CIMA has just published legal opinion addressing Director's liability for statements in the OFR

13 July 2005

An opportunity to change the face of business reporting may be at risk if fears of legal liability cause directors to resort to 'boilerplate' statements instead of informative forward-looking statements needed to make the Operating and Financial Review (OFR) meaningful and effective.

As a strong supporter of the OFR, CIMA (The Chartered Institute of Management Accountants) is concerned about this risk and has sought, and is publishing, a legal opinion from Allen & Overy LLP on director liability for statements in the OFR.

One of the key findings of Allen & Overy's advice to CIMA is that while the recently published regulations for the OFR did not include the provision of a 'safe harbour' (or exemption from liability for directors for certain elements of the OFR), directors can significantly minimise the risks of criminal and civil liability when making forward-looking statements if they:

• Carefully consider the process for agreeing the content and preparation of the OFR so as to exercise, and be seen to exercise, the requisite degree of skill and care;
• Comply with the ASB's Reporting Standard 1: Operating and Financial Review (RS1) which raises a (rebuttable) presumption of compliance with the contents requirements for the OFR;
• Make it clear that the OFR is addressed to shareholders and has been prepared to meet its statutory purpose of assisting shareholders to assess the company's strategies and their potential for success;
• Ensure forward-looking statements in the OFR are appropriately couched and qualified in order to clarify the level of reliance shareholders should place on them. As a result, directors should feel more comfortable in fulfilling the Government's objective of including meaningful and informative disclosure in the OFR;
• Make it clear that: forward-looking statements reflect the knowledge and information available to the directors at the date the OFR was prepared; that the OFR will not be updated during the financial year; but forward-looking statements will be considered in preparation of the next OFR;
• Minimise the risks by seeking appropriate professional advice on assessing the legal risks.

Allen & Overy's advice to CIMA is also that the real issue (in line with the RS1 reporting standard) is not whether forward-looking statements are ultimately accurate, but whether they were made in good faith and with due skill and care and in appropriate terms.

Commenting on the clarification of Directors' legal liabilities for statements within the OFR, Charles Tilley, chief executive of CIMA said: 'Many directors of quoted companies are concerned over the position of their legal liability should a forecast be missed by a large margin, or if an unanticipated risk significantly impacts on the worth of the company. While we would have much preferred the regulations to have included a safe harbour, it is critical that directors ensure there is an effective process for determining the information to be included in the OFR. Our objective is to avoid directors being driven towards making boilerplate statements, by giving them the assurance that they can make forward-looking statements with a minimal risk of criminal and civil liability.'

Richard Slynn, corporate partner, at Allen & Overy commented:
'The new statutory requirement for quoted UK companies to produce an operating and financial review in their annual reports and accounts has not been free from controversy. Financial reporting has, until now, been almost exclusively concerned with past events. The requirement on directors to make forward-looking statements which, of their nature, are more likely to turn out to be incorrect will undoubtedly cause concern for directors who are charged with responsibility for such statements.'

- ENDS '

For interviews, photographs and further information please contact:
Lottie Muir, CIMA
020 8849 2407
lotttie.muir@cimaglobal.com

You can download the full document containing Allen & Overy's advice to CIMA on Directors' Liability and the OFR in PDF format (894KB).

Please note that the legal opinion given by Allen & Overy was prepared solely for The Chartered Institute of Management Accountants and, accordingly, neither party accepts liability to any other person.

