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action urged to clear up chaotic post-OFR scene

February 2006

Confusion is growing in the UK as to how companies should report on their forward-looking social and environmental risks, now that the government is scrapping the requirement to produce an annual operating and financial review.

A group of 20 organizations has written to the trade and industry department urging ministers to take ‘provisional action ... to restore much-needed clarity in the reporting framework, especially as the financial year end ... is approaching.’ The group claims the chancellor of the exchequer’s decision to abolish the requirement ‘has left a policy vacuum which is likely to destabilize companies’ reporting efforts’. The Universities Superannuation Scheme, the Co-operative Insurance Society, Fortis Investments and RCM, a subsidiary of insurance company Allianz, are among signatories.

In mid-January the government repealed the regulation that would have brought in the OFR regime. It now intends to amend sections referring to it in the Company Law Reform Bill. In addition, it will bring forward measures in the bill requiring companies to produce annual ‘business reviews’ to meet the terms of the European Union Accounts Modernisation Directive. However, the government is still consulting on the shape of the business reviews and will not end that process until 15 February. The Department of Trade and Industry has said that the business review will be ‘less prescriptive’ than the OFR.

A recent survey by environmental research consultancy Trucost found that fewer than one in ten of the 161 company secretaries it questioned at listed UK companies had even heard of the EU directive.

Simon Thomas, chief executive of Trucost, said that, having expended so much energy publicizing the OFR, the government now had a ‘significant communications exercise’ on its hands to inform companies of their forthcoming obligations in this area.

There is more confusion about the status of Reporting Standard 1 (RS1) guidance that was drawn up by the Accounting Standards Board to support the OFR but which is now in limbo. The board has converted RS1 into a ‘statement of best practice’ on reporting, but has not tailored the document to take account of the EU directive’s requirements.

The signatories point out in their letter that as a result it is now ‘more difficult for companies to judge the necessary standard of reporting to meet their statutory obligations, and that the problem is particularly acute for companies with a financial year end of 31 March, whose reporting season is imminent’.

Additional uncertainty arises out of the judicial review proceedings initiated by Friends of the Earth in the High Court on the grounds that the government failed to consult on the abolition of the OFR.

In a move that further confuses the situation, the government has agreed an out of court deal to stop the judicial review proceedings. The deal, which involves paying Friends of the Earth's legal costs, means the government will begin new consultation on whether to include OFR provisions in the draft Company Law Reform Bill that is currently having going through the House of Lords. It will also consult on whether to introduce new OFR measures into law in the interim.




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