Title: Analysing the significance of annual reports and financial
statements for London Stock Exchange Listed companies: A Stakeholder
Perspective.
Student ID:
Student Name:
1
Table of Contents
1. Introduction.........................................................................3
2. Internal Stakeholders...........................................................3
2.1 Management and Executives:..................................................4
2.2 Board of Directors:.................................................................4
2.3 Employees:.............................................................................6
3. External Stakeholders..........................................................7
3.1 Investors and Shareholders.....................................................7
3.2 Creditors and Lenders.............................................................7
3.3 Regulators and Government Agencies......................................8
3.4 General Public and Media........................................................8
4. Comparative Analysis...........................................................9
4.1 Similarities:............................................................................9
4.2 Differences:............................................................................9
5. Challenges and Limitations.................................................10
5.1 Complexity and Volume of Information...................................10
5.2 Information Asymmetry and Timeliness..................................11
5.3 Accounting Complexity and Understandability........................11
5.4 Biased Narrative and Omission Risks.....................................11
6. Future Trends and Recommendations..................................12
7. Conclusion......................................................................... 13
8. References.........................................................................14
2
1. Introduction
Notably, annual reports and their accompanying audited financial statements are crucial
resources for organisations registered on the London Stock Exchange (LSE) to provide
insights into financial performance, strategic vision, and corporate governance to a wide
range of stakeholders (Brealey et al., 2020). These reports usually include the main
financial statements: the income statement, the statement of financial position (balance
sheet), and the statement of cash flows plus management commentary and other corporate
information disclosures (Alexander & Nobes, 2020). The main intention of financial
reporting is providing transparent information, allowing individuals involved to make
informed decisions based on a company’s financial health and outlook (IFRS Foundation,
2021).
Stakeholders are generally divided into two groups internal and external stakeholders, and
each group with different interests in financial statements. Financial reports serve as a key
source of information for internal stakeholders, including management, employees, and the
board of directors, to make strategic decisions, assess performance, and ensure compliance
with governance requirements (Brigham & Ehrhardt, 2021). Financial statement users such
as investors, creditors, regulators, and the public rely on these reports to judge profitability,
risk, and sustainability (FRC, 2022).
This essay discusses the internal and external stakeholders of LSE-listed companies and how
these stakeholders use annual reports and financial statements. The session will compare
their respective usage, explore challenges in financial reporting, and cover future trends
and recommendations to improve stakeholder engagement.
2. Internal Stakeholders
3
Internal Stakeholders: The inner circle of a company that directly influences various aspects
of company operations and decisions. How often they return to annual reports depend on
the job.
2.1 Management and Executives:
Financial statements help managers monitor profitability, liquidity, and cost efficiency,
which guide budgets, investments, and strategic planning (Atrill & McLaney, 2020). KPIs in
financial reports allow executives to measure business performance against set goals and
implement corrections to operational strategy. The annual report of Tesco PLC for the
year of 2022 states the firm that it highly values the firm operational metrics to make the
decisions and states the expectation of growth (Tesco, 2022).
Managers of the company (e.g. CEO, CFO) use financial statements to evaluate the
performance of the firm against targets and to set goals for the future. The annual report
serves as a year-end summary that assists management in assessing successful business
segments or initiatives and identifying areas that did not perform well.
This understanding informs future budget and strategy development. Management will use
profitability and cash flow figures, for instance, to determine if it should spend more or less
in the coming year. They also utilise the narrative sections (such as the Operating and
Financial Review) to communicate accomplishments and defend their strategy to their
boardroom and shareholder audiences. In other words, the financials are what hold
management accountable to the goals put forth and the real opportunities to measure
progress over time. In the annual report, relevant metrics (for example, key performance
indicators (KPIs)) often align to management’s strategic objectives — for example, Tesco
plc’s 2022 Annual Report features “Our Big 6 KPIs” (sales growth, cash flow, profit, etc.)
which management uses to monitor success in delivering its strategy.
2.2 Board of Directors:
4
Directors utilize financial reports for governance, compliance, and risk managements. They
analyse financial data to monitor executive performance and determine pay policies.