Notes to editors

1. CIMA (the Chartered Institute of Management Accountants) is a leading professional body that offers an internationally recognised qualification in management accountancy, focussing on accounting in business. It is the fastest growing UK based membership body, in terms of members, in both the UK and worldwide and is the voice of over 150,000 members and students in 156 countries. CIMA is responsible for the education and training of management accountants who work in industry, commerce and not-for-profit and has more members in the public sector than any other UK based body. CIMA prides itself on the commercial relevance of its syllabus, which is in tune with the activities of high performance organisations, and evolves continually reflecting the latest developments in global business. It is committed to upholding the highest ethical and professional standards of members and students, and to maintaining public confidence in management accountancy. For more information about CIMA, please visit www.cimaglobal.com

2. Allen & Overy is an international legal practice with over 4,800 staff, including some 440 partners, working in 25 major centres worldwide. In this news release, 'Allen & Overy' means Allen & Overy LLP and its affiliated undertakings. Any reference to a partner in relation to Allen & Overy means a member, partner or employee of, or consultant to, Allen & Overy LLP and/or an affiliated undertaking.

3. The relevant provisions relating to OFRs were inserted into the Companies Act 1985 by The Companies Act 1985 (Operating and Financial Review and Directors' Report etc) Regulations 2005 (S.I. 2005 No 1011). The legal requirements in relation to quoted companies in Northern Ireland are set out in The Companies (1986 Order) (Operating and Financial Review and Directors' Report etc) Regulations (Northern Ireland) 2005 (Statutory Rule 2005 No. 61).
4. Quoted UK companies will be required to produce an OFR for financial years commencing on or after 1 April 2005. Under the Companies Act 1985, a quoted company means a GB company whose equity share capital:

• is included in the official list under Part VI of the Financial Services and Markets Act 2000; or
• is officially listed in another EEA State; or
• is admitted to either the New York Stock Exchange or Nasdaq.
  

5. A "safe harbour" is a provision which, had it been adopted, would have exempted certain areas of OFR reporting, for example forward-looking statements, from liability provided that certain specified conditions were met (such as acting honestly and diligently in the preparation of such statements).

6. Executive summary of legal advice. The main conclusions in the opinion are:

• Responsibility is placed on the directors for the preparation of the OFR and for satisfying the relevant Companies Act requirements.
• The directors owe a common law duty to the company to exercise the requisite degree of skill and care. This requires the directors to consider carefully the process for preparation of the OFR and the contents of the OFR (in accordance with the Companies Act requirements, the requirements of RS1 and with the assistance of the Implementation Guidance (appended to RS1), the DTI Guidance and the Radcliffe Report). In order to fulfil these duties, the directors will need to consider carefully the relevant expertise and experience of the board and the further expertise and experience that is required from within the business and from external advisers.
• There is a rebuttable presumption that compliance with RS1 will mean compliance with the contents requirements of the Companies Act in respect of OFRs.
• The directors should ensure that records are kept in relation to the preparation of the OFR both to satisfy themselves that the correct procedures have been adopted and in case the Financial Reporting Review Panel, when exercising its enforcement powers, requests evidence as to how the OFR was compiled and how the directors reached conclusions on particular issues.
• The risk of criminal liability and civil liability of the directors in connection with the preparation and contents of OFRs will be reduced if the directors exercise the requisite skill and care and comply with RS1.
• The greatest concern for directors relates to potential civil liability for negligent misstatement in relation to forward-looking statements in the OFR (given the absence of a statutory safe harbour). The risk of liability is reduced by taking the following steps:
  
• making clear within the OFR that the OFR is addressed only to members as a body (and disclaiming liability to others) and that its purpose is limited to the statutory purpose, namely to assist members to assess the company's strategies and the potential for those strategies to succeed in
• making sure that forward-looking statements in the OFR are appropriately couched and qualified in order to clarify the degree of reliance that members should place on them ' directors should, in consequence, feel more comfortable in fulfilling the Government's objective of meaningful and informative disclosure in the OFR; and
• making it clear that forward-looking statements contained in the OFR reflect the knowledge and information available to the directors at the date the OFR was prepared and that the OFR will not be updated during the financial year, but that forward-looking statements contained in it will be considered in the preparation of the next OFR.
• Directors will likely seek assistance from accountants in the preparation of the OFR and from law firms, particularly on the issues of legal risk assessment and the steps that may be taken to minimise risks.