Saunders, Lewis and Thornhill: Research Methods for Business Students, 6th edition, Additional Case Studies
Case 8a The involvement of auditors in preliminary profit announcements Tony Beasley and Jim Keane, University of Gloucestershire Each year UK companies publish and issue an annual report and audited accounts, which are sent to numerous shareholders and other users. The process may take as long as three months from the end of the companies accounting period. This delay could create problems: investors would be without up to date information and the probability of insider trading is therefore increases the longer the delay between the data being prepared and the accounts being published. For these two reasons the London Stock Exchange requires listed companies to issue Preliminary Profit Announcements or ‘Prelims’. Prelims are brief (usually only about four pages long) announcements, made by companies to the financial markets. They give estimates of the financial performance of the company during the year, and should, in principle at least, represent a summary of the information to be included in the subsequent full annual report and accounts. Tony and Jim had a good knowledge of the literature. Previous research had shown that the release of Prelims had a significant impact on the share price of a company and that stock market analysts ranked Prelims as their most important source of information. Yet, despite this Prelims were relatively lightly regulated by the stock market. They hypothesised that the content of Prelims was more likely to differ from that in the annual accounts the greater the time period between the time that they were released and the publication of the annual accounts. A large sample survey of current company practice was therefore planned. Companies have to issue their Prelims through the Stock Exchange Regulatory News Service (RNS) which controls the dissemination of price-sensitive information to the financial markets. Many large...
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