign the audit report content at the end.

8 – Place of signature

This gives the city in which the audit report was signed.

9 – Date of the audit report

Let us look at a brief understanding of each heading in the audit report.

10 – Date of signature

This gives the date on which the audit report was signed.

Importance of audit report

Investor – it is human nature that while making an investment the investor

wants maximum safety and return for his investment. The audit report helps
in increasing the confidence of the investors in the organization and it on the
basis of the audit report only that the investors decide to invest in an
organization.

Shareholders – shareholders are the actual owners of a company, but they

are usually very far from the place of business. They are large in member
also as a result of which they cannot directly take part in the management of
the company. Therefore the company is managed by a group of
representatives selected by the shareholders known as the board of
directors. In this way, there is a separation of ownership and management in
a company. Therefore the correct information about the work done by
directors is available to the shareholders from the audit report only. The
audit report gives the shareholders information about the completeness of
the ledger and accounts, their accuracy and their adherence to the correct
principles.
Directors – it is possible for the directors of a company to fore-see all the
activities of the company themselves. The main job of the directors is to
formulate the policies of the company, on the basis of which work is done,
by the employees such information can be obtained by them from the audit
report.

Creditors – the creditors of any organization are always eager to find out
about the financial position of the company? Whether their money is safe or
not? Therefore the creditors rely on the audit report to find out about the
financial situation of the organization/company.

Government – business and government have a direct relationship. The

growth of business, industry and finance plays an important role in the
growth of the country. Erosion in the capital of the country, embezzlement
of capital, disincouragement to investments are such issues for which the
participation the government is essential. The government also invests its
funds in government companies. 

Taxation officer – various officers such as income tax officers, sales tax
officers, and excise officers also rely on the audited accounts and take a
decision on the basis of the report without doing much verification. This
helps them in increasing the amount of tax. Such tax is an important source
of revenue for the government; therefore the audit report is also very
important for the government.