ANALYSING THE SIGNIFICANCE OF ANNUAL REPORTS AND

FINANCIAL STATEMENTS FOR LONDON STOCK EXCHANGE

LISTED COMPANIES FROM STAKEHOLDERS’ PERSPECTIVE

For a big company1, the yearly report could be hundreds of pages long and contain much
accounting slang and too much buried information for some stakeholders to cope with. “It is
very difficult to believe that most annual reports … mean very much to the average shareholder
and there is, in fact, some strong empirical evidence to suggest that very few are actually read.”
(Dyson, 2020, p. 194) Knowing how to read yearly reports can’t but help in that regard.
However, it has been known even for trained investors who actually read these annual reports
to miss signs of cumulative problems tucked away therein made purposefully difficult to
notice. (Dyson, 2020, p. 195; Johnson, 2018) Nonetheless, the absence of such reports
(misleading and deceptive as they may be), would severely exasperate the existing and already
challenging agency problem. Commercial trust would be obliterated, notwithstanding the fact
that it is illegal for reasons that extend beyond mere taxation issues. (Dyson, 2020, p. 31) For
stakeholders to be able to take an interest and invest in anything, it is imperative that enterprises
continue to account for what matters to stakeholders via as many useful financial instruments
as will at least satisfy the law if nothing further. The term “stakeholders” is in reference to a
wider concept that encompasses two main groups, each of which can be broken down into
further subgroups. Each group and subgroup have their own specific interest in the use of
companies’ financial statements and annual reports. (Freeman, 1984)

Group number one herein referred to as internal stakeholders consists of managers and owners
which can be further broken down into:
 Board of Directors who are interested in corporate governance, strategic direction,
shareholder value, and ensuring the company’s long-term success.
 Management and Executives who are interested in company profitability, growth, strategic
planning, leadership development, and effective decision-making.
Management accounting2, also known as cost accounting information, primarily focuses on
providing information to the latter and former internal stakeholder subgroups who need more
detailed information for costing purposes on a regular basis. (Dyson, 2020, p. 281)

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Financial accounting focuses on providing information regarding entities’ financial activities
to all the other stakeholders, although directors and managers share this as an additional interest
as the optics of what situations appears as from owners’ perspective has obvious value to them.

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 Employees who are interested in job security, competitive salaries, fair working conditions,
career development, and a positive work environment. Although they sometimes also buy
shares in the companies they work for, thus in addition to the latter, they may also share the
same interests as shareholders.
 Shareholders, or Owners who are interested in return on investment, stock value
appreciation, dividend payments, and overall financial health of the company.
And this is where the agency problem kicks in because the “owners” have essentially delegated
the task of running their PLCs over to the “managers” and so the more transparent a set of
financial instruments that the latter can provide the former with for the establishment of trust
the better. (Morris, 1997, pp. 413–424)

The primary objective of accounting is to gather measurable data, convert it into monetary
units, preserve the data, and subsequently extract and condense it into a format that is easily
accessible for relevant stakeholders in need of such information. (Dyson, 2020, p. 498) And
certainly as we begin to look at the below interests of the second group herein referred to as
external stakeholders, the significance of companies’ annual reports and financial statements
becomes rather evident for each of the subgroups as well as in general.
 Government and regulatory bodies who are interested in compliance with laws and
regulations, tax payments, and contributions to the local economy.
 Competitors who are interested in fair competition, adherence to industry standards, and
respect for intellectual property rights.
 Investors who are interested in a return on investment, financial transparency, and the
company’s ethical and sustainable practices.
 Suppliers who are interested in stable and reliable business relationships, fair payment
terms, and long-term contracts.
 Customers who are interested in quality products/services, fair pricing, excellent customer
service, and positive brand reputation.
 Communities who are interested in job creation, responsible environmental practices,
community engagement, and corporate social responsibility.
To recap; all stakeholders (even the internal management stakeholder subgroup) and especially
shareholders, have a vested interest in knowing the answers to the below three most basic
questions financial accounting aims to provide via yearly reports and financial statements:

