RSS feedsUK plc appears to be suffering from the corporate equivalent of the Stockholm Syndrome. Chancellor Gordon Brown tears up the statute book on Operating and Financial Reviews and instead of being grateful, or at least relieved, British business collectively throws its toys out of the cot.
There are genuine reasons why British business could feel miffed about the timing of Brown’s announcement. Pulling the plug just a few months before the first statutory OFRs were due to appear when a lot of the work has been done and millions spent by finance directors and others is insensitivity. But politicians like making headline-grabbing announcements knowing they won’t have to deal with the consequences. While Brown may have run true to form for a politician, business leaders who spend much of the time calling for cuts in red tape were acting out of character, busy making announcements, in effect saying that abolishing the statutory OFR was the wrong sort of legislative burden reduction. Since when did business fall in love with red tape?
The CBI welcomed the move, but maybe it only did so out of politeness, because Brown was speaking at its conference. Most representative bodies seemed perturbed by the move. For instance, the Institute of Directors said that to abolish the OFR at this late stage, after many companies had incurred costs to meet the requirements, showed a slap-dash approach to regulation policy. And, indeed, Brown certainly has created regulatory confusion. The Reporting Standard 1 (RS1) ‘Operating and Financial Review’, issued by the Accounting Standards Board flows from statutory instrument 1011/2005, which needs to be repealed to fulfill Brown’s announcement. But these are technical niceties that regulators and civil servants are well remunerated to untangle.
All those who criticise the non-appearance of the statutory OFR need to remind themselves of the bigger picture. Brown has done the right thing, even if he has done it for wrong, or muddled reasons. As the Financial Reporting Council noted in its response to Brown: “The FRC has long believed that the publication of a narrative explanation of a company’s development, performance, position and prospects should be encouraged as an important element of best practice in corporate reporting. A significant number of FTSE-100 companies already publish an OFR. Regardless of whether or not an OFR is a statutory requirement, the FRC’s view of best practice remains unchanged. RS1 is the most up to date and authoritative good source of good practice guidance for companies to follow.”
There is a danger that because Brown has pulled the rug from under the OFR, companies will be tempted to take it less seriously than if the idea of statutory backing had never been mooted. But this need not happen, the FRC carries clout these days and if it joins forces with regulators, such as the FSA, the message will soon hit home that the OFR remains a document that directors must take seriously.
A Deloitte survey found that 82% of companies were preparing an OFR, or something like it, and regulators should be looking for that figure to continue to edge upwards. Allowing the OFR to revert back to its persuasive, rather than mandatory, status should encourage companies to meet the expectations of the City and to produce reports and accounts that offer a summary of the opportunities, risks and challenges that the directors understand the business to be facing. If shareholders want the company to produce sensible OFR-style information then they should make sure the directors understand that. Equity analysts in particular should have the courage to mark down the shares of those companies that fail to produce the goods.
This is an opportunity for companies to pick out the relevant elements for their organisation from RS1 in whatever form it emerges and whatever status it has and ditch the auditor-type process, which had built up around the OFR. The OFR started to diminish rapidly in value in 2003 when the ICAEW released guidance aimed at directors on how to prepare one. This was the OFR from the point of view of auditors, where naturally the emphasis was on due process rather than the output. A DTI-sponsored working group chaired by Rosemary Radcliffe also wrote guidance for directors on producing an OFR. Plus, of course, the ASB had updated its guidance and explanation. The OFR was being turned into a regulation-fuelled industry where vested interests were seeing the OFR as a way of forcing directors to take account of their particular hobby horse marketing, sustainability and environment, human capital management and diversity, to name but a few. Now it has a chance to return to its proper and original role.
In May 2004, the then Trade and Industry Secretary, Patricia Hewitt, said the OFR was the “directors’ overview of the company providing shareholders with key information on the organisation’s objectives, strategies, past performance and future prospects”. She was right then and her words hold true now. Directors should be capable of delivering a decent OFR, even if they are not obliged to do so by law and reams of regulation.
