In Search of a Lingua Franker: Jargon-Filled Corporate Reports Can Be More Than an Annoyance for Users, Writes Malcolm Smith If a Company Seems Incapable of Communicating Clearly, There May Be More Sinister Factors at Play

By Smith, Malcolm | Financial Management (UK), November 2003 | Go to article overview

In Search of a Lingua Franker: Jargon-Filled Corporate Reports Can Be More Than an Annoyance for Users, Writes Malcolm Smith If a Company Seems Incapable of Communicating Clearly, There May Be More Sinister Factors at Play


Smith, Malcolm, Financial Management (UK)


We're all familiar with the comical possibilities of a breakdown in communications, as exploited by Sir Humphrey Appleby, the scheming civil servant in Yes, Minister. But, as the political storm over the information given to justify the war in Iraq has shown, the use of spin to bury bad news, economise with the truth or give only partial explanations is more ominous. We seek honesty and transparency in the provision of public and corporate information, and these traits are closely associated with clear communications. Any attempt to mislead us sends a clear signal that something is wrong.

The process of management depends on the manager's ability to communicate information that can be used for effective decision-making. Studies suggest that the printed word is better for conveying abstract concepts and audiovisual media are better for concrete data, but face-to-face communication is preferred for persuasion. In an accounting context, the communication process demands that we distinguish between:

* the accountant (the transmitter of the message);

* the information conveyed (the financial message);

* the annual report, say (the vehicle of transmission);

* the business user (the recipient of the message);

* the decision (the impact of the message).

This relationship can break down if the recipient misinterprets the message or if the transmitter provides a misleading message in the first place. If this misleading message demonstrates a deliberate attempt to deceive, there is a serious problem. Surveys have repeatedly shown that unsophisticated users of accounting information rely almost exclusively on narrative sections in the annual report. But the financial narrative is a complex document and, if the user can't understand it, there are opportunities for misinterpretation.

We might expect that a firm's corporate report will be easy to read if it wishes to signal good performance to the market. But, if there is no good news, a firm might send misleading messages. It must report, even if it has only bad news, because a failure to do so will be even more damaging. My 1992 study of UK manufacturing firms with Richard Taffler, now professor of accounting and finance at Cranfield, showed that there was a significant link between the readability of the chairman's narrative and financial performance--liquidity in particular. The better the financial performance, the more readable the prose.

Traditional measures of readability--eg, the Flesch index--are usually based on word and sentence lengths, so the measure of difficulty is independent of the target audience. Deloitte's Bullfighter software is a more recent attempt to measure clarity, in terms of both readability and the amount of jargon, although it's hard to define precisely what constitutes jargon. …

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In Search of a Lingua Franker: Jargon-Filled Corporate Reports Can Be More Than an Annoyance for Users, Writes Malcolm Smith If a Company Seems Incapable of Communicating Clearly, There May Be More Sinister Factors at Play
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