Understandability of Narratives in Annual Reports

Abstract

This article shows problems in the communication process between preparers and users of financial reports. In Sweden as well as in other European countries, understandability of financial reports is a qualitative characteristic that is increasingly focused on. This is partly due to the growing significance of the stock market as a source for venture capital. Test techniques from linguistics and pedagogy have been used in accounting research to investigate the understandability of financial reports. The cloze technique is used in this study to investigate the understandability of messages in two Swedish annual reports related to small investors, and sophisticated preparers and users such as auditors and financial managers. The results show that important parts of the reports were not understood by small investors. The conclusion is that if small investors are continuingly to be considered as a target group for these financial reports, then there must be a large improvement of the text material. Otherwise the financial reports must be left to sophisticated users and interpreters.