How unbiased is a financial report really?
Research into financial reports has found that the way they’re designed has a big influence on how a business is judged.
- There is a general misconception that financial information is objective and value-free.
- The way information is presented can influence or even mislead people.
- Given that trust is important for companies, more focus is needed on the design of corporate communication.
By Stephanie Woo
We’ve all heard the saying that “the numbers don’t lie”, but is that entirely true?
“There is a general perception that financial information is objective and value-free, but people can be misled by the way information is presented,” says Dr Andreas Hellmann FCA, a senior lecturer at Macquarie Business School and director of research for consulting services organisation Brain Value.
“For example, if positive information is presented last in the management commentary section of an annual report, people often evaluate the performance of the company more highly,” he says.
Hellmann and his colleagues are closely examining the design of current financial reports and sustainability reports to explore a best practice approach to data-centric storytelling. They have come up with a framework accountants can use to build trust with stakeholders and tell the data’s story in a clear way.
How ‘impression management’ works
The strategies and techniques employed by individuals and organisations to influence the way others perceive them is known as ‘impression management’. According to Hellmann, companies use various impression management techniques in their financial reports, which may create a misleading corporate image.
Hellmann and his team are studying the interplay between narratives and graphical elements in financial reporting, and have found that the brain does not process all information cues equally.
“In many situations, people don’t make objective, rational decisions,” says Hellmann. “The human brain takes shortcuts in processing information and can handle limited information, so natural biases come into play as the brain picks and chooses what it retains.
“Accounting information is much broader than just numbers. We need to understand exactly what features of the narrative sections influence the perceptions of users of accounting information.”
The power of the photo
Infographics, photographs and graphical presentations help to effectively communicate complex financial information and material about big data.
“We believe humans have always been storytellers and place great importance on emotion,” adds marketing expert Dr Lawrence Ang, an associate professor at Macquarie University and co-director of Brain Value.
“Visuals such as photographs are often used in corporate communication and are very important for storytelling,” he says. “A growing body of knowledge around impression management – including our own research at Brain Value – provides strong evidence that photographs within financial reports can deliberately or inadvertently over-emphasise selective data, attracting a reader’s attention.
“By understanding the role of visual cues and emotional valence [positive or negative] in influencing perception, our research aims to shift the way accountants present data and build a sense of trustworthiness with users of accounting information.”
“Our research aims to shift the way accountants present data and build a sense of trustworthiness with users of accounting information.”
This is important because the photographs chosen in a financial report may not communicate the intended message. “We are interested to find out whether an intended message is clearly conveyed to the relevant stakeholders,” adds Hellmann.
“Based on biometric evidence, we have created a comprehensive framework to predict how photographs and certain information cues should be placed in financial reports for effective communication. As a result, we are able to present a sequence of information that captures the eye and feeds information to the brain.”
But the use of photographs in financial reporting falls outside the regulatory remit of standards such as the International Financial Reporting Standards (IFRS).
“Since photographs are now commonly used in financial reports, artificial intelligence (AI) provides an efficient tool to overcome the cognitive biases related to the subconscious interpretation of photographs,” says Dr Suresh Sood, co-director of Brain Value and a big data and machine learning expert.
Managing corporate image as a way to shape trust
Building trust is a powerful force employed by professionals to communicate credibility, and Ang believes corporations have an opportunity to shape trust by managing their corporate image in reports.
“Our neuroscience research reveals financial reports tend to be emotionally laden and are capable of signalling a company’s virtues,” says Ang.
Adds Sood: “AI helps us in predicting human behaviour in response to financial reports. So, when we have newly generated reports, we can compare them with biometric databases to predict the potential biases that may exist.
“By understanding how the brain processes data and information emotionally, AI provides accountants with an ability to generate financial reports focusing on the priority topics of interest for the reader or client.
“We need to put ourselves in the shoes of our reader, whether they be a professional or non-professional, and ask whether big data is relevant in telling the story.”
Given that trust is very important for companies, greater attention needs to be placed on the design of corporate communication. The finance profession needs to be mindful that improper use of impression management may backfire and lead to the erosion of trust.
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