Annual Report

• Author: Jeffrey Lehman, Shirelle Phelps

Page 281

A document published by public corporations on a yearly basis to provide stockholders, the public, and the government with financial data, a summary of ownership, and the accounting practices used to prepare the report.

Annual reports measure a corporation's financial health. They focus on past and present financial performance, and make predictions about future prospects. By law, any corporation that holds an annual meeting for stockholders or security holders is required to issue an annual report. Regulations set down by the SECURITIES AND EXCHANGE COMMISSION (SEC) specify in detail what information the report must include about the corporation's finances, markets, and management. The rules are strict: the SEC can levy stiff penalties if corporations fail to comply.

Traditionally a rather dry and factual document, the annual report has acquired a larger audience in recent years as corporations increasingly treat it as not merely a legal obligation but also a public relations opportunity. Yet, even as annual reports take on the appearance of glossy magazines, promote corporate public relations, and make political arguments, they remain bound by legal concerns about completeness and accuracy, and sometimes expose corporations to lawsuits when they fall short.

Although federal law governing the financial industry is quite old, its application to annual reports grew in complexity from the mid-1970s to the mid-1990s. This authority derives from two laws: the Securities Act of 1933 (15 U.S.C.A. § 77a et seq.) and the Securities Exchange Act of 1934 (15 U.S.C.A. § 78a?78jj). The 1933 law requires issuers of securities to file financial information with the federal government; the 1934 law authorizes the SEC to act as a regulatory body over the financial industry. In 1974, the SEC tightened requirements on annual reports by specifying a broad range of information that must be provided, and it frequently amended them in subsequent years. Corporations have consequently made greater efforts to scrutinize their reports for compliance with the law, increasing the role of lawyers in producing what was once the work of accountants.

These requirements address financial and general information. An annual report must include a balance sheet reflecting changes in the corporation's financial worth, an income and cash flow statement, and other relevant documentation, all of which must be reviewed first...