UK Firms Warned To Give Plausible Performance Indicators

by Robin Pilgrim, LawAndTax-News.com, London

13 January 2005

The new Operating and Financial Review (OFR) Regulation, which implements aspects of the EU Accounting Rules Modernisation Directive and will come into effect for accounting periods commencing 1 April 2005, is set to have a significant impact on the way in which companies in the UK provide forward-looking information, according to a Lexis-Nexis report.

Speaking to the news service this week, capital markets partner with Weil, Gotshal and Manges, James Cole explained why this will be the case:

"The new law will formalise what has been best practice for the vast majority of large public quoted companies in the UK for some time under voluntary arrangements. The major impact of the OFR is to create a criminal offence for directors for knowingly or recklessly approving the contents of an erroneous OFR, which will lead to the introduction of formal disclosure systems and procedures for companies subject to its provisions,” he revealed.

According to the report, the key problem for directors engaged in preparing OFRs will be trying to decide how future events can influence key performance indicators or other elements of the OFR. Under the new rules, management must disclose future events if they believe in good faith that they are likely to impact the business.

The news service explained that:

"This was a sensitive issue in the consultation process for the Regulations because unlike the US, which has a safe harbour for liability for statements made by management in certain circumstances, there will be no such protection in the UK. Some critics point out that this absence of a “forward looking statements” safe harbour will mean that companies will tend towards bland, boilerplate information that will be useless to shareholders in an attempt to limit liability for these portions of an OFR."

However, it added that: "The Government says it will issue guidance to encourage directors to be candid about the distinction between verifiable data and that based on good faith judgements, with the latter to be treated by investors with more caution."

The later implementation date for the OFR Regulation (which was initially set to come into force on January 1), is reportedly due to the rushed consultation schedule on the matter.

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