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  What profit has the business made?
 How much does the business owe?
 What does the business have and how much is owed to it? (Dyson, 2020, p. 10)
In particular and due to the risks involved, shareholders of (equity) ordinary shares, or (debt)
preference shares (of both public and private limited liability companies), have a far more
vested interest in the answers to the above questions in order to make informed decisions
regards their investments, as do investors / lenders, or suppliers and the entire stock trading
industry. (Harrison, et al., 1996, pp. 46–60)

The below comparative analysis of the different users’ usages of annual reports and
financial statements should further amplify the significance of such instruments for each
stakeholder group.
 Shareholders (in other words the proprietors of a business), require financial statements in
order to evaluate the financial performance and position of the business in which they have
invested their capital. This enables them to make well-informed decisions and choices, such
as whether to divest their shares, acquire additional shares, or terminate the employment of
the managing director(s).
 In the process of extending loans, lenders (in other words financial institutions such as
banks), evaluate the creditworthiness of prospective borrowers and analyse the potential risk
associated with non-repayment of the funds. The decision-making process primarily relies
on historical performance and financial standing, which are documented in the financial
statements.
 In a manner akin to shareholders, prospective investors depend on financial statements as a
means to evaluate potential investment opportunities. By scrutinising the financial
statements of companies, investors can more effectively engage in necessary comparative
analysis to improve their decision-making process regarding the most suitable allocation of
their funds.
 In the field of commerce, it is common for transactions to occur on credit, allowing
companies to make immediate purchases and defer payment until a later date. Similar to
financial institutions, suppliers extending credit for the sale of products, or services, need
stiff reassurances regards timely payment in full of the amounts owing to them. The
determination of lending terms and trading partners will again rely on the financial
statements of prospective clients.

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 When making purchasing decisions, consumers typically want assurances that the company
will remain operational in the event the purchased product malfunctions and requires
replacement or repair during the warranty period. Examining a company’s financial records
can provide insights into the potential duration of its operations.
 As previously mentioned, governments levy taxes on businesses. The determination of the
appropriate tax liability is predicated upon the numerical data recorded within the financial
statements of an enterprise.
 Managers especially must thoroughly analyse accounting and financial data to improve their
managerial skills to make informed decisions about future changes. This is crucial for
optimising business operations and satisfying stakeholders. Such study may uncover the
need to launch promotional initiatives to enhance sales volume, modify pricing methods, or
reduce personnel expenses.
 Prosperous employees may seek information regarding the probability of potential bonuses
in a thriving business. What portion of such profits may be distributed could also be alluded
to in financial records. (Dyson, 2020, pp. 29–31)

In spite of the assistance provided by annual reports and financial statements, numerous
challenges and risks cannot be overestimated:
 No matter what, stakeholders are inevitably exposed to volatility of commercial markets,
driven by constant technological innovations, or changing customer trends, with capacities
to bring down previously prosperous companies. In some business sectors the survival or
competitive edge of some companies are far more volatile and likely to change unexpectedly
despite a company’s promising past and present financial track record and with what
visionary mind, that most do not possess, can average stakeholders foresee disasters before
they happen and affect their capital investments?
 Enterprise managers have been known to fall victim to bad decision-making at the expense
of stakeholders. For stakeholders to be kept abreast of such would involve an unprecedented
yet unsustainable and non-existent management-to-owners level of up-to-the-minute
transparency which could also be used by competitors to capitalise on such managerial
mistakes bringing about the downfall of the companies so badly managed instead of
preventing such from happening.

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 Stiff competition alone between enterprises has a proven track record of causing companies
to take it in turn at succeeding at the expense of others and gaining a monopoly over certain
markets only to then lose to another, a few years or even months later.
 Companies suing other companies, or the release of hazardous substances and environmental
harm sometimes caused by certain businesses can negatively impact public perception,
leading to potential boycotts against said responsible companies. This too can have
consequences for stakeholders who have a vested interest in those companies.
 Also, what use are annual reports and financial statements to those who don’t possess even
the most basic accounting knowledge of what formulas to use and how to calculate the health
of an enterprise?

