The New Operating & Financial Review
(OFR)
Over the
last ten years, reporting on environmental performance
has become almost commonplace for large international
companies. Leading companies are also increasingly
publishing reports on a broader range of social, economic,
and environmental issues—often referred to as
sustainable development reports, corporate citizenship
reports, or corporate responsibility reports. Whatever
they are called, they are part of the movement toward
greater corporate transparency, and toward making available
to shareholders and other stakeholders the information
they need to make informed decisions.
To date, these reports have been voluntary and based
on pressures coming from the marketplace. The result
is that, while leading companies tend to report, the
overall number of companies reporting is still relatively
small. The good performers tend to report. The poor performers
do not. And they are the ones who should be reporting.
Since reporting is voluntary, it often provides incomplete
information that is not comparable. And for some, the
value of the information is diluted because it comes,
in the most part, as non-verified, self declarations.
The
organisations that develop the guides and systems to
support voluntary reporting are aware of these issues.
The Global Reporting Initiative (GRI) is working tirelessly
to develop and promulgate standardized global reporting
systems. Organisations like AccountAbility have developed
complementary assurance systems for the verification
of reports. However, without mandatory reporting, there
is no way to compel organisations to report.
This is about to change. The United Kingdom will soon
have in place amendments to company law that will require
all UK listed companies, of which there are about 1300,
to file an Operating and Financial Review (OFR) in 2006
for the period beginning January 1, 2005. The UK Department
of Trade and Industry (DTI) released the draft regulations
for consultation in May of this year, with submissions
to be made by the end of the first week of August, 2004.
It is expected that the final regulation will be introduced
before Parliament before the end of the year. |
This article was published in the Summer 2004 issue
of Perspectives.
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The purpose of the OFR is to provide members (shareholders)
with the information they need to make informed decisions
by showing the main trends and factors underlying the development,
performance, and position of a company now and in the future.
This includes employee issues, environmental matters, and
social and community issues as well as showing the objectives
and strategies in place to manage them, the resources available,
the principle risks and uncertainties faced, and the capital
structure. Similar to the Sarbanes-Oxley law in the United
States, the OFR must include an analysis of both past and
future issues and performance.
The OFR will not replace voluntary reporting but may rely
on it and reference it, as long as it meets the criteria
of the new regulation. An important thing to understand about
the new OFR is that it is principles-based, not rules-based.
That is, it does not prescribe what must be reported.
It is made very clear that a company does not have to report
on everything. This places an onus on the company to select
what is 'relevant' to report. It also places the onus on
the company to then be able to demonstrate the validity of
process for selection. The Directors of a company must sign-off
on the selection and the selection process and are held accountable
for the report. The whole process also will be subject to
external audit.
There are currently no standards in place for the OFR;
however, the UK government has decided that the Accounting
Standards Board (ASB) should develop some. The ASB has appointed
an advisory committee, and intends to issue an exposure draft
of OFR standards in the second half of 2004, to be finalized
in 2005.
While the proposed OFR has had some mixed reviews, many
see it as a means to improve relations among companies, their
shareholders, and other stakeholders. It will also provide
investment managers with consistent and comparable information
for making decisions. Some also are suggesting that it will
bring much needed rigor to the management of environmental
and social issues.
The OFR represents a significant challenge to those companies
that must now comply with its reporting requirements. Very
quickly, companies will need to fully understand what the
OFR means for them. They will have to establish or update
their internal systems and processes to manage compliance—as
well as internal and external audit procedures. Many companies
may not be currently equipped to do this. ICF International
has followed the development of the OFR closely and can provide
up-to-date briefings. The firm has developed a system to
select and evaluate the 'relevant' or material trends and
factors that must be managed and reported on, and can help
to develop or update appropriate systems for managing the
delivery of the OFR.
There is little time to prepare for this new regulation.
Companies, especially those that have never published environmental
or corporate responsibility reports, may find it onerous.
ICF International can help make compliance more efficient, cost
effective, and beneficial to these organisations.
Learn more about ICF International's environmental
management capabilities.
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