Annual reports also guide boards in evaluating corporate governance approaches and
shareholder expectations (Mallin, 2022). The UK Corporate Governance Code applies to
companies listed on the LSE, so these companies are required to follow stricter standards in
terms of transparency and accountability in financial reporting (FRC, 2022).
The board uses the annual report in discharging its governance and oversight
responsibilities. Directors are required to review and approve the financial statements,
which must give a “true and fair” view of the company’s affairs. The board assesses
management’s stewardship of the company’s resources through audited financial results
(IFRS Foundation, 2018).
For example, the board will check variances by comparing actual results to budgets and to
prior years, examining variances in revenue, expenses and important ratios. This allows
them to evaluate how effective management’s policies and risk management are. The
annual report also includes details of compliance with corporate governance codes and risk
factors, both of which directors review to ensure the company adheres to its regulatory
requirements. In reality, LSE company boards make material decisions on the basis of data
in the annual report such as whether to declare a dividend (which depends on profitability
and retained earnings) and how much to pay executives (often including bonuses linked to
financial performance). One pertinent example is the new requirements in the UK for
boards to include a Section 172 statement in the annual report explaining how directors
have engaged with the interests of employees, suppliers and a range of other stakeholders
in the decisions they make. This reflects the board’s responsibility to include stakeholder
interests and the annual report is the medium through which they do so (Financial
Reporting Council, 2023) . Thus, the board looks to financial statements not only to track
fiscal health, but to convey accountability to owners and stakeholders.
5
2.3 Employees:
Workers, especially those involved in share ownership schemes, review financial
statements to determine job security, business expansion, and potential bonuses (Deloitte,
2021). Workforce-related disclosures that relate to diversity and employee engagement
impact employee sentiment and organisational commitment (KPMG, 2023).
Therefore, annual reports are beneficial for internal stakeholders in terms of financial
performance discussions, accountability of the governance, and motivation for the
workforce.
Annual reports and financial statements are also consulted by employees within a company,
though with a different lens. Rank-and-file employees and middle management can gauge
whether their employer is stable and prosperous based on the reported financial result.
Good financial results (i.e., growing profits and revenues) can also indicate stability and job
security, and a likelihood of pay raises or bonuses, while bad results can presage cutting,
restructuring, or downsizing. For this example, if a retailer listed on the LSE states in its
annual report that profits have substantially decreased, employees can be forgiven for
being concerned about cost-cutting initiatives.
By contrast, steady profits and a strong balance sheet might reassure employees about the
company’s long-term future. Moreover, many companies run employee bonus or share
incentive plans based on financial targets; as such, employees pay attention to numbers
such as profit or earnings per share in the annual report to anticipate whether performance
bonuses will be received. Employee shareowners (staff who own company shares or share
options) use the report in the same way as their external shareholder counterparts – to
make a call on the company’s performance and prospects that drive the share price and
dividend payments.
Annual reports also frequently have sections directed at employees: in particular,
companies promote workforce developments, training outlays and shifts in head count.
Some employed businesses in the LSE ego explicitly report employee welfare metrics —
Tesco here is reporting a 2022 “Great Place to Work” metrics (a proxy for the percent of
6
workforce who would recommend Tesco as an employer) that demonstrates
management’s concern for employees. Such disclosures also enable employees to
understand how their feedback and wellbeing are being considered at the corporate level.
In brief, employees rely on information in the annual report to understand how their
company is faring financially and where it is headed, which can have an effect on their
morale and career plans.
3. External Stakeholders
External stakeholders (stockholders, suppliers, customers, etc.), on the other hand, cannot
directly control aspects of how a company functions but use the financial reports to
determine whether to invest, regulate, or do business with a company.
3.1 Investors and Shareholders
External, including both institutional and individual, shareholders use annual reports to
evaluate a company’s profitability, growth, and financial position. They use key metrics like
net profit, EPS, and dividends to determine whether they should continue to hold, buy, or
sell shares. Such as the record profit of $28 billions of BP p.l.c. in 2022 resulted in a 10%
increase in dividends and increased shareholder confidence (Reuters, 2023). Investors learn
about management’s discussion and future outlook to determine whether a company will
survive long term. To find investments on a public basis, potential backers evaluate
financials of other companies using their annual reports. The annual report is free
information to them that they can use to make better decisions with their portfolio or how
to vote shares.
