FSN: Chancellor's OFR U-turn puts EU Directive back on corporate agenda

Chancellor's OFR U-turn puts EU Directive back on corporate agenda

5th December 2005
Gordon Brown's sudden and surprising decision to backtrack on the OFR still leaves all large and medium sized companies with the need to comply with the EU Accounts Modernisation Directive which came into effect for year ends commencing after the first of January 2005. Nigel Youell, Marketing Director, Hyperion, told FSN, "When the dust has settled on the OFR, companies will begin to realise that most of the requirements remain."

Whilst all organisations wish to avoid the unnecessary burden of compliance and reporting, the way in which Chancellor Gordon Brown abandoned the OFR has left many commentators, industry groups and professional bodies dismayed and annoyed. Afterall, the consultation period around the introduction of the mandatory OFR had been very lengthy. The DTI has spent approximately 2 years persuading industry and professional bodies of the need for more complete, accurate and transparent disclosures to protect the interests of shareholders and most recently, again after extensive consultation, Defra had released comprehensive guidelines on the reporting of environmental Key Performance Indicators. In addition, the Accounting Standards Board (ASB) put months of effort in parallel into constructing a completely new reporting standard (RS1) to be used in conjunction with the amended 1985 Companies Act. Ernst & Young is just one of the parties that has pointed to the huge waste of time, estimating that around 30 to 40 percent of quoted companies were already conducting trial runs of OFRs before they were due to go live next year.

There is no doubt that the OFR was a uniquely British interpretation of the EU Directives (an amalgamation of the 4 th and 7 th Directives as adjusted) and went further than the strict requirements laid down for member states - the so called gold plating of EU directives. Therefore, it follows that the removal of the thin layer of gold plate exposes the raw EC Directive.

Robert Hodgkinson, technical director at the Institute of Chartered Accountants (ICAEW) told FSN, "I was shocked by the announcement and this move is going to require a great deal of reflection. For example we are going to have to consider the realignment of the reporting standard to the EU Accounts Modernisation Directive. This sudden decision has created a lot of uncertainty and the need for re-engineering the work that has been completed."

Nigel Youell, Marketing Director, Hyperion, told FSN, "We are in the business of promoting and enabling best practice reporting and like many of our large quoted customers we have been preparing for the OFR for several months and providing thought leadership in this area. We are very surprised by the suddenness of the government's U-turn on the OFR, particularly as we have shown that the requirements are not too difficult to implement with modern day performance management systems and processes."

"We are concerned that the OFR debate has masked the current requirement to consider the reporting of financial and non-financial KPI's as part of the EC Accounts Modernisation Directive, which ironically affects all large companies in EC member States and not just quoted companies. When the dust has settled on the OFR, companies will begin to realise that most of the requirements remain."

Richard Mattison, Head of Strategic Planning at Trucost plc, the environmental consultancy that advised the Defra on the interpretation of the environmental aspects of the OFR told FSN of the widespread confusion created by the abandonment of the OFR with many organisations not realising that they still have to comply with the EU Accounts Modernisation Directive.

He told FSN, "We were very surprised by the Chancellor's decision, particularly as most people thought that the OFR and the ASB's standard struck the right balance. However we have had a large number of companies asking us about the implications of scraping of the legislation, not realising the EC Directives still apply."

"We have done a point by point comparison of the OFR and EU Directives and found that companies still need to give a balanced and comprehensive analysis of their performance during the financial year and at the end of the year. They are also required, where necessary, to provide an analysis using Key Performance Indicators, including non financial KPIs relating to environmental and employee matters."

"In effect, the legislation without the OFR is almost as weighty, the key difference is that there is no need to report on current trends and factors affecting future performance," he added.

If the Chancellor's motive in reversing the OFR was intended to remove red-tape and reduce the compliance burden then it has had little practical effect. It has caused a large number of organisations and companies to waste resources, effort and money at a time when they can least afford it. More seriously, it has undermined well intentioned efforts to improve the transparency of reporting to shareholders and a wide range of other stakeholders.

For all of the ambiguity surrounding the OFR it was widely regarded as a step forward and an area in which the UK had taken the lead. For many, including the Financial Reporting Council, (FRC), the Reporting Standard (RS1) remains the most up to date record of reporting best practice which some companies will undoubtedly follow voluntarily, irrespective of the statutory position. Far from bringing the OFR debate to a close, the Chancellor's rash decision has stoked a debate that will rage for some months to come.

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