Preparers’ Construction of Users’ Information Needs in Corporate Reporting: A Case Study

Abstract

This paper studies how preparers assess users’ information needs and preferences, and how these constructions relate to preparers’ reporting decisions. Drawing on interviews as well as other internal and external data, our qualitative case study focuses on a prominent annual report restructuring at the large industrial firm Siemens. Employing the theoretical framework of institutional logics allows us to trace how Siemens’ changing context influenced the ways in which actors dynamically reconsidered the meaning and purpose of the annual report. We document how the previously coexisting compliance and stakeholder logics gave way to a dominant capital market logic, which required Siemens actors – similar to standard setters – to construct the notion of ‘usefulness’ for capital providers. Constructing users as vulnerable to disclosure overload and interested in the annual report only as a confirmatory tool, Siemens transformed the annual report into a concise compliance document. We conclude that changes in corporate reporting reflect dynamic shifts and reinterpretations of institutional logics shaped by firm-specific contextual factors.

Keywords:

• Annual report
• Corporate reporting
• Decision usefulness
• Institutional logics
• Users

Acknowledgements

We would like to thank Beatriz García Osma (Editor), three anonymous reviewers and Catalin Albu, Nadia Albu, Stefano Cascino (discussant), David Cooper, Thomas Fischer, Omiros Georgiou, Martin Messner, Maximilian A. Müller, Alexander Paulus, and Rafael M. Zacherl, participants of the workshop ‘Financial Reporting and Auditing as Social and Organizational Practice 4’ at the London School of Economics, the 35th EAA Doctoral Colloquium in Larnaca, the 42nd EAA Annual Congress in Paphos, the 6th Workshop on the Politics of Accounting at the University of Manchester, the 1st EAR Annual Conference, the 2020 Annual Conference of the TRR 266 Accounting for Transparency, and research seminar participants at LMU Munich, University of Innsbruck, University of Mannheim, and University of Bucharest for valuable comments on prior versions of this paper. Most notably, we gratefully acknowledge the support of interview partners from our case company Siemens AG and its audit firm.

7. Disclosure statement

Subsequent to the initial submission of this paper to the European Accounting Review one of the authors entered employment at one of Siemens’ subsidiaries.

Notes

1 These specific disclosures include, for example, the remuneration report (Chahed & Goh, 2019) or the President's Letter and MD&A (Yuthas et al., 2002).

2 Whereas corporate reporting is multi-layered, the annual report of public firms is often regarded as a key communication instrument (Loughran & McDonald, 2014; Yuthas et al., 2002). Its main purpose being to provide information to internal and external parties (Firth, 1980), it is sometimes viewed as the primary source of information for them (Ertugrul et al., 2017).

3 Thus, for instance, information on sustainability was moved to a separate report, reflecting a more general compartmentalization of reporting information.

4 The IFRS Conceptual Framework for Financial Reporting refers to the users of general purpose financial reporting as ‘existing and potential investors, lenders and other creditors’ (IASB, 2018, paragraph 1.2). In the context of listed companies, this user group is frequently referred to by the shorthand ‘the capital markets.’

5 In what follows, the term ‘regulators’ comprises all actors that shape mandatory reporting requirements, including public legislators, private standard setters, and enforcement bodies.

6 While in many cases, information relevant to valuation and stewardship purposes might be identical, there are also instances where stewardship and/or valuation might require more specific information (e.g., Cascino et al., 2014; Lennard, 2007). For example, substantial note disclosures about related party transactions would typically satisfy stewardship demands, while providing little, if any, relevant information for valuation purposes.

7 Schneider (2015) thus refers to this logic as a ‘sustainability logic.’

8 In the context of sustainability reporting or integrated reporting, which, in many jurisdictions, is largely voluntary, literature refers to the professional logic as reflecting compliance concerns, rather than explicitly taking up the state logic (e.g., Cerbone & Maroun, 2020; Edgley et al., 2015).

9 Siemens AG, located in Munich, Germany, is the parent of Siemens group, the consolidated entity. The annual reports on which we focus are prepared by Siemens AG and contain information about the consolidated group.

10 For example, Siemens submitted twelve comment letters to proposals by the IASB or EFRAG between 2010 and 2019. At the national level, Ralf P. Thomas, Siemens CFO since 2013, was actively involved in the re-establishment of the German accounting standard setter, the Accounting Standards Committee of Germany (ASCG), in 2011 and served as the Chairman of ASCG's Administrative Board from 2011 to 2020 (https://www.drsc.de/en/news/33-mitgliederversammlung-des-drsc/).

