Selectivity and Measurement Distortion of Graphs in Sustainability Reports: A Comparative Study

The second major type of impression management using financial graphs is measurement distortion, i.e. management may choose (or permit) design features which enhance the message conveyed by the accounting numbers in an unwarranted manner.
Also for this form of interpretative shading, Vivien Beattie and Michael John Jones have played an important role, considering their wide contribution to the field of research of measurement distortion. In their paper “The use and abuse of graphs in annual reports: theoretical framework and empirical study” (1992), the authors find that a total of 142 graphs (30% of the 465 key financial variable graphs) show material discrepancies, 103 (22%) exaggerate and 39 (8%) understate the trend (taking into account the authors’ choice of considering a materiality level of 5%). The mean score of the GDI over the 465 graphs is + 10,7%, but if we consider only material distortions, the mean score rises to +34,3%.
The results lead the authors to formulate four considerations: first, the cause of the discrepancy is most frequently non-specific, i.e. the graph is simply not drawn in proportion to the underlying numerical values. The absence of a scaled vertical axis and/or grid lines frequently accompanies this type of distortion. Second, in twelve cases the trend in the variable over five years is in the opposite direction to the change in the current year. Under these circumstances the effect of distortion on the portrayal of the company's performance is ambiguous. A non-zero or broken vertical axis exaggerates an upward trend, but also exaggerates the decline in the final year. Third, the authors recognise that unfavourable distortions can be caused by graphing difficulties, arising from relatively small magnitudes in the initial year. However to identify and exclude such cases would have involved arbitrary judgements which were not undertaken. Fourth, it can be argued that, where, for example, specific causes of measurement distortion exist which are clearly labelled (or explained by way of a footnote disclosure), misperceptions will not arise. It is also supported the hypothesis stating that measurement distortion is likely to give a more, rather than less, favourable portrayal of the company’s performance.
In “Corporate annual report graphical communication in Hong Kong: effective or misleading?”(1995), the author John K. Courtis analyses two surveys of chart graphics within annual reports of Hong Kong public companies listed on the Stock Exchange. A sample of 364 annual reports for 1992-1993 and another sample of 327 annual reports for 1994-95 are examined.