Mark Hynes - thoughts on corporate disclosure

Opinions on changing rules, changing best practices, and their effect on investor relations officers.

Friday, January 21, 2005

Regulatory Update January 2005

First the good news. No less than 3 sets of regulators recognised the impact of the changed legislation on listed companies in the last month. Charlie McCreevy, the EU's new Financial Services Commissioner, promised a regulatory pause and a focus on implementing those regulations already in the works. The Financial Services Authority has recognised the regulatory load, and promised to do all it can to lighten it, and Chairman (of the SEC) Donaldson weighed in with concerns about the impact on foreign issuers of Sarbanes Oxley’s Section 404 on internal controls reporting. Mr. Donaldson showed readiness consider delaying implementation beyond July 15th.

The bad news of course is that until these best intentions take effect, listed companies and investor relations officers are faced with implementing the rules already passed. Update:

Results under the new IFRS rules – A couple of early trends are emerging: companies – especially larger ones - are producing indicative numbers to IFRS in their 2004 prelims, with balance sheet reconciliation to UK GAAP, rather than waiting for the interims. From the analysts side, we are seeing sector based analysis, with sector estimates of earnings dilution as a result of IFRS. It is however still too early, despite some of the headlines, to predict a pattern. Many companies are still coming to terms with the detail of the changes. One constant however is cash – and many expect discounted cash flow to remain a significant measure in valuations.

Also, look out for a unique survey into the preparedness of investment analysts for the imminent adoption of IFRS by UK quoted companies. The survey has been conducted by Fallon Stewart Limited, in conjunction with Citigate Dewe Rogerson,

This research has revealed that many investment banks have simply not prepared their analysts for the potential impact of the change to accounting standards. The research further highlights that company forecasts, valuations and, potentially, share prices could undergo an intense period of volatility without more work being done by both the companies and analysts.

Transparency Obligations Directive (1). The consultation period for Part 1 of the Transparency Obligations Directive ended on Friday January 28th. The responses can be seen at http://www.cesr-eu.org . The responses, published on Monday January 31st, are broadly in favour of the proposals on dissemination, although with reservations about the administrative impact on mid and small cap companies. Few responses addressed the issue of the Central Storage Mechanism – the “European EDGAR”.

OFR Update. The ASB has issued an Exposure Draft of a Reporting Standard (RED 1) on the Operating and Financial Review (OFR). This follows a Government announcement that, for financial years beginning on or after 1 April 2005, quoted companies in Great Britain will be required to prepare an OFR. The Government has also announced that it intends to specify the ASB in legislation as the body to make the standards for the mandatory OFR.

The proposals in the RED build on the requirements of the OFR Regulations and the ASB's existing 2003 statement of best practice on the OFR, which is already used by many companies. They involve:
  • the specification of a number of principles to apply when preparing an OFR; and
  • the provision of key elements of a disclosure framework to apply in order to meet the requirements of the Regulations
Flint/ Turnbull internal controls. Against a background of serious concerns among US listed companies about their ability to comply with Sarbanes Oxley section 404 on internal controls, the Flint committee published its first review of the Turnbull guidance. It is consulting on the impact of Turnbull, and gathering ideas on how the guidance might be updated.

The paper asks important questions about how organisations understand risk, whether the scope of controls covered by Turnbull should be narrowed to financial control, the role of external auditors and – perhaps most importantly for IRO’s – whether a listed company should have to publish an opinion on whether its system of internal control is “effective” – a word causing major concerns in its definition.

The question NOT asked – but implied – is whether the UK and US systems should be brought into line.

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