11 For a detailed documentation and discussion of the media response, refer to Table 4 and section 5.4.

12 Most of our data sources are in German. In producing the quotes used in section 5 below, we used the machine-learning-based translation software DeepL (https://www.deepl.com/translator). The initial German-to-English DeepL translations were manually adjusted to reflect the tone and context of the original German quote.

13 For the interview not recorded, the interviewer took detailed notes.

14 The confidentiality agreement assures strict anonymity and security in data handling and storage, pseudonomization of all personal details to prevent identification of interviewees by third parties and Siemens management, and coordination with Siemens about the wording of verbatim quotes in any publications.

15 Two other articles, which merely summarized public statements made by Siemens personnel without providing commentary or assessment, were excluded as irrelevant.

16 Article 4 of Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July 2002 on the application of international accounting standards. Further, at the time of the annual report restructuring, Siemens was subject to mandatory quarterly reporting. According to paragraph 10 of IAS 1, Presentation of Financial Statements, a complete set of IFRS financial statements normally comprises: (a) a statement of financial position as at the end of the period; (b) a statement of profit or loss and other comprehensive income for the period; (c) a statement of changes in equity for the period; (d) a statement of cash flows for the period; and (e) notes, comprising significant accounting policies and other explanatory information.

17 The objective of IFRS financial reporting is ‘to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity’ (IASB, 2018, 1.2), i.e., capital market orientation (e.g., Young, 2006; Zhang & Andrew, 2014).

18 According to paragraph 3 of GAS 20, the aim of the group management report is ‘to report on the use of the group's resources by management during the reporting period and to provide information that enables a knowledgeable user to obtain a suitable understanding of the course of business, the position and the expected development of the group, and of the opportunities and risks associated with this development.’

19 On 15 November 2007 the SEC decided to immediately allow foreign issuers to file their financial statements according to IFRS without the need to provide a reconciliation to U.S. GAAP. The impact of SEC reporting is reflected in the terminology used in Siemens’ annual report where, for example, until 2011, Siemens labeled the Konzernlagebericht ‘Management's Discussion and Analysis’ (a term from the SEC's forms 10-K and 20-F) instead of ‘Management Report’ (the proper German translation).

20 At a first stage, the private-sector German Financial Reporting Enforcement Panel (FREP) reviews publicly traded firms’ financial reports. Where issues are found and the firm does not cooperate, a second stage involving the German Federal Financial Supervisory Authority can ensue. See, for example, Hitz et al. (2012).

21 We deem it impossible for outsiders to assess in detail which parts of Siemens’ notes to consider mandatory and which voluntary. Overall, whereas classifying the notes as mandatory in their entirety will tend to somewhat overstate the mandatory parts of Siemens’ annual report in particular before 2015, we do not expect it to affect our conclusions.

22 In line with EU Regulation 1606/2002, as a cross-listed firm using U.S. GAAP, Siemens had to switch to IFRS only in 2007.

23 The ‘combined management report’ or ‘combined management discussion and analysis’ combines those of Siemens AG, the parent, and of Siemens Group, the consolidated entity. This term is not to be confused with the annual report being presented as a ‘combined report’ by Siemens in 2013 and 2014.

24 While the AR2013 refers to an ‘integrated approach,’ this was not necessarily perceived by actors at Siemens as implying a move toward integrated reporting: ‘We introduced something that we called a “combined report.” I’m not sure if we wanted to make a first step in the direction of integration. We never called it “integrated”’ (CR1).

25 In 2009, sustainability had been a core topic in book 1 of the annual report and also been emphasized on the frontpage of the report. This focus in the reporting followed ‘[r]ecent changes in our organization [that] reflect the high importance we attach to sustainability. At Managing Board level, Barbara Kux is now responsible for sustainability’ (AR2009, p. 54).

26 For instance, the sustainability section of the combined management report in Siemens’ 2013 Annual Report (pp. 210–226) does not refer to capital markets or investors, but includes nine references to the term ‘stakeholders.’

