Abstract This document critically evaluates the usefulness of narratives included in financial reports. It seeks to indicate the impact that these narratives have on stakeholders and to determine the measurement of their efficiency. The recent financial depression has necessitated the evaluation of all component of financial report to assess the influence they have on investor decision. IntroductionCampbell and Slack (2008), define narratives as the non-financial parts of the reports included without legal obligation. A firm may disclose information to uninformed investors regardless of how good or bad the information is.
Many disclosure choices are aimed at capturing and maintaining interest of shareholders, debt holders and management. The variance of the choices creates conflicts hence the provision of incentive which may also vary with company characteristics. Narrative reporting has the potential to enhance stakeholders understanding. To create this understanding, the shareholders are viewed as the chief addressees of the financial reports. This however does not mean ignoring legal compliance which is equally crucial. There is a struggle to balance the quality and quantity of information disclosed. Increase in the volume of reports has not increased the usefulness of reports.
Analysts have indicated that these reports have become generic disclosure documents with unnecessary clutter. There is loss in purpose with the inclusion of lingual appealing jargons making narratives part of the problem and not the solution. This document seeks to evaluate the value that is attached to financial narratives and the implication that the narratives have on both the sell side and the buy side. The relevance of such narratives is sought out especially as pertaining to the shareholders and the organisational analysts. Recent corporate failures have necessitated evaluation of the significance of corporate disclosures.
Narratives are now notably the only statutory formal communication between businesses and the external stakeholders. They provide an opportunity for the management to explain is objectives and strategies. They also provide a context for explaining the financial positions and performance of the entity. Integrity of Narratives In ReportsThe credibility of the reports is a matter of dispute as most parts of the narratives are edited to present the management is favourable light. This is in opposition to the social responsibility in that it is a conscious attempt to control the images that are real or imagined in social interactions.
Bhana (2009) indicates that the narratives are useful as they help managers to report companies’ achievements and to mould the readers’ expectations on the reporting company. Poor performing companies have the opportunity to create a variance in corporation’s image with the overall reading of the report. Generally the management seeks to achieve positive image matching the expectation of the shareholders while avoiding negative values. In a study to determine the similarity in narrative content of poor performers and high performing companies, Bhana’s utilised reports of 50 listed companies with improved performance and 50 companies with declined performance.
She determined that there existed great attempt to hide the negativity of the company. All company reports majored on the positivity of the fiscal year. It was also determined that words that signalled negativity were avoided in the reports thereby creating an effect that the company had a generally positive performance even if the fiscal year had significant losses (Bhana 2009).