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AIA

OFR back on the legislative agenda

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25th May 2010
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“We will reinstate an Operating and Financial Review to ensure that directors’ social and environmental duties have to be covered in company reporting, and investigate further ways of improving corporate accountability and transparency.”
- The Coalition: our programme for government

The new government’s commitment to do something about narrative corporate reporting came as almost a big surprise to officials at the department of Business Innovation and Skills as it did to the wider accounting community.

Somewhat mistakenly, environmental and social campaigners had hitched their hopes for more detailed corporate reporting on non-financial activities to the mandatory Operating and Financial Review that was jettisoned from the Companies Act 2006 at the insistence of Chancellor Gordon Brown. Instead of an OFR, the act laid down a non-mandatory requirement for directors to present an enhanced business review that included forward looking performance indicators, comment on social, community and employee issues, and environmental matters.

Reinstating the OFR would give the Liberal Democrats and Conservatives an opportunity that something was being done to encourage sustainability through disclosure, and the BIS confirmed that the Companies Act contained powers allowing the government to amend reporting regulations through secondary legislation.

So, after a period of consultation, a new narrative report could arrive sooner than expected. In the absence of detailed guidance this article returns to many of the points that arose when the mandatory OFR was debated back in 2004-06.

Lecturer and Francis Clark technical partner Stephanie Henshaw admitted to being “slightly puzzled” when she first heard about the OFR revival because it appears to duplicate the requirements of the business review. “There isn’t a listed company that isn’t doing it in line with ASB best practice,” she said. “How is it going to be different – unless the plan is to impose it on a wider level?”

This suggestion did not impress Steve Collings. “That would be stupid,” said the AccountingWEB.co.uk contributor. “When I asked a medium-sized client why they hadn’t included a business review in their accounts, they looked at me like I was bonkers and said they haven’t got time to do that.”

In the run up to the Companies Act 2006, the profession was deeply divided on the issue of a mandatory OFR. ICAS argued that making narrative reports mandatory would lead to blander statements, while ACCA supported the move and said that including key performance indicators would overcome the tendency to include “boilerplate” disclosures.

Having developed an entire Reporting Standard to support the OFR, the ASB adapted its guidance for listed and larger companies preparing business reviews in line with the Companies Act. Acknowledging that it is up to company directors to decide how to structure their review, the ASB said it should reflect the circumstances of the business and provide a forward-looking view based on industry trends. While emphasising the need for citing key performance indicators (KPIs), the standard does not specify the types of KPI that should be disclosed.

Last year, the ASB carried out a study to assess how well companies were fulfilling the requirements of the enhanced business review and found some glaring lapses. Thirty-two percent of the sample did not disclose any non-financial KPIs and only 38% of companies presented a relevant discussion of the trends and factors that would affect performance in the future.

Sections covering risk reporting and corporate social responsibility (CSR) sections suffered from “clutter” that distracted from the most important information. “Listing every conceivable risk just adds to clutter; one company had 33 risks and 8 companies had 20 or more. Some companies had risk sections that were 10 pages long,” noted ASB chairman Ian Mackintosh.

The ASB was concerned that environmental issues were complicating the reviews and touched on environmental factors that did not affect the future of the business. Instead, it argued that sustainability issues should be dealt with in a separate report.

Green concerns will continue to cast a shadow over the enhanced business review/OFR.

At the CCH user conference this week, PwC partner and former ICAEW president Peter Wyman predicted that companies would find they had to report more and more non-financial information. “Carbon accounting will come in probably in the next 5-10 years,” he said.

But carbon was just the start: “People are increasingly making investment decisions on things other than financial performance. Companies are going to be forced to provide more information.”
 
A comparison of DIY retail chain accounts highlighted the problems of consistency and comparability between the environmental disclosures they were making. “They all report roughly the same thing, but all in a slightly different way,” said Wyman.

As well as worrying about the lack of standards, Wyman was concerned about the role of auditors in the age of enhanced narrative and environmental reporting. “Somebody has to become the global standard setter and create standards everyone buys into to provide comparability.

“The scope of corporate reporting is going to broaden enormously – and the scope for auditors to play a really big role in that is enormous. But it should not be statutory,” warned Wyman.

Now that we’re back where we were five years ago with the OFR, it’s time to dust off and rehearse all the old arguments. There will no doubt be a consultation period to give the objectives and objections a wider hearing, so whichever position you plan to adopt, it’s worth taking note of Wyman’s stance and getting your retailiation in early.

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