Hiding behind annual reports
Filed in archive Compliance by leon on June 09, 2006

why annual reports are hard to read - the directors and managers might be trying to hide something.Those are the findings of a University of Michigan study.
The study by Feng Li, assistant professor of accounting at the U-M's Stephen M. Ross School of Business, found that annual reports of underperforming companies are hard to read.
To measure annual report readability, Li measured syllables per word and words per sentence in companies' 10-K filings. He also used two readability measures: the Fog Index, which tells us the number of years of formal education a reader of average intelligence would need to read and understand the text; and the Kincaid Index, which rates text on a US grade-school level.
Hard-to-read annual reports are found at large companies and growth firms. And in a sign that jargon is used to hide bad news, he found that annual reports with more negative special items are harder to read. The most difficult to read annual reports are found in industries like insurance, health services and electric, gas and sanitary services. Airlines and the stone, clay, glass and concrete products industry have relatively easier reports.
I have previously blogged on why jargon is a dead give-away of a company trying to hide something.
And as I said at the time, it's not only bad for investigators and the general public. It can be deadly for the company because it can result in bad management.
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