THERE is unanimous agreement among users of financial accounts, from pension fund managers to city analysts and corporate finance dealmakers, that when it comes to information about companies, more information is better than less.
In particular, there is long-standing dissatisfaction with the statutory report and accounts. These are seen as a historical snapshot of where the company has been, but are regarded as an unsatisfactory indication of where it is going. For this reaso
n, by late 2004 the government leaned towards the idea of introducing a mandatory additional reporting obligation on public companies. Called the Operating and Financial Review, or OFR, it was a forward-looking, strategic position statement on the company's reading of its markets and its intentions for the year ahead and even further out.
The idea was welcomed by many users of financial information, but slammed by the Confederation of British Industry as imposing yet further costs on the UK's business sector, making it less competitive with other countries that were not planning to introduce new reporting requirements. There were also concerns about how such information would be audited and about the risks to companies of making forward statements in an uncertain world.
However, it was also seen by many companies as a chance to differentiate themselves by being more open and by reporting more meaningfully to their stakeholders.
For this reason there were mixed feelings when the government did an about turn in mid-2005 and announced that it had decided not to make the OFR compulsory. Instead, it said, it would ask companies to add a business review section to their existing accounts. How this would differ from the OFR was not clear, but the general idea was that it would be less onerous in reporting terms.
In many ways this has left the situation in an unsatisfactory state. It doesn't help to define the content of the business review and it does nothing useful to mitigate the risks on firms that make forward statements.
There is plenty of evidence to show that shareholders and investors benefit when the company not only sets out its strategy, but also provides a rich context within which its performance on that strategy, and the key risks the company faces, can be evaluated.
The primary reason why firms refrain from doing this is not cost, since one could argue that a cost benefit analysis that could show money spent informing and communicating with the market is money well spent. The reason for not embracing the concept of the OFR is fear. No company wants to give hostages to fortune and find itself being sued by investors at a later date, when its predictions turn out to have been wrong.
As Mark Harwood, an audit partner at Baker Tilly explains, the position of directors as regards their liability for voluntary forward-looking statements is far from clear.
"We seem to be in a paradoxical position where directors have protection if they stay within the strict disclosure regime, so long as they are not negligent or deliberately set out to mislead. But they are liable for forward-looking statements made voluntarily. That is absurd and the government has suggested that it will introduce legislation to protect directors with respect to forward-looking statements."
However, there is no clear indication of when the government might do so, and Baker Tilly's advice to clients is to not introduce OFR-style reporting until the position is clarified.
David Phillips, head of corporate reporting at PricewaterhouseCoopers (PWC), argues that companies overplay the additional workload and the costs associated with OFR-style reporting. In fact, he argues, PWC research shows that companies who go in for OFR reporting tend to find that they benefit from greater market understanding of the company's longer term challenges and opportunities.
"We have done a lot of work on what base information investors need to make decisions. What they want is not so much the financial outputs in the annual report and accounts, as the OFR, which helps explain how these financial outputs are achieved," he says.
The full article contains 703 words and appears in The Scotsman newspaper.
