UK Firms Urged Not To Underestimate New Corporate Reporting Standards

by Jason Gorringe, Tax-News.com, London

16 May 2005

Quoted companies should not look at the Government’s new initiative to improve corporate reporting as a simple amendment to existing practice, says PricewaterhouseCoopers.

In reality the new Operating and Financial Review (OFR) reporting standard announced by the Accounting Standards Board (ASB) last week will extend the scope, transparency and content of corporate reporting and challenge the quality, reliability and availability of information provided by companies, says PwC.

The new OFR changes reporting in a number of key areas:

• For the first time an OFR will be mandatory for all quoted companies.
• It demands greater transparency on the information needed by investors to assess the strategies adopted by a company and the potential for those strategies to succeed.
• All of the risks, resources and relationships important to successfully implement strategies and achieve goals and objectives need to be explained.
• It requires not only historical analysis, but an explanation of the main trends and factors likely to impact future performance.
• Directors will be required to exercise judgment to determine what information is important – a mere checklist will not suffice.
• Directors will be required for the first time to communicate Key Performance Indicators (KPIs) and other performance indicators, both financial and non-financial, that they use to manage their business, consistently year on year

“PricewaterhouseCoopers has been supportive of a statutory OFR from the outset and so welcomes the ASB's first Reporting Standard (RS1)," commented David Phillips, the firm's Value Reporting leader.

He added:

"We see it as a crucial advancement in the development of the corporate reporting model. All our research suggests that the existing financial reporting model fails to meet the needs of its primary users, namely investors. This research has shown that the information management and investors value most is largely contextual and non-financial in nature - precisely the information required by the standard.

“There is also welcome flexibility within the standard. It is principles-based, providing a framework for disclosure that will allow directors the flexibility to tailor it to the particular circumstances of their business rather than working from a prescribed checklist. However, the standard is clear that the information reported within the OFR should be that which directors actually use to manage their business. The onus will therefore be on directors to determine what information is important and how it should be reported. As a result we would encourage directors to take the first steps.

“The OFR provides a mechanism to help companies create a more commercially attractive and differentiated picture of the business, which in turn can lead to better investor understanding and improved stakeholder relationships. But if companies get it wrong, through inadequate planning and execution, they risk damaging their reputation among stakeholders, their market rating and ultimately their competitive positioning.

“At a macro level, this is an important crossroads in the development of a European governance reporting model; we believe the OFR is a key piece of the jigsaw. It will be interesting to see how the UK framework serves as a model for other countries to follow.”

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