3.2 Creditors and Lenders
Creditors (including banks, bondholders, and suppliers) use annual reports to determine
whether they should lend to a company. They examine debt levels, liquidity and key
financial ratios such as debt-to-equity and interest coverage. Lenders analyse financial
7
statements to determine if a company can fulfil its debt commitments and comply with
loan covenants. This for example uses reports from companies such as Tesco to assign
credit ratings, which directly influence the cost of their borrowing. Before extending trade
credit, suppliers examine financial reports to assess the risk of non-payment. Thus, annual
reports act as significant instruments for assessing the financial risk.
3.3 Regulators and Government Agencies
Regulators check annual reports to verify compliance with financial and other
requirements. The UK’s Financial Reporting Council (FRC) examines these reports to check
compliance with accounting rules and can demand amendments if disclosures mislead. The
financial watchdog, Financial Conduct Authority (FCA), is also looking for potential market
abuse in financial reports. As an example, Carillion plc faced blame for publishing overly
cheerful financial accounts hiding its declining financial position. Also, Revenue authorities
(such as HMRC) check financial statements for correct tax provisioning and stock exchange
authorities check for timely reporting of results. And regulators are essential to maintaining
the orderly functioning of the market and protecting investors.
3.4 General Public and Media
Consumers and reporters, advocacy groups explain financialization to understand
responsibility and sustainability in corporate sector (GRI, 2022). Annual reports with
environmental, social, and governance (ESG) disclosures shape public perception and
corporate reputation (Eccles & Krzus, 2021).
Therefore, annual reports provide exceptionally important information to external
stakeholders relative to investment decisions, regulatory oversight, credit assessments, and
public scrutiny.
8
4. Comparative Analysis
Annual reports and financial statements are essential sources of information for both
internal and external stakeholders, but they vary in terms of their uses, access, and
decision-making processes.
4.1 Similarities:
Both internal and external stakeholders demand that financial information be transparent
and accurate and that it complies with regulations (IFRS Foundation, 2021). Financial
stability is assessed through management and investors using important financial metrics,
including revenue, profitability, and liquidity. Board members and regulators also scrutinise
corporate governance disclosures to make sure everything is legal and ethical (Mallin,
2022).
Financial statements make for performance benchmarks as well. Managers use them
internally to monitor corporate initiatives and externally to measure performance against
industry rivals (Damodaran, 2021). Additionally, both sets of clients greatly emphasize
timely reporting, since any deliverable that comes late would inevitably not perform any
value to decision-making.
4.2 Differences:
The key difference is the access to information. Internal financial data and internal
reports may also be available to internal stakeholders, including executives and board
members, enabling them to make informed strategic decisions. Nevertheless, external
stakeholders depend on publicly available periodic financial reports that may not provide
timely information (Brealey et al., 2020). Management can use internal forecasting to shape
their operations, but investors are forced to interpret financial performance data and make
predictions so assent based upon existing financial reports.
9
Moreover, stakeholder priorities differ among themselves. Internal stakeholders like
operating managers focus on operational efficiency, risk management, and resource
allocation while external stakeholders focus on financial returns, creditworthiness, and
corporate governance (Moyer et al., 2020). Managers use reports, for example, to justify
budget allocations, while investors analyse them to determine whether to buy or sell
shares.
Another key difference lies in the decision-making flexibility. Also, the financial reports can
be acted upon immediately by internal stakeholders like management and employees by
modifying business strategies. Conversely, external stakeholders are impacted by disclosed
data that can influence many such as investment or regulatory decision-making (up to a
measure of limited influence) (FRC, 2022).
Finally, the frequency and level of detail of reporting varies. Some internal stakeholders
read monthly or quarterly reports and updates, while external stakeholders accept annual
and interim reports. Such chronological difference in accessibility creates an information
asymmetry, that could possibly affect the investment and regulatory choices (Alexander &
Nobes, 2020).
And yet, in spite of these differences, financial transparency serves as the common ground
between internal and external stakeholders.
