IR and PR officers involved in the annual reporting process look set to have a tough time in the coming year. As if moving towards International Financial Accounting Standards was not enough, the Government is intent on introducing a statutory Operating & Financial Review (OFR) for the 2005 reporting year.
Of course, many companies already include OFRs in their annual reports.
First recommended by the Accounting Standards Board in 1993, they have become a standard for providing shareholders with a narrative of the drivers behind a company's performance.
Beyond financial reporting
But the Government's latest proposals go a whole lot further. They significantly widen the content of the OFR. This is no longer simply a commentary on past performance: the Government wants to see companies talking in detail about the future, the challenges to their businesses, how they manage risk, their relationships with stakeholders, and a whole lot more. Non-financial aspects are key.
The proposals seek to make OFRs a statutory requirement - previously, it was only a recommendation, and many companies, particularly outside of the FTSE 100, have not yet put it in place.
Finally, these proposals would require an effective audit of the OFR, with auditors required to express a positive opinion as to whether they are consistent with accounts.
In essence, the OFR will be a director's overview of the company that will give shareholders and potential investors key information on strategy.
So will this be a communications nightmare? Fishburn Hedges head of corporate responsibility Martin Le Jeune says companies should regard it as an opportunity. The challenge for many will lie in bringing non-financial reporting systems up to a par with, say, financial and environmental structures.
Alastair Eperon set up a business - OFR Solutions - on the back of the Government's proposals, specifically to help guide companies through the quagmire ahead. 'Companies will have to show how they are managing their impacts,' he says. 'They'll need data on areas such as environmental performance, ethical sourcing and how they manage reputational risk.'
For better or worse
Not all companies view it like that, however. Some have begun to moot the possibility of using the OFR as a replacement corporate social responsibility report - in effect, using it as an opportunity to cut back on their reporting commitments rather than an expansion. Kate Crawford, CSR account director at creative agency Flag, warns against that route.
'There isn't necessarily a direct link between all the information required for a 40-page CSR report and that needed for the OFR,' she says, pointing out that detailed information on, for instance, environmental impacts, is probably best left out of reports.
So who is going to handle this type of reporting? Is it really the job for investor relations specialists, or does it fall more naturally into the laps of those in charge of risk issues such as health and safety?
After all, companies are going to have to put their necks on the line and make it clear how various factors might affect their future plans.
'Lots of companies have done good historical reporting on business performance,' says corporate comms agency Merchant MD Robert Moser. 'But relatively few have talked about their future prospects and how they manage all the factors surrounding those prospects. The new OFR will mean they have to talk about their perceptions of corporate reputation, brand equity, intellectual capital and more. The vast majority of companies don't even go near those subjects.'
Whatever the answer, PROs will have a role to play as the reputational element becomes more clear.
Companies outside of the FTSE 100 that already give detailed coverage to a wide range of non-financial measures in their annual reports are few and far between. One company that has done so over recent years is Peterborough-based food producer and marketer Geest.
The latest annual report is geared towards informing readers why Geest is focused on its particular markets, what opportunities it sees for growth in those markets, and a clear discussion of future prospects.
'One of the things we've really developed in recent years is talking about the risks within the business,' says group communications manager Paula Cooper. 'Those risks are also opportunities if you manage them correctly.
It's quite a good way of providing a balanced view of the business.
'There's no point in just giving the good side of things. A balanced view helps current and potential investors to make the right decisions.'
Cooper says that a wide range of audiences are taken into account when compiling the report - from shareholders and government agencies to customers, suppliers and employees.
She says the approach puts Geest in a good position for when the Government's OFR legislation comes into force. Her main concern? That the need for a final sign-off from auditors for this type of content might lead companies to be overly cautious in what they are prepared to say.
Directories publisher Yell is in its first full year of reporting since becoming a listed company last July. Prior to that, it was owned by a number of venture capital companies following its sale by BT in 2001.
Yell strategic planning manager Nick Saunders is responsible for its annual report and has been following the debate on the new OFR with interest. 'I'm still not convinced that the business community really knows what it's going to be reporting on,' he tells PRWeek. 'If you talk to 20 different people, you get 20 different views.'
Yell is using this year's annual report to explain the wider context of its business in a bid to improve investors' understanding of its industry.
Much of that information would be required by the OFR proposals, but it does not go as far down the future prospects route as, perhaps, the Government might like.
Nor is Saunders certain that the auditing community will be happy to put its neck on the line to back up some companies' OFR statements.
'We're certainly going to do at least the minimum when the proposals come into effect - we don't have anything to hide,' says Saunders. 'It's the whole issue of forward-looking information where I see potential issues for many companies. I'm not sure if businesses have thought through what it is going to entail.'
What is an OFR?
The Operating & Financial Review will require the directors of quoted companies 'to give a balanced and comprehensive analysis' of their businesses within their annual reports.
Why should IR specialists and PROs be concerned?
Because it will have a significant impact on reputation management - putting non-financial issues right at the top of the reporting chain. Companies will have to think carefully about how they measure, discuss and talk about areas from risk management through community issues to employee welfare and more.
When will this happen?
The Government released a consultation document in May and wants responses by 6 August. It wants companies to be legally bound to include an OFR within their reports for the financial year beginning 1 January 2005.
Why is it happening so quickly?
It isn't. The Department of Trade and Industry (DTI) has been consulting on these issues for several years as part of the Government's Company Law Review.
Where can we obtain information?
Go to dti.gov.uk to find 'The OFR: Practical Guidance for Directors', as well as the background documents, the consultation paper and more.
Who else can help?
The Accounting Standards Board and the Institute of Chartered Accountants also have guidance and links on their sites, asb.org.uk and icaew.co.uk respectively.