15 December 2005
Latest results of a MORI survey commissioned by the Chartered Institute of Management Accountants (CIMA) show a sharp contrast between Chancellor Gordon Brown’s controversial announcement to abolish the mandatory Operating and Financial Review (OFR) and the readiness of business to embrace it.
According to the ‘CIMA OFR business readiness survey’, over 80 per cent of listed companies required to produce a mandatory OFR in Spring 2006 (April-June) were either fairly or fully prepared with only three per cent not prepared. Over two thirds (71%) of companies were at least fairly well prepared, regardless of when they were required to report under the new Standard. Importantly, more than half (54%) of respondents see the OFR as beneficial for their investor communications. However, two-thirds are still deciding on some or all of which key performance indicators (KPIs) to report on (67%) and their definition (68%).
The results of the survey come as the Department of Trade and Industry (DTI) is consulting on the future of the OFR, following the Chancellor’s surprise announcement to abolish it. It was a decision which surprised and disappointed many supporters of the OFR, including CIMA.
Charles Tilley, Chief Executive, CIMA, said:
“It is very disappointing that the opportunity to bring all companies into line with best practice has potentially been lost. Our survey reveals encouraging signs that a lot of good preparation has already taken place in the majority of listed companies to meet the requirements and the spirit of the OFR. However over two thirds of the companies we surveyed have not decided which KPIs to report on, or their definition. This is a missed opportunity to improve the quality of management information available to all boards, and in so doing, make a step change in the quality of business reporting to investors.”
He added:
“If the statutory OFR were abolished, we still have the Business Review disclosures required by the European Union Accounts Modernisation Directive. But we will lose the emphasis on strategy; the forward-looking orientation of the review; and the transparent definitions of KPIs which enable sector comparisons.’
“The benefits of an OFR are unquestionable. Set against a DTi estimate of £33 million savings, the OFR would only need to produce a tiny reduction in the cost of capital on a UK stock market value of £1.3 trillion, to justify its mandatory introduction .“
CIMA is encouraging all listed companies to follow the best practice guidance set by the Accounting Standards Board (ASB). CIMA will also be considering other options to promote and support best practice. These options include a possible recommendation that the OFR becomes a requirement of the Combined Code. There is also the opportunity to revisit the issue of director liability and explore options that would enable the government to create something akin to a ‘safe harbour’.
The ‘CIMA OFR business readiness survey’ was conducted by MORI and based on telephone interviews with senior finance executives in 200 UK listed companies between 4 October and 10 November 2005. 54 per cent of them see the OFR as beneficial for their investor communications, giving them more information, understanding and clarity. Over 40 per cent of listed companies have previously produced an OFR and over 70 per cent feel at least fairly prepared to meet the OFR’s requirements.
An Executive Summary and main findings of the survey are available in at www.cimaglobal.com/ofrmorisurvey
Lynda Hardy Maskell
Chief Press Officer, CIMA
+44 (0) 20 8849 2347
lynda.hardymaskell@cimaglobal.com
1. CIMA (the Chartered Institute of Management Accountants) is the only international accountancy body with a sole focus on business. It is a world leading professional institute that offers an internationally recognised qualification in management accountancy, focusing on accounting in business, in both the private and public sectors. CIMA is the voice of over 85,000 students and 65,000 members in 158 countries and is responsible for the education and training of management accountants who work in industry, commerce and not-for-profit and has more members in the public sector than any other UK based body. CIMA prides itself on the commercial relevance of its syllabus, which is in tune with the activities of high performance organisations, and evolves continually to reflect the latest developments in global business. It is committed to upholding the highest ethical and professional standards of members and students, and to maintaining public confidence in management accountancy. For more information about CIMA, please visit http://www.cimaglobal.com/
2. Reporting Standard 1: Operating and Financial Review was published by the ASB in May 2005. It is currently mandatory for all UK quoted companies, and any other entities which purport to prepare an OFR. Compliance with RS1 constitutes compliance with the requirements of the Companies Act 1985 (Operating and Financial Review and Directors Report etc.) Regulations 2005. The ASB Press Notice can be read here http://www.frc.org.uk/asb/press/pub0793.html. RS 1 replaced the previous ASB guidance, issued in 1993 and updated in 2003, which was not a standard and which had "persuasive" rather than mandatory force. The FRC (Financial Reporting Council) issued a statement on 29 November, advising preparers that regardless of the uncertainty about the ultimate status of RS1, companies should follow its requirements since it is the best source of guidance. The FRC Press Notice can be read here http://www.frc.org.uk/press/pub0974.html.
.
