Good intentions threaten integrity of the OFR

Disproportionate liability reared its head again this week. This time, however, it concerns the all-singing, all-dancing operating and financial review.

The OFR has long been in existence and has become best practice among at least three-quarters of the UK’s publicly listed companies. Until now, it’s been voluntary, yet is deemed to be one of the most useful tools for prospective investors, shareholders and stakeholders.

But architects of the new mandatory OFR risk turning a respected, succinct, forward-looking document into a minefield of legal jargon that few will touch with a bargepole.

So the news that auditors and business groups have reportedly persuaded the department of trade to drop a highly legal turn of phrase, that of ‘due and careful inquiry’, from OFR proposals has been welcomed.

The term is considered a highly legal phrase almost exclusively used in company prospectuses, and would have made auditors liable for directors’ statements.

John Davies, head of business affairs at ACCA, says: ‘That test only applies to prospectuses. It’s a fairly stiff and legalistic test to apply to well-known companies.’

To have gone ahead with this terminology included, experts say, would have forced directors to supply reams of information, instead of a short narrative, to avoid claims of liability.

The inclusion of such terminology would defeat the purpose of the OFR, which is intended to be ‘less prescriptive’, say accountants.

With auditors already struggling to limit their liability on the annual statutory audit, it would come as another demoralising blow to increase their liability in a new reporting requirement.

‘It’s important there’s symmetry between directors and auditors. What we need is a framework that is sensible and proportionate, so that directors, in good faith, can give information,’ says Will Rainey, partner at Ernst & Young.

Auditors agree they should take their part of the blame when a company inadvertently or otherwise, misleads shareholders. But the crux of the issue is that auditors only want to accept their part and not that of others.

It’s broadly accepted that if company directors wish to deceive or withhold information from their auditors, there is little an audit team can do. So to lay yet more liability in the laps of auditors – particularly in a document that is meant to be forward-looking and less prescriptive – would, they say, defeat the ultimate goal.

Experts believe it was never the government’s intention to turn the OFR into a legal minefield, applying yet more pressure on auditors. Indeed the government is to delay implementation of the OFR by three months from the original date to 1 April 2005, which shows evidence that ministers are listening to business leaders’ counsel.

Davies says: ‘It’s supposed to be a blue-sky document. To apply legalistic tests on this document would be inconsistent with the idea.’

Accountants’ warnings that the reviews will become ‘bland and meaningless statements’ if potential legal liabilities aren’t removed would have also encouraged the government to back off from such terminology.

Rainey adds: ‘If they make the requirements too onerous, companies will be under pressure to inform on everything. It’ll drive companies down the anodyne, boilerplate route.’

For now, the future success of the OFR hangs in the balance. The DTI would not say when it will lay out its final proposals, but a spokesperson said: ‘We hope to be able to make an announcement in the next two weeks.’

Those close to the issue suggest that trade secretary Patricia Hewitt is due to make an announcement today.

Critics have already drawn their conclusions. The OFR was intended to improve corporate reporting for stakeholders, shareholders and potential investors, but unless certain safeguards are urgently put in place, the review will morph into a monotonous narrative couched in qualifiers, ifs and maybes.

By making the OFR mandatory, the intention of the government and regulators was to ensure that it grows in status and respectability. In this they could still fail.

Observers believe that the UK’s corporate reporting regime, considered to be one of the most transparent and open in the world, could face a huge setback if a well-respected, much used document was replaced with stiff requirements that would force directors to shy away from open dialogue with their auditors and stakeholders.

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