The Use and Abuse of Graphs in Annual Reports: Theoretical Framework and Empirical Study

Abstract

This study investigates the use and abuse of graphs in external financial reporting. From an analysis of the annual reports of 240 large UK companies for the year ended 1989 we document the nature and extent of graph usage. The average number of graphs per annual report is 5.9, with 65% of companies graphing at least one key financial variable. Drawing on modern theories of graphical perception we identify selectivity in the use of graphs, and non-compliance with the principles of graph construction, as potential distortions in the communication process. We find that companies with ‘good’ performance are significantly more likely to use financial graphs. Material measurement distortions occur in 30% of these graphs, with the underlying numerical data being exaggerated by an average of 10.7%. We conclude that auditors' and directors' responsibilities in this area should be made more explicit.