Anyone hoping for an honest appraisal of the company's health and the quality of its management is being naive. And while it has its supporters (notably chartered accountants and their mums) most agree that the annual report is probably the most unreliable document since Hitler wrote to Neville Chamberlain apropos Poland.
Most people only use them to stabilise wonky tables. But it's a bit like buying a house and agonising over whether to get a survey. You know the report is going to be clogged with caveats - "we have been unable to lift the downstairs carpet so can not form an opinion on the main foundations'' - but you're reluctant to skip it on the one in a million chance that your surveyor may discover a fault in the Earth's crust.
At first glance, the annual report appears to offer reassurance in abundance. Somewhere towards the back appears the auditor's report, which in all but the most exceptional of circumstances tells you that the auditors have "examined the accounts'' and that they "show a true and fair view'' of the company's affairs and comply with legal requirements. A quick look at the easy bits may show the company to have 10 years of spectacular profits growth and a balance sheet like the Rock of Gibraltar. What can possibly go wrong, you wonder. It is a question still on the lips of the thousands of shareholders in Polly Peck, British & Commonwealth, Coloroll etc.
The worry for investors is that their lack of accountancy training will lead them to miss early warning signs of impending disaster. The truth is there rarely are any. Where they do feature, they are usually expertly hidden in note 27 to the accounts (normally under the heading of contingent liabilities) and it is up to the investor to unravel the mind-numbing legalese.
When auditors state that they have "examined the accounts" and that they "show a true and fair view'', it is professional-speak for: "we have negotiated a substantial fee for which we are prepared to agree with the accounts the directors have drawn up. We have done a few selective tests that have thrown up nothing untoward and the directors have promised us on scout's honour that there has been no jiggery pokery and that their behaviour has been beyond reproach''. Differences between directors and auditors over what the final figures should be are normally settled over a splendid lunch.
The inescapable conclusion is that it is dangerous to rely on an audited set of accounts when making investment decisions. They rarely have any bearing on the true performance of the business.Reuse content