OFR – 6 months on, many companies not yet compliant.

Cometh the new rule, cometh the (non) compliance surveys. 6 months following the initial introduction of the Operating and Financial Review, companies appear to be differing in their views as to how to be compliant with Reporting Standard 1 of the ASB.

Headline stats. A survey from Deloitte’s “Hold the Front Pages” suggests that whilst 82 % of applicable companies produce some form of OFR – either formally or adopting the broad recommendations – significant numbers fall short of the rules applicable from 2006. For example, the survey suggests that 59% disclose no KPI’s, 55% do not disclose the principal risks facing the business, and nearly half do not discuss the business objectives and strategies.

And the length and complexity of the task should not be underestimated, with annual reports now averaging 71 pages – a massive 59% increase since 1996. And according to another survey from Hyperion, whilst many large organisations have invested substantial sums in their transaction systems the same is not universally true of their management reporting systems. Many rely heavily on a hotchpotch of applications and spreadsheets to furnish their monthly board reports and relevant data is scattered widely through the organisation. It is clear that the OFR requires a more co-ordinated and consistent approach underpinned by regular and repeatable processes.

Reminder of the regulations The Companies Act 1985 spells out the objectives and legal requirements of the OFR but detailed guidance on its preparation is contained in Reporting Standard 1 (RS1) prepared by the Accounting Standards Board. The mandatory OFR came into effect for all companies whose year ends commence on or after the 1st April 2005. From 2006, the DTI will impose tough penalties - ultimately, unlimited fines - for directors personally who fail to comply.

Content should include

(a) the development and performance of the business of the company during the financial year,
(b) the position of the company at the end of the year,
(c) the main trends and factors underlying the development, performance and position of the business of the company during the financial year, and
(d) the main trends and factors which are likely to affect the company’s future development, performance and position, prepared so as to assist the members of the company to assess the strategies adopted by the company and the potential for those strategies to succeed.

Key issues facing IRO’s include the requirement to set out strategic plans and prospects in a realistic manner. How can this be done without assisting the company’s competition? Also, as companies can only measure and report on what is actually done - not on where it might wish to be - descriptions of strategy and prospects in the context of market trends and risks will need based on solid ground to satisfy investors and analysts.

Policies and processes to ensure effective and fair treatment of people will need to be in place and measurable.

Socially responsible behaviour - from ethical principles including the supply chain, and community practices - will be high on many agendas. But if accountability and reporting procedures are not in place, there will be little on which to report.

Reputational risk – as with any form of risk – requires measurability across all areas of the business, and few outside the oil industry have made progress. Understanding the reputational impact of the core business is a long list, from levels of compliance through pressure group interest, to stakeholder opinion audits.

And finally, whilst these requirements impact UK listed companies at the moment, the impact and uptake of OFR is being carefully watched on the other side of the Atlantic. A recent NIRI chapter meeting, discussing the “poor quality” – per the SEC – of Management Discussion and Analysis, was told that unless improvements were seen, an OFR style regime would be considered.