Strategy & Operations » Governance » The new OFR rules: say nothing

In mid-2005 the government did an astonishing about-turn on its promise to
make the Operating and Financial Review (OFR) mandatory. Instead, a somewhat
lesser report, rebadged as the Business Review, is being put forward. At present
there is great uncertainty both about when, exactly, it will become law, and
what the substantive differences will be between a new-style BR and the old OFR.
(We still have Reporting Standard 1 which sets out OFR reporting guidelines with
what audit experts regard as reasonable clarity.)

There are excellent reasons why companies should go beyond mere financial
reporting and actually explain what’s going on in the business and what its
prospects are. But there are some very sensible reasons why, as yet, many don’t.

Looking forward

Companies should provide detailed narratives because shareholders benefit
when the company not only sets out its strategy but provides a rich context
within which its performance and the key risks it faces, can be understood.

But the primary reason for not voluntarily going down the route sketched out
by the now-defunct OFR is fear – and at present, the fear seems to be at least
partially grounded in reality. As Baker Tilly audit partner Mark Harwood
explains, directors’ potential liability for voluntarily making forward-looking
statements is far from clear.

“Right now we seem to be in a paradoxical position where company directors
have protection if they stay within the strict disclosure regime, so long as
they are not negligent or deliberately set out to mislead,” he says. “But they
are liable for forward-looking statements which they make voluntarily. That is
absurd and government has suggested that it will introduce legislation to
protect directors with respect to forward-looking statements.”

However, as yet there is no clear indication as to when the government might
do so and his firm’s advice to clients right now is to hold fire and not i
ntroduce OFR-style reporting until the position is clarified.

That’s Harwood’s advice – but David Phillips, head of corporate reporting at
PwC says, “Most companies are already going beyond the scope of the proposed
Business Review and the question is simply how far they will move towards the
old OFR.”

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