The Operating and Financial Review’s arrival is looming. Briefing outlines how the legislation has developed and what it will mean for your organisation.
Almost a year ago, Briefing commented on the up-coming OFR. Here Toby Kent provides a progress update. Despite concerns voiced by some business lobbies, the new regulations should bolster the case of CSR leaders, he finds.
Remind me again, what’s the OFR about?
The OFR will require all publicly quoted companies to include statutory Operating and Financial Reviews (OFR) within their annual report and accounts. On May 5 this year, the UK government published draft regulations to introduce the OFR. A consultation is now underway and will close on August 6. Under the current timetable, the OFR will affect accounting periods starting on or after January 1, 2005.
OK… So, what does this actually mean?
The government has adopted a narrow approach to the OFR, which they see primarily as a tool to help shareholders understand the business and its prospects better.
Directors will be responsible for setting out the main drivers of the company’s past and future performance, as well as their view on managing all the factors which are crucial to the company’s future success and reputation. While this includes a ‘consideration’ of CSR-type issues, it is not the giant step towards mandatory social and environmental reporting some were hoping for.
Can you give some more detail?
It’s a two-tiered approach: firstly the regulations set out what companies must include within the OFR. The second tier includes what directors must ‘consider’ including in the OFR. Mandatory content will be the company’s business objectives, a review of operating performance and material change, and an update on any known trends or uncertainties that may affect future performance. Then directors must consider whether they have anything to report on the following topics, and if not, make an explicit statement to that effect:
the employees of the company and its subsidiary undertakings
environmental matters
social and community issues
relations with suppliers and other key business partners
Under the proposals, auditors must state whether in their opinion the directors have prepared the review ‘after due and careful enquiry’. The emphasis will be on auditors expressing a view on the process that was followed in producing the OFR, as distinct to an opinion on the content of the OFR.
How will OFRs take shape?
An important tool will be the ‘OFR standard’ – currently being drafted by the Accounting Standards Board. Directors will be required to state whether their OFR has been prepared in accordance with this standard, and if not, why not. The first draft is due later in 2004.
So, in balance is the OFR a good thing?
Broadly speaking, yes. The OFR regulations should lead to better, broader and more balanced company reporting. Corporate responsibility reporting (and performance) will also benefit, by improving engagement of company directors in the management processes and strategic consideration of non-financial issues and risks.
Companies already producing credible corporate responsibility reports and/or listed on US stock markets and completing the risk-oriented Form F-20 should be well placed to meet the OFR’s demands. Their key challenge will be to decide what goes in the OFR – that is, what they deem to be ‘material’ to the business – and what can remain solely in the CR report.
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