OFR Special Reports - Wise words or waffle?

Introducing a five-page special report, Chris Quick considers the purpose of the new operating and financial review.

Arguing against the operating and financial review (OFR) is like arguing against motherhood and apple pie, according to John Pierce, chief executive of the Quoted Companies Alliance.

The quote, gleaned in our research on how the business world feels about OFRs (see p32), follows trade secretary Patricia Hewitt's announcement last month that the government intends to make them compulsory for all quoted companies starting with financial years beginning in 2005.

And it neatly sums up the challenge its critics face. Producing an OFR - Hewitt's definition is given in the box below - in many ways sounds like an eminently reasonable thing to make companies do.

There are two main aims of an OFR - one hard and one soft. The harder business-orientated one is to make directors tell shareholders more about the current situation of the company and its future prospects. In part, the aim here is to compensate for the fact that annual reports are backward-looking and fail to deal with many of the intangible factors, such as staff skills, which are important to modern businesses.

The more touchy-feely aim is to make directors address their company's approach towards its staff, the environment, the community and so forth.

It is hard to argue that these intentions are anything but laudable.

The information will be of use to investors and other stakeholders. And the fact that the OFR is compulsory will hopefully help expose situations where management is weak, unfocused or even dishonest.

Critics, including Pierce, have therefore focused on the extra work and costs producing an OFR will load on companies at a time when they are already grappling with the new Combined Code and International Accounting Standards, and on the risk that OFRs could turn into meaningless waffle or pointless box-ticking exercises.

Interested parties will be raising these and other points highlighted on the following pages as they pore over the draft OFR regulations issued as a consultative document by the Department of Trade and Industry. The closing date for responses is 6 August.

Expectations gap

There is another concern. Investors should of course be given as much useful information about a company as they can reasonably digest, but there is a risk that they could come to rely on an OFR too much.

Guidance for directors (see box on p30) was published with the draft OFR regulations, which includes the sentence: 'The OFR should contain all the information necessary to enable members to assess the company's strategies and the potential for them to succeed.'

This is certainly an ambitious statement. Those investors relying totally on a company's OFR on which to base decisions would be regarded by many as rather foolhardy.

Brian Singleton Green, ICAEW corporate reporting manager, comments: 'Few of those involved in business reporting believe that this will be possible.

Most think that investors and others need information from a variety of sources to form judgments about a business and its prospects.

'The worry for those in business is that excessive expectations of what an OFR can achieve will lead to both a proliferation of pointless disclosures and, ultimately, liability problems.'

Patricia Hewitt explains the new OFR

The OFR is a narrative report by quoted companies that will be made annually to shareholders, setting out the principal drivers of a company's performance both in the past and in the future. It will cover the issues traditionally seen as key to a company's performance - an account of its business, performance and strategy, a review of developments over the past year, and a description of the main risks. But it will also cover prospects for the future and, where necessary, information about the environment, employees, customers or social and community issues where that information is important for an assessment of the company.

Source: DTI Draft Regulations on the Operating and Financial Review and Directors' Report.

A Consultative Document.

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