August 2005
Operating and Financial Review (OFR)
Using corporate environmental and health & safety management systems to accelerate compliance and increase competitive advantage.
In January 2005 the UK government published the final draft of the Regulations that requires mandatory reporting of an Operating and Financial Review (OFR) by all UK quoted companies. Not only are there criminal liabilities for not completing an OFR, there are fines for Directors who complete them without due care and skill, and potential civil liabilities for misrepresenting a company's future outlook and prospects.
The aim of the OFR is to provide transparency and accountability for a company's objectives and strategies, past performance and future prospects. However, in the longer term, widespread adoption of the process will increase global competitiveness and the prospects for a stable and sustainable UK economy.
Who must comply?
The Regulation will apply directly to approximately 1300 quoted UK companies (and their subsidiary undertakings), listed on the London, New York and Nasdaq stock exchanges. The Regulations will also apply to certain other quoted companies but not companies listed only on the Alternative Investment Market (AIM).
While many businesses will see the OFR as another regulatory burden, the reporting process is an enormous opportunity to improve corporate risk identification, management and mitigation. This in turn will force action and disclosure about the measures taken to control and mitigate those risks, which will then "drive a greater appreciation of their potential influence on business performance".
Clearly, smart money is on using the OFR as a tool for improving business performance. When looking to prepare an OFR, the most efficient and cost-effective means of accelerating the process is to ensure the process is information technology-based and integrated with existing information management systems. Considering that one of the core purposes of OFR reporting is disclosure of material non-financial risks, a solid foundation for OFR reporting will be existing enterprise-wide systems for managing key non-financial risks such environmental and health and safety management systems.
The review should include quantitative and qualitative information on a wide range of factors that may be relevant in order for shareholders and stakeholders to understand the business. As a compulsory report providing a balanced and comprehensive assessment of a company's position and prospects, the OFR is "increasingly becoming one of the key elements of corporate reporting".
Why was the OFR introduced?
Explicitly, compulsory OFR reporting was introduced to increase corporate transparency and accountability, in order to assist investors in assessing a company's strategies, the potential risks to them and thus their potential to succeed.
Consequently, while the long-term success of OFRs and corporate compliance with OFR Regulation will to some extent depend on the strength and breadth of the enforcement regime behind it, from the outset OFR Regulation has all necessary to make it a permanent, serious and significant component of the UK corporate compliance landscape.
If you require assistance to help get your management systems in shape for an OFR or would like more information on integrating systems for audits, contact Steve Stones on 024 7632 3260.
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