Reporting to the DTI

The DTI wants organisations to reveal more in their annual reports. Charlie Hoult considers the implications of the Operating and Financial Review

Design Week is probably the last place you’d expect discussion of the Accounting Standards Board, but from 1 April a whole new set of legislation comes into force which will require a different approach to Annual Reports. The legislation is contained in the Department of Trade and Industry’s Operating and Financial Review. And the changes will affect the emphasis of brand and design in financial review documents – not just public companies, but charities, educational establishments and public bodies.

OFR is less about red tape and more about broadening the basis of reporting. The rules aren’t prescriptive in terms of formats and factual requirements, so the latitude is an opportunity for design groups to persuade clients to push the boundaries.

Many companies already report a fair bit of the ‘stuff’ that OFR seeks to draw out – but the overall shape could be radically shifted by this new directive. This shift is likely to feed across from public company reporting to public sector bodies that produce annual reports, sustainability audits and general corporate social responsibility commentaries.

In the typical ‘velvet glove’ speak of bureaucrats, this new initiative is intended to improve the field, where ‘content and rigour of reporting varies widely’. After the recent stock market crash and outbreak of New Labour stakeholder advocacy, the DTI is hoping to get ‘a balanced and comprehensive analysis’ of business activity with the OFR.

The DTI is suggesting that organisations reveal more information, in a bid to build up public trust – and help facilitate clearer management thinking about their role. Perhaps regulators are presuming that if it’s not published, it’s not considered – so they want to see more in black and white.

Several new areas of importance

• Prior to OFR, an annual report’s purpose was to review the performance of the prior year. OFR stresses the need to extrapolate this as a guide to the future by asking companies to explore ‘the main trends and factors underlying the development, performance and position of the entity during the year which are likely to affect their future’

• OFR is also specific in encouraging reporting of CSR issues for inclusion in reporting. Topics to consider relate to environmental, employment, social and community policies as they make an impact on an organisation and its wider community.

• There is a suggestion that businesses include key performance indicators that the business uses to evaluate its effectiveness. These are often the most telling statistics of how the business model works and need to be certified by auditors as genuinely linked to underlying business strategy, rather than highlighted for marketing spin.

What impact will this have on design?

OFR says it needs to be a separate, stand-alone report in the Annual Report. Will this mean it becomes central to the business write-up or something to lose in the dense figures section? Will companies think the OFR does indeed merit a separate document, as is the case with some of our clients?

We believe that the OFR is likely to need coverage high in the running order of an annual report. Especially as, once the issues are covered, they don’t need to be duplicated elsewhere. This potentially means a rejig in the brief to the chairman and chief executive for their reports, which will need to add to the colour and personality of the document. The OFR can cover the hard data and KPIs on performance and prospects.

On KPIs, the question here is whether to use established financial metrics or to start to publish more indices? Many of our clients already do point to key data that makes an impact on their business models – and we have an opportunity to show our creativity in giving these the best light. However, given the stipulations, you can imagine that the legislation may scare people off holding wider discussion in fear of the compliance backlashes. The regulators can often get people going in precisely the wrong direction from their ardent hopes!

The CSR issues are often the highest whims of political correctness or business hype – as well as being fundamental best practice to the core stakeholders. So, we are looking to ensure that they are covered off to put an organisation’s case in best light – again, why ghetto-ise these in the statistical section, if you can address the issues head-on and show you have nothing to hide?

However, with the regulators looking at the OFR as another designated section (such as the Directors’ Remuneration report or Corporate Governance section), we may see it less as strategic narrative and more as a ‘box ticking exercise’. Many organisations may prefer the more formal setting among the statistics.

As ever, a positive frame of mind, a robust view of buried skeletons in the closet and an experienced hand will be required to navigate the gamesmanship of the regulators.

Operating and Financial Review reports OFRs will be introduced from 1 April 2005 They will be a stand-alone report inside existing annual reports Organisations will be required to assess the main trends that are likely to affect their future regarding: their development, performance and position during the financial year

Charlie Hall is chief executive of Loewy Group

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