The Debate – Do we need the OFR?

The balance is right over OFRs

By Jacqui Smith

The recent independent Company Law Review (CLR) stated that requiring an operating and financial review (OFR) ‘would improve the quality, usefulness and relevance of information available to the markets, and to everyone with an interest in the company’.

Investors and others need better information on intangible assets, such as employees’ skills, and on forward-looking issues such as the company’s strategies and the opportunities, risks and uncertainties it faces.

The Accounting Standards Board (ASB) published guidance on OFRs in 1993 and updated it last year. Evidence suggests that some 60% of quoted companies already publish an OFR or information that reflects that guidance. But the CLR noted that compliance was ‘patchy’ and that a mandatory requirement was needed if best practice was extended.

The government’s proposals are based firmly on the CLR recommendations.

In implementing those recommendations we have sought to avoid unnecessary burdens. We resisted calls to broaden the reporting requirements to include other issues, or to require some topics to be covered always rather than when necessary.

We make clear that it is for directors to decide what to include in their OFR, and that the OFR is primarily for shareholders, though it will be of interest to other groups such as employees.

The ASB has agreed to develop a standard for the OFR, using its own guidance and the report of the working group chaired by Rosemary Radcliffe.

The CLR said the company’s auditors should review the OFR for ‘the propriety of the directors’ process in preparing it’, as well as for consistency with the auditors’ knowledge. A forward-looking OFR is different from the accounts, which must be ‘true and fair’.

We have therefore suggested that the auditors state whether the OFR has been prepared after ‘due and careful enquiry’, which is intended to capture the CLR’s ‘propriety of process’.

I hope a wide range of organisations will respond to the consultation to help us get the detail right.

  • Jacqui Smith, MP, is minister for industry

We must not burden business
By John Cridland

Business supports informative and practical OFRs for shareholders.

The current system of descriptive reporting underpinned by the combined code and guidance from the Accounting Standards Board has generally worked well. The existing voluntary arrangements have given shareholders valuable information they wouldn’t have otherwise had. This has happened without putting an excessive burden on companies.

The proposed statutory OFR must be no less workable for companies and equally useful to shareholders. The danger is that value will be undermined as companies are pushed into sterile, formulaic reporting.

The CBI is seriously concerned that the new proposals for statutory reporting requirements will expose companies to substantial extra reporting and damaging litigation. The standards of compliance must not be over the top, and at the moment it looks as if the DTI has inadvertently gone too far.

The requirement that auditors report on whether the OFR has been prepared by the directors ‘after due and careful inquiry’ is one of the highest legal standards possible. It makes no mention of the OFR having been prepared in accordance with directors’ judgement – particularly important when forward-looking information has to be disclosed.

We don’t understand why the requirements should be different from those for statutory accounts, where they must show a ‘true and fair view’. Achieving this very high standard would impose excessive liability burdens on companies and directors and lead to significant additional costs in audit fees and professional advice.

Like statutory accounts, the OFR should simply have to show a true and fair view in the judgement of the directors. In addition, auditors’ obligations to report on the OFR should be limited to financial information.

We must get this right or we will expose companies to unnecessary and excessive reporting burdens, and damaging litigation. We have been encouraged by the DTI’s response to our concerns and we want to work closely with them to resolve the issue.

  • John Cridland is deputy director-general of the CBI.

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