The operating and financial review: Richard Mallett addresses the key concerns of CIMA members about the new regulations and Richard Slynn considers the legal implications for directors.
| Author | Mallett, Richard |
| Position | Chartered Institute of Management Accountants |
CIMA strongly backs the introduction of mandatory operating and financial reviews (OFRs) for quoted UK companies, writes Richard Mallett. Despite this, the institute, along with other bodies, is concerned about the lack of a "safe harbour" in the regulations that amend the Companies Act 1985. It expressed this concern to the government in an earlier consultation and highlighted the liability risks arising from the wide scope of the requirements--particularly their emphasis on forward-looking information.
In response, the government decided that a safe harbour was not appropriate to the legal framework. It has published guidance which states that readers of the OFR should be warned that they ought to treat forward-looking statements with caution, although this guidance is clearly labelled as having "no legal force".
There is, therefore, a high risk of confusion over the requirements on, and exposure of, directors. Fear of legal liability could easily lead directors to be less candid in the forward-looking statements required by the OFR. It would be a great shame if the first crop of OFRs were prepared against a background of confusion and resulted in boilerplate statements that imparted little information to readers.
CIMA thought it would be helpful to obtain a legal opinion, so it asked Allen & Overy LLP to try to clarify matters. Its resulting opinion can be downloaded from the news section of www.cimaglobal.com. This was prepared solely for CIMA and, accordingly, neither Allen & Overy nor the institute accepts liability to any other person.
Directors of quoted companies are likely to be particularly concerned about their liability if a forecast is missed by a large margin or if an unanticipated risk significantly affects the business's value. Allen & Overy's advice to CIMA makes it clear that the real issue--in line with the Accounting Standards Board's Reporting Standard 1 (RS1)--is not whether forward-looking statements are ultimately accurate, but whether they were made in good faith, with due skill and care, and in appropriate terms.
A large number of management accountants in the 1,300 companies concerned will be involved in OFR preparation. In the context of the legal opinion, it is important that they:
* Alert directors to the need for, and help to establish, a considered and effective process for determining what information is included in the OFR to help directors exercise "due skill and care". This will also be evidence if the...
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