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Financial reporting of good news and bad news: evidence from accounting narratives
Abstractdocumented 翻译—Accounting narratives are an increasingly important medium of financial communication. In particular, they play a crucial role in the corporate annual report, allowing company management to present annual performance to users in a readily accessible manner. Research suggests that such narratives are widely used and considered important in the investment decisions of private and institutional investors. However, accounting narratives are unaudited and thus may be subject to impression management. This paper focuses on the chairman's narratives of the top 50 and bottom 50 listed UK companies ranked by percentage change in profit before taxation. The research examines whether companies with improving and declining performance report good and bad news in different ways. The findings suggest that both groups of companies prefer to emphasise the positive aspects of their performance. In addition, both groups prefer to take credit for good news the
mselves, while blaming the external environment for bad news. Thus, despite reporting on markedly different financial performance, management approach it in the same self-serving way. The results of this and previous research have important policy implications for financial reporting. The current auditing regulations could usefully be extended so that the narratives are more rigorously reviewed.
1、 Introduction
Accounting narratives represent an increasingly important financial reporting medium. These narratives, such as the chairman's statement in the UK or the president's letter in the US, typically occupy prime positions within the annual report. They allow management to present a serial, annual description of corporate financial performance. Empirical research in the US has demonstrated that both the inclusion and the content of president's letters significantly affect the judgments of individuals in equity investment decisions (Kaplan etal.,1990).
The importance of accounting narratives is well documented. Studies in Australia and New
Zealand (Anderson and Epstein, 1996), in the UK (Bartlett and Chandler, 1997) and in the US (Epstein and Pava,1993) all show that accounting narratives, especially the chairman's statement or equivalent, are particularly useful and important parts of the annual report. For example, in the UK, Bartlett and Chandler (1997) show that out of 17 sections of the annual report, the chairman's statement is the most read (read thoroughly by 48% of readership) and ranked second in overall importance by private shareholders. Studies of the use of information by sophisticated users, such as investment analysts and institutional investors, also show that narrative sections of the annual report are considered important in making investment decisions (e.g.. Lee and Tweedie,1981). Arnold and Moizer(1984) find that, after the financial statements, the chairman's statement is the most influential information source in the annual report to both financial analysts and institutional investors. Moreover, in an empirical study involving earnings and share price data, Abrahamson and Amir (1996) determine that the president's letter contains useful information about the future of a company. Smith and Taffler (2000) also demonstrate that the content of the chairman's statement is highly predictive of insolvency.
Accounting narratives are a relatively new phenomena. In 1973, the American Institute of Certified Public Accountants (AICPA: 13) stated: 'Financial statements should not be limited solely to quantified information. Amplification, in narrative form, of data included in statements may be required' (emphasis added). A generation later, it is rare to find an annual report which does not contain extensive narratives. Indeed, these narratives are now encouraged by the regulatory authorities (for example, the management discussion and analysis is mandatory in the US and the operating and financial review is recommended in the UK).As the UK's Accounting Standards Board (ASB) explains (1993: 1), 'there is a growing need for annual reports to include an objective discussion that analyses and explains the main features underlying the results and financial position'. The nature and extent of accounting narratives, however, still takes even informed onlookers by surprise. Arthur Andersen (1996: 5), for example, comment: 'What surprised us was that the 'narrative' pages exceeded or equaled the number in the statutory financial statements in half of our survey companies' [100 UK puhlic limited companies] annual reports.' More recently, Arthur Andersen (2001) point to an increase in the proportion of large listed compa
nies' annual reports devoted to narrative information from 45% (in 1996) to 57% in 2000.
Comparatively little research has been conducted into accounting narratives in annual reports, despite their growing importance. This is especially true compared to the wealth of research devoted to the financial statements. Research is particularly timely because of the current largely discretionary and unaudited nature of accounting narratives. The situation in the UK is typical of that worldwide. SAS No. 160, the applicable UK auditing standard, states 'auditors have no responsibility to report that the other information (i.e., accounting narratives contained in the annual report with the audited financial statements) is properly stated. Auditors should, however, read the other information and if they identify material inconsistencies with the financial statements or misstatements within the accounting narratives they should seek to resolve them' (APB, 1995, para.4). In practice, however, these provisions are difficult to interpret and act upon. This gives management opportunities to select, discuss and explain corporate financial performance largely untroubled by mandatory constraints. If they wish, management may therefore indulge in impression management by influencing (or attempting to influence) the perceptions of user
s. This may, in turn, lead to conflicting messages being given in the narrative statements and in the quantitative financial statements (Smith and Taffler,1995).
This current paper aims to add to our knowledge of accounting narratives, especially their role in impression management. The particular focus of this paper is the chairman's statements from the annual reports of 50 UK listed companies reporting improving performance and 50 UK listed companies reporting declining performance. The chairman's statement is not only the most read of the UK's accounting narratives, but also the longest established. These narratives provide a forum to investigate the key question of whether companies with improving and declining performance adopt the same reporting strategies.
The main purpose of this study is to ascertain whether the amount of news and level of attributions in the chairman's statements of companies with improving and declining performance are significantly different. In particular, we focus on two main issues. First, does the nature and amount of the good and bad news reported vary between the two groups of companies? Second, do the attribution patterns (i.e. explanations given by management) for good and bad news vary?

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