5. Challenges and Limitations
5.1 Complexity and Volume of Information
Annual reports of LSE listed companies have grown increasingly long and technical. The
average annual report of a FTSE 100 company is now over 250 pages long, and the trend,
unsurprisingly, has been a growing volume of reports per year (Friend Studio, 2023). This
leads to the challenge for non-expert stakeholders, such as small investors or employees, to
10
find relevant information. Complex financial terms, as well as dense disclosures, further
lower accessibility. According to research, stakeholders face difficulties processing key
information for decision-making when financial reports are excessively complex (Beattie et
al., 2020). In light of this issue, the FRC (2024) has called on companies to avoid bulk
disclosures and be more concise and entity specific addressing logistics involved in investor
decision making.
5.2 Information Asymmetry and Timeliness
While transparency initiatives are in place, the truth is that third-party stakeholders are
rarely privy to the same information as those who work within companies. Annual reports
are released months after the financial year has closed, so they deliver a backward-looking
perspective not present moment awareness. This delay reduces the value of the data in
fast-moving industries (Gajevszky, 2021). Interim reports and trading updates may provide
some information, but stakeholders will still lack confidential or forward-looking information
which impedes their capacity to forecast future developments (Brown & Tarca, 2020).
5.3 Accounting Complexity and Understandability
Financial statements prepared in accordance with IFRS standards require management
judgment and estimates. Stakeholders need to either trust these assumptions or be
financially literate enough to read them. For example, understanding a bank’s report will
require understanding expected credit loss models, while understanding an insurance
company’s report will require understanding actuarial assumptions (PwC, 2023). Moreover,
there are multiple profitability measures (e.g. operating price and internet profit), which
makes the interpretation even harder. Although companies try to combat this with
glossaries and explanation notes the complexity in itself is an obstacle to many users (ICAS,
2022).
5.4 Biased Narrative and Omission Risks
11
Financial numbers are subject to the scrutiny of an auditor, but the narrative sections of
annual reports such as the C.E.O.’s statement and the operational review — are subjective
and unaudited. Management will naturally present favourable outcomes and de-emphasize
risks, which risks offering biased picture of the company's performance (Healy & Palepu,
2021). In the worst cases, “creative accounting,” using legal loopholes to show better
results, may come into play. The case of Carillion plc, KPMG and misleading reporting the
case of Carillion plc (KPMG, 2019) demonstrates the risks attached to misleading reporting,
where it was not clear to stakeholders that key financial indicators were faltering (FCA,
2019). Moreover, since annual reports provide historical-oriented performance, early
warning signs of market transitions or technological disruptions can easily evade
stakeholders (Deloitte, 2023).
6. Future Trends and Recommendations
Integrated and ESG (Environmental, Social, Governance) disclosures vs corporate reports
are a thing because corporate reporting as a topic has become hotter than ever in order to
keep up with stakeholders’ expectations. Financial and non-financial data are increasingly
integrated by companies to offer a comprehensive perspective of the value they create
across different forms of capital—including social, financial, and natural resources (Lueg &
Lueg, 2021). This is also supported through regulatory bodies in the establishment of the
International Sustainability Standards Board (ISSB) and the implementation of IFRS S1 and
S2 standards on sustainability disclosures. Consequently, companies listed on the LSE will
be required to report in a similar manner regarding climate risks, diversity, and social
impact, adding transparency and comparability (IFRS Foundation, 2023).
The second major trend is the digitalization of financial reporting, largely driven by
regulations, such as the European Single Electronic Format (ESEF) and its UK counterpart
(UKSEF). At the moment, companies submit their annual report as xHTML/iXBRL, which
facilitates the analysis of the data by stakeholders with the help of the software tools
(Lucanet, 2023). This paradigm shifts advances accessibility, facilitating immediate analysis
12
and auto-benchmarking. In time, increased use of AI-based financial analysis, interactive
digital reports, and real-time dashboards could enable more effective interaction with
stakeholders. Consequently, companies that leverage these capabilities will emerge with an
advantage in transparency and confidence for investors.
With these emerging trends, corporate reports will evolve from solely financial reporting to
stakeholder-centred reporting with increased clarity and accountability.
