ntellectual capital is made up of human, structural and relational capital (Edvinsson and Malone, 1998; Luthy 1998), there are distinct characteristics associated with this term according to Davison (2014), for example investment in humans and strategies to drive the business forward. Intellectual capital can also be described as ‘knowledge assets' or ‘intangibles' and as globalisation is increasing at a fast pace there is a push towards investment in innovation and technology, however there seems to be a lack of sufficient accounting framework for intellectual capital (Davison, 2014).
It is critical to understand the differentiate between information which is of quality. It is a rather subjective area and can mean different things to various stakeholders. Jonas et al. (2000) states that quality is when “items that have significant impact on whether the financial statements are representationally faithful, verifiable, neutral and consistent, whereas some state that the quality is measured indirectly by focusing on earnings management, financial restatements, and timeliness (Cohen et al., 2004).
This essay will critically analyse the role of visual imagery, narrative techniques and wider paratext in the quality of information communicated and delivered to stakeholders through financial reporting.
Visual imagery consists of pictures, sketches, graphs, press releases and videos and intellectual capital disclosures through visual images are arguably more powerful than words (Anderson, 1980; Spoehr & Lehmkuhle, 1982; Tversky, 1974). The role of visual imagery is undermined, it has the ability to trigger a special memory and cognition, create emotional power, carry complex messages which are open to interpretation (Davison, 2014). Visual images are multi-faceted and can have subtle meanings and can be said that it is done to manipulate stakeholders into thinking a certain way.
For example, Courtis (2004) carried out research to see whether colour plays a role in changing the users perception of the information presented and investment judgements. A proxy visual rhetoric was chosen through the use of coloured paper as background to financial reports, and the aim was to see whether this was being used to enhance the reporting of good news or mask the bad news. The results showed that annual report preparers perceive colour to possess positive communication attributes irrespective of the profitability outcome, this suggests to me that management are trying to enhance the results either way.
Visual imagery is also known to arouse emotion (Joeffe, 2008). Behaviour finance has had extensive research into this and how emotion can affect investment decisions. Rindova et al. (2006), states that positive emotional responses can lead to a favourable perception of a company even if the historical performance shows otherwise. If we take Oxfam's 2017/2018 annual report we can see a lady holding a pineapple, looking happy. This is followed by a fact on the next page which states they have helped 14million people to fight poverty (Oxfam 2017-18 Annual report). This gives the impression that Oxfam have succeeded their mission and therefore puts the reader in a positive mood.
Vivid language is a type of narrative technique used which evokes an image in a person's mind. There is a confirmation bias involved, for example, if you as an investor have invested a certain amount into a company, you are more likely to look for positives and less likely to look for the bad. Sorley (1998), Shiller (2000) and Ball (2009) explain this using the bear and bull market theory; It is said that in a bull market vivid language affects investor sentiment the language affects short investors sentiment by making it difficult for them to hold pessimistic beliefs about prospects of the company. In a bear market there is a larger impact on long investors where they gain negative investors sentiment. The idea is that inherently words seem to be less objective and there are concerns that this is abused by firms as it affects investor sentiments during the bull and bear markets. An example of how company's do this can be seen through Debenhams financial statements (2017), “stakeholder value has risen|” when in fact the share price has fallen', stating that they have redesigned strategies when in fact it can be inferred that you would only redesign if the old strategies were failing. The CEO's statement also contained more positive statements which are forward looking rather than discussing historic performance.
Elements which frame a piece of text is referred to as paratext (LeJeune, 1975, p.45). It has the ability to make information more easy to digest by having an organised structure to the financial statements. It also successfully gives more weighting to non-accounting information which gives a focus on intellectual capital. The elements which make up the framework of the paratext consist of the physical format, names, titles, epigraphs and intertitles. If we take a look at Ted Baker's 2005 annual report, the front page had a prize-winning dog show which stated ‘Ted's Best in Show' which created an illusion which heightened their success. Another example is the tobacco company Gallaher which used high resolution and high-gloss paper which created a sense of luxury and quality.
As Lev (2001) and Wyatt (2008) suggested the accounting deficiency with regards to intellectual capital had led stakeholders to search beyond the accounts and other regulatory disclosures for information. Other disciples such as psychology and marketing have looked into the benefits of using visual imagery, narrative techniques and wider paratext yet accounting seems to be far behind. It is no secret than we are subliminally tricked as consumers and readers of annual reports to think a certain way.
Visual imagery is used subtly and is effective which triggers memories, for example if we see the colour black we usually assign the connotations of darkness, emptiness and gloominess rather than positives. On the other hand, when we see lighter colours such as yellow and white, we think purity, happiness and forward-looking. Never the less this is a subjective area which therefore is different from person to person, therefore it is difficult to measure how this affects the quality of information communicated.
...(download the rest of the essay above)