An OFR You Can't Refuse: Recent Initiatives to Modernise Company Law Should Give Management Accountants a Wider Role in Financial Reporting. Jim Metcalf Explains Why the Government's Proposals for the Operating and Financial Review in Annual Reports Might Lead to the Publication of Some Really Useful Information. (Finance: Reporting)

By Metcalf, Jim | Financial Management (UK), November 2002 | Go to article overview

An OFR You Can't Refuse: Recent Initiatives to Modernise Company Law Should Give Management Accountants a Wider Role in Financial Reporting. Jim Metcalf Explains Why the Government's Proposals for the Operating and Financial Review in Annual Reports Might Lead to the Publication of Some Really Useful Information. (Finance: Reporting)


Metcalf, Jim, Financial Management (UK)


When the company law review steering group delivered its final report to the DTI in July last year, it was the culmination of a comprehensive--and long-awaited--analysis of UK company law. This report formed the basis of the government's Modernising Company Law white paper, which was published 12 months later. The paper is a consultation document itself, of course, with comments invited until 29 November.

Company law was overdue for reform, so this review has been widely welcomed. Over a three-year period it covered many areas of the legislation and published eight major intermediate reports and a two-volume final report. The section covering the operating and financial review (OFR) is of particular interest to management accountants and has been adopted almost unchanged in the white paper.

The OFR was introduced in July 1993 in a non-mandatory statement from the Accounting Standards Board (ASB). The board hoped that, because compliance was voluntary, companies would follow the spirit of the statement and make useful disclosures that would help investors to understand the most important financial and operating issues. This has proved to be a qualified success: nearly all major companies now produce either an OFR or a financial review that pays lip-service to the guidance, but compliance has been weak in the very areas that should be covered in detail--eg, issues affecting the future performance of the business.

The ASB issued an exposure draft of a revised statement in June. This was a routine update, not specifically in response to the steering group's proposals. It did not alter the original approach, but introduced principles that companies should apply when preparing an OFR and widened the definition of the words "business performance" and "investment". The text was updated and clarified in harmony with the steering group's proposals.

The steering group's final report proposes that the OFR should:

* be flexible and capable of development;

* incorporate some mandatory items and some items to be included only if the directors think they are material;

* include a "safe harbour" provision exempting reporting and auditing from liability in certain areas--eg, forward-looking statements--to encourage candid reporting;

* incorporate material currently contained in the directors' report, which would no longer be mandatory.

The detailed recommendations for the framework are divided into "mandatory content" and "content `required to the extent'" (see panel, right). The proposals have been largely adopted in the white paper, except for the "safe harbour" suggestion.

The steering group's proposals for the content of the OFR are evolutionary rather than revolutionary. Of the mandatory items, two were part of the 1993 ASB statement and the third, "objectives and drivers", was already being covered in the better reports. The other items, of which only the obligation to comment on relationships is new, draw together and sharpen up existing requirements.

But the main immediate effect of the proposals is that compliance will be enforced. Company law will mandate the form of the report and the content will be monitored by means of an audit review, evidenced by a statement from the auditor, to be published in the annual report.

The white paper describes the government's intention to develop the ASB into a standards board with powers to make detailed rules on the OFR and other areas, alongside its existing powers on financial statements. On the compliance side, a successor body to the financial reporting review panel will have its existing powers of enforcement over financial statements extended to cover the OFR, among other documents.

Under the new requirements we can expect to see more comprehensive details on business drivers and on factors affecting future performance. Both these issues are at the core of the management accounting role in business, and experienced management accountants will need to be involved in both preparation and audit review. …

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An OFR You Can't Refuse: Recent Initiatives to Modernise Company Law Should Give Management Accountants a Wider Role in Financial Reporting. Jim Metcalf Explains Why the Government's Proposals for the Operating and Financial Review in Annual Reports Might Lead to the Publication of Some Really Useful Information. (Finance: Reporting)
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