27 ‘She [the Head of Investor Relations at the time] was one of the leading drivers of the project because of her good connection to the CEO and CFO.’ (IR1) At Siemens, Investor Relations had previously been only involved in the preparation of a limited number of annual report chapters, with Corporate Reporting leading the process. (CR1).

28 This project title roughly translates to ‘AR half,’ meaning ‘annual report divided by two.’

29 This involved the (sub-) heads of Investor Relations, Corporate Communications, Legal & Compliance as well as several sub-units of the Corporate Reporting department.

30 The head of Investor Relations had left Siemens by the time of our interviews, and the CFO was not available to us.

31 In the terms of the IASB: ‘Financial information is capable of making a difference in decisions if it has predictive value, confirmatory value or both’ (IASB, 2018, para. 2.7).

32 The ‘other channels’ in this quote include interim reports, earnings releases, capital market days, road shows, innovation days and other fora where Siemens interacts in a high-frequency and often direct way with investors on a regular basis (W2019).

33 Siemens posits disclosure overload as a major motivation and rationalization for the ‘GB-Halbe’ project. In their introduction, TSW2016 (p. 449) state:

Disclosure Overload … describes a flooding of financial report users with information that is irrelevant for both valuation and monitoring. … companies can also contribute to reducing disclosure overload … Siemens AG aspires to increasing transparency for its investors by sharpening the focus of its annual report. This article describes the measures taken in the Siemens Annual Report 2015, the considerations behind them, and the experiences Siemens has gained with this new approach.

34 While the stakeholder logic does not provide the frame of reference for the individuals involved in Siemens’ annual report development (i.e., how they make sense of and prepare the information in the annual report), this does of course not preclude that stakeholders might perceive information provided in the annual report as useful.

35 TSW2016 (p. 464) state:

The response to the focused annual report was consistently positive. Analysts welcomed the increased clarity due to the smaller scope as a result of the focus on essential contents. However, positive feedback was received not only from these experts, but even from often very critical representatives of private investor associations at the Annual General Meeting. Furthermore, there are already signals from other companies that they want to follow the example of Siemens AG. In some cases, experience has already been exchanged, although the specifics of the company always require individual assessment. There was no fundamental criticism of the new approach from users.

36 Section 3.2 describes our selection of relevant articles, and Table 4 summarizes them.

37 B2016a and B2017 report on the Der Beste Geschäftsbericht (‘The Best Annual Report’) contest published in the business magazine Bilanz. B2016b covers the Investors’ Darling contest published in the business magazine manager magazin.

38 We consider these articles relevant, as prior studies have used German annual report contest rankings to measure experts’ perceptions of disclosure quality (e.g., Daske & Gebhardt, 2006; Leuz & Verrecchia, 2000).

39 We describe and summarize this data source in section 3.2 and Table 5, respectively.

40 Such dissonance could lead to adjustment reactions such as capital providers demanding – and preparers supplying – relevant information outside the regulated financial statements, e.g., non-GAAP earnings measures.

41 This may be rational, as it is not clear if human experts are capable of precisely articulating their concrete information-collection and information-processing activities, even if they were willing to do so. The difficulties experienced by the IASB in collecting user views for its standard-setting projects are a case in point (Bhimani et al., 2019). Drake et al. (2019) also show that the information interests of different professional users are not necessarily homogeneous. This implies that a wide range of information is considered relevant by at least some users, whereas there is little information on whose relevance users agree.

42 From this perspective, by rendering other, interim disclosures more relevant through its confirmatory role, the annual report is valuation useful even if, in the extreme, nobody reads it.

43 Similarly, during the IASB's outreach activities related to its ‘Disclosure Initiative,’ users are quoted as stating: ‘[We] believe incomplete or missing disclosures are a much greater threat to the usefulness of financial reporting than too much irrelevant information (“disclosure overload”)’ (IASB, 2013, p. 36).

44 Most recently, in April 2021, the European Commission issued a proposal for a Corporate Sustainability Reporting Directive (CSRD), which would amend the existing reporting requirements of the 2014 Non-Financial Reporting Directive (https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52021PC0189).

45 In 2020, for example, Siemens again published a separate report on ‘Sustainability Information’ (Siemens, 2020).

Additional information

Funding

This work was supported by the Deutsche Forschungsgemeinschaft (DFG, German Research Foundation): Collaborative Research Center (SFB/TRR) – Project-ID 403041268 – TRR 266 Accounting for Transparency.