7. Conclusion
For those companies listed on the London Stock Exchange, annual reports and accounts are
the bedrock of corporate transparency. They are still pivotal tools for a wide range of
stakeholders management, employees, investors, creditors, regulators and the public. And
while each stakeholder group has its own take on them, everybody uses these reports to
gauge their financial health, execution and strategic direction. The best annual reports knit
together narrative and numbers, placing financials alongside context to provide a
stakeholder perspective on historic performance and future outlook.
Annual reports are vital corporate governance documents as well but suffer from a number
of significant shortcomings including complexity, information asymmetries and bias. But
integrated reporting, ESG and digital financial reporting (new practices) will very much
addressing these as well as making it widely available and relevant. By ensuring that the
report is a tool for accountability, the report need not join the pile of opaqueness
accountable to no one. Annual reporting if done objectivity along with sound notes ensures
trust, informed decision making and Corporate sustainability in long run.
13
8. References
1. Alexander, D. and Nobes, C. (2020) Financial Accounting: An International
Introduction. 7th edn. Pearson.
2. Atrill, P. and McLaney, E. (2020) Accounting and Finance for Non-Specialists. 12th
edn. Pearson.
3. BP (2022) Annual Report and Form 20-F 2022. Available
at: https://www.bp.com (Accessed: 10 February 2023).
4. Brealey, R.A., Myers, S.C. and Allen, F. (2020) Principles of Corporate Finance. 13th
edn. McGraw-Hill Education.
5. Brigham, E.F. and Ehrhardt, M.C. (2021) Financial Management: Theory & Practice.
16th edn. Cengage Learning.
6. Damodaran, A. (2021) Investment Valuation: Tools and Techniques for Determining
the Value of Any Asset. 3rd edn. Wiley.
7. Deloitte (2021) The Future of Work and Employee Engagement. Available
at: https://www.deloitte.com (Accessed: 15 January 2023).
8. Eccles, R.G. and Krzus, M.P. (2021) The Integrated Reporting Movement: Meaning,
Momentum, Motives, and Materiality. Wiley.
9. Financial Conduct Authority (FCA) (2022) FCA Handbook on Corporate Transparency
and Financial Reporting. Available at: https://www.fca.org.uk (Accessed: 12 February
2023).
10. Financial Reporting Council (FRC) (2022) UK Corporate Governance Code. Available
at: https://www.frc.org.uk(Accessed: 20 January 2023).
11. Financial Reporting Council (FRC) (2023) Annual Review of Corporate Reporting
2023/24. Available at: https://www.frc.org.uk (Accessed: 25 February 2024).
12. Global Reporting Initiative (GRI) (2022) Sustainability Disclosure Standards. Available
at: https://www.globalreporting.org (Accessed: 18 March 2023).
14
13. Healy, P.M. and Wahlen, J.M. (2021) 'A Review of the Earnings Management
Literature and Its Implications for Standard Setting', Accounting Horizons, 35(3), pp.
293–318.
14. IFRS Foundation (2021) Conceptual Framework for Financial Reporting. Available
at: https://www.ifrs.org(Accessed: 10 March 2023).
15. KPMG (2023) ESG and Workforce Engagement Trends in Corporate Reporting.
Available at: https://home.kpmg(Accessed: 5 February 2024).
16. Mallin, C.A. (2022) Corporate Governance. 6th edn. Oxford University Press.
17. Moyer, R.C., McGuigan, J.R. and Rao, R.P. (2020) Contemporary Financial
Management. 15th edn. Cengage Learning.
18. PwC (2023) The Future of Financial Reporting: AI and Digitalisation Trends. Available
at: https://www.pwc.com(Accessed: 28 January 2024).
19. Smith, A. (2021) Corporate Failures: Lessons from Carillion and Other Scandals.
London: Routledge.
20. Standard & Poor’s (2023) Global Corporate Credit Ratings and Financial Risk Metrics.
Available at: https://www.spglobal.com (Accessed: 15 April 2023).
21. Tesco PLC (2022) Annual Report and Financial Statements 2022. Available
at: https://www.tescoplc.com(Accessed: 3 February 2023).
15
