24 February 2005
Charles Tilley, CIMA's Chief Executive comments:
"CIMA are very supportive of the proposed ASB standard. We share the Government's view that shareholders need good information about the main drivers of a company's performance, so they can make informed investment decisions. From the company's perspective, it's easy to assume that new regulations merely impose additional costs on industry, but robust narrative reporting brings them real benefits. The effect of making the top level of management information of the company visible to the public will be to encourage enhancements to the information provided to the Board, consequently contributing to the company's improved performance. In addition, research has shown that companies which make good disclosures benefit from reduced costs of capital."
The main points in CIMA's response were:
Flexibility - CIMA are very supportive of the principles-based approach to the OFR, which allows Directors the flexibility to order their narrative, and requires them to focus on matters relevant to the interests of investors. The consequence of this approach is that Directors are required to make conscious decisions about presentation, relevance, materiality, and structure of OFR-type disclosures. These decisions may make it harder for both the auditor and user, since it can mean that OFR type information is located in various places within the reporting package. But such flexibility is worth it - the alternative checklist or boilerplate approach may appear superficially more attractive, but it can't approach the quality of disclosure of a candid and thoughtful OFR.
Focus - Published financial statements have got progressively longer over the years, often to the detriment of effective communication with shareholders. CIMA are concerned that the requirements to include the information to enable investors to understand every KPI and other measure could add significant amounts of text to the OFR. We feel that such information should be presented elsewhere, for example on the company's website. We also advocate the use of tables, graphs and other visual formats to present data and relationships effectively and economically. We recommend an increased emphasis on the principle that the OFR should focus on material matters, rather than try to be comprehensive, because of the danger of interpreting comprehensive to mean all-inclusive.
KPIs. In theory, having a range of performance measures focussed on significant factors will be a valuable reporting tool to make comparisons over time, or between entities. In practice, meaningful measures can be relatively dynamic, being recalibrated more often than traditional accounting measures. And deriving commonly accepted standard measures for industry sectors will be a real challenge. Any recommendations in this area, including the developmental suggestions made by CIMA in our response, have to be tempered by practicality.
Assurance – The new regulations require auditors to state whether the information given in the OFR is consistent with the company's accounts, and with other matters which have come to their attention during the audit. However, the narrative material could be located in various sections of the reporting package. CIMA feel that there may still be significant potential for confusion from users of the financial statements, about the status of information in different sections - about what has been audited, or subject to another kind of review, and what the nature of that scrutiny was. Although not directly addressed in this consultation, other relevant issues on which CIMA have views are:
Directors' Liability - CIMA took the opportunity to reiterate in its letter to the ASB, our concern about the lack of such a 'safe harbour' provision to protect Directors from liability in respect of forward-looking statements. The OFR is to be the means by which Directors present their view of the business, and it achieves this by allowing flexibility and requiring focus. Yet for Directors to report about risks, risk management, claims, projections or forecasts in a meaningful and confident way, they need to be protected from the consequences of being sued if, quite reasonably, events happen not as they had been forecast in good faith.
Implementation costs - CIMA were pleased to note that the DTI have adopted a pragmatic approach to the publication and distribution costs of the OFR, and amended their original proposal that the OFR should be sent in full even to those shareholders who request summary financial statements (SFS). Instead, these shareholders are advised of the availability of the OFR, a hard copy of which they can request, and an on-line version is to be published on the company's website.
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