The Decline of the Annual Report: A Game-Changer for Investors and Analysts
Why Bother with Annual Reports?
The 2024 company results season has been well underway this month, leading into its strange postscript – the time of year when annual reports drop into inboxes and on to doormats. The earnings numbers are long since in the public domain, the conference calls finished, and the price action has moved on, but still they arrive. Why do we bother?
The Evolution of Annual Reports
Partly because it’s still a statutory requirement. But we can’t blame the regulators entirely for the extent to which annual reports have grown over the years. There’s an old joke among equity analysts that if you want to keep something really secret, publish it in a company’s annual report, somewhere between the section on management pensions and the statement on net zero emission goals. As the real action has moved to the headline announcements and investor relations calls, the annual report has turned into a repository of all those disclosures that everybody feels like companies ought to make, but which nobody wants to read.
The Decline of the Annual Report
But surely the numbers themselves are useful? Less and less so, unfortunately. The big advantage an annual report has over a press release or investor presentation is that all the audited numbers are there. A skilled investor relations professional can spin gold out of the most unpromising straw; costs can be "adjusted", revenues "normalised", and any bad event treated as a one-off. The annual report is where the confessions have to be made – where did the cash come from, and where did it go?
The Rise of Artificial Intelligence
It is still possible to uncover insights if you take the trouble to read a set of annual accounts in detail, and have the skill to undo the work of the investor relations department in trying to paint as favourable a picture as possible. In fact, there are arguably more opportunities to do so than ever before – the permutations of "adjusted earnings" get more egregious every year. But, would you really advise an intelligent new graduate entering into the financial industry to spend years developing this skill?
The Future of Annual Reports
For one thing, being able to decipher annual reports is less useful than it used to be. Over the past five years – as many active fund managers will ruefully tell you – outperformance has not been a matter of finding hidden treasure but of picking the megacap momentum plays and hanging on. The ability to ignore red flags – from Tesla’s inventories to Nvidia’s accounts receivable – has been a more reliable source of alpha than the ability to detect them.
And for another, this is a game of processing large amounts of information and combing through it to spot patterns and inconsistencies. It is surely bound to be taken over by artificial intelligence, and probably sooner rather than later. Not only will large language models be able to unspin the numbers faster than the investor relations teams can spin them, they may even be able to dig through the disclosures and find the occasional nugget.
Conclusion
So maybe we need to reinvent the whole concept of the annual report, taking advantage of new technology to do so. And we ought to think big. If we used artificial intelligence to free us from the constraint that a set of accounts had to be comprehensible to a human being, what might we be able to do? One place to start might be the gap between management accounting and financial reporting. The most misleading numbers in any annual report are often the dates at the top of each column – they imply, often comically wrongly, that 12 months is the relevant period over which performance should be assessed.
FAQs
Q: Why do annual reports still matter?
A: While annual reports still have some value, their importance has decreased over time as the real action has moved to headline announcements and investor relations calls.
Q: What is the future of annual reports?
A: The future of annual reports may involve using artificial intelligence to free us from the constraint that a set of accounts had to be comprehensible to a human being, and to provide more transparent and comparable data.
Q: Will AI take over the role of financial analysts?
A: Yes, large language models will be able to unspin the numbers faster than the investor relations teams can spin them, and may even be able to dig through the disclosures and find the occasional nugget.