Regards future trends already sprouting which could present yet more challenges further down
the line for traditionally organised enterprises, we have the rise of formless organisations
(virtual / networked organisations) hastening and shaping the evolutionary path of businesses,
even altering the very essence of work in certain cases, through talent competitions on a
project-by-project basis. On the talent marketplace, Upwork for instance, with slogans such
as “Forget the old rules. You can have the best people. Right now. Right here.,” an entrepreneur
has the ability find providers for virtually any conceivable business operation (Upwork, 2015)
and as one more example there’s Topcoder with slogans such as “Get the best talent on your
work, and only pay for outcomes, not hours.” offering similar services with more of the same
on the way and bound to one day flood the market. (Topcoder, 2023)

To conclude, in comparison to the state of affairs in the early days of the industrial revolution,
the arrival of current government legislation which to some extent force companies to give an
account of how they are doing (via the provision of financial instruments such as annual reports
and financial statements), is certainly welcomed and a move in the right direction with
significant benefits to stakeholders. However, these legislations could do a lot more to solve the
agency problem between the directors (the executive), in control of enterprises who are in
effect agents for the shareholders / the principals. Directors being inherently interested in
personal benefits such as wage increases, bonuses, or on-the-house expenses, reduce profit
margins belonging to shareholders resulting in a conflict of interests, creating mistrust currently
not fully ironed out by company audits, or government legislation. (Heath, 2009, pp. 497–528;
Dyson, 2020, p. 31)

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More education to equip current and future generations from an early age to better understand
accounting matters wouldn’t go amiss either, although government’s (speculated-upon)
perspective on the matter might well be to reiterate the fact that as public servants, it is not their
place to educate their masters on such matters; even the law conveniently states it will not aid
those who slumber upon their rights as if expecting citizens from all walks of life to be lawyers.

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 BIBLIOGRAPHY

Dyson, J.R. and Franklin, E. (2020) Accounting for Non-Accounting Students. Ed. 10.
Harlow, United Kingdom: Pearson Education Ltd.

Freeman, R.E. (1984) Strategic Management: A stakeholder Approach. Boston, MA: Pitman.

Harrison, J.S. and St. John, C.H. (1996) ‘Managing and Partnering with External
Stakeholders’, Academy of Management Perspectives, 10(2), pp. 46–60. doi:
https://www.jstor.org/stable/4165323.

Heath, J. (2009) ‘The Uses and Abuses of Agency Theory’, Business Ethics Quarterly, 19(4),
pp. 497–528. doi: https://doi.org/10.5840/beq200919430.

Johnson, M. (2018) How investors failed to spot Carillion’s mounting problems, Financial
Times. Available at: https://www.ft.com/content/ba8c6b72-fa10-11e7-9b32-
d7d59aace167 (Accessed: 30 November 2023).

Morris, S.A. (1997) ‘Internal Effects of Stakeholder Management Devices’, Journal of

Business Ethics, 16(4), pp. 413–424. doi: https://www.jstor.org/stable/25072908.

Topcoder editors (2023) Top website designers, developers, freelancers for your next project,
Topcoder. Available at: https://www.topcoder.com/ (Accessed: 01 December 2023).

Upwork editors (2015) Find the best freelance jobs, Freelance jobs | upwork™. Available at:
https://www.upwork.com/en-gb/freelance-jobs/ (Accessed: 01 December 2023).

Upwork editors (2015) How work should work, Upwork | The World’s Work Marketplace.
Available at: https://www.upwork.com/en-gb/ (Accessed: 01 December 2023).

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 ENDNOTES

1 A company is a different type of business organisation which is incorporated. What that

means is its ‘birth’ or ‘incorporation,’ is registered at Companies House. There are many
different forms of companies but basically a company is an entity that has a separate
existence from that of its owners, it is a separate legal ‘person’ in the eyes of the law. (Dyson,
2020, pp. 18–19)

2 Management accounting is the application of the principles of accounting and financial

management to create, protect, preserve and increase value for the stakeholders of for-
profit and not-for-profit enterprises in the public and private sectors (CIMA, Official
Terminology, 2005). (Dyson, 2020, p. 281)

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