Narrative Reporting and Liability

1
Narrative Reporting and Liability

• CBI The Companies Act 2006 Conference, 7 November
  2007
• Kathryn Cearns, Chairman, ICAEW Technical
  Advisory Committee

2
Narrative Reporting

• The Transparency Rules
• CA 2006
• Guidance on narrative reporting
• The Business Review and the Operating and
  Financial Review
• New law on business review applies from 1
  October 2007
• And my message is there are rules, but you can
  forget them!

3
Transparency rules

• Transparency Directive part of the EU Financial
  Services Action Plan
• Deals with the production of periodic financial
  information, its dissemination and its storage
• Companies with securities traded on a regulated
  market (NB varies as to whether equity, debt or
  any traded security)
• Accounting periods beginning on or after 20
  January 2007
• Requires the existence of a liability regime for
  issuers in relation to periodic financial
  information

4
Transparency rules

• DTR 4 Periodic financial reporting
• DTR4.1 annual financial report
• DTR4.2 half yearly financial report
• DTR4.3 interim management statement (IMS)
• First two of these must contain a management
  report
• Fair review
• Principal risks and uncertainties
• It is required to be forward looking
• IMSs are new
• Explanation of material events and transactions
• General description of financial
  position/performance of issuer

5
Transparency rules

• Responsibility statements are required for the
  annual and half yearly financial report
• Made by persons responsible within the issuer
• The board of directors for UK purposes
• State name and function of person making
  statement
• Statements are
• Accounts true and fair
• Fair view in management report

6
Section 417 Content of directors' report
business review (non-small companies)

• All non-small companies
• The purpose of business review is to inform
  members and help them assess how the directors
  have performed their duty under Section 172
• Section 172 contains the duty to "promote the
  success of the company for the benefit of its
  members, which was previously a common law test

7
Section 417 Content of directors' report
business review (non-small companies)

• Fair review of the business, and describe
  principal risks and uncertainties (subsection
  (3))
• Balanced and comprehensive analysis of the
  development and performance during the financial
  year, and the position at the year end
  (subsection (4))
• Where appropriate, include references to, and
  additional explanations of, amounts in the
  accounts (subsection (8))

8
Business review Key Performance Indicators (KPIs)

• Use financial KPIs "to the extent necessary"
  (subsection (6)(a))
• Non-medium companies should use non-financial
  KPIs where appropriate, including environmental
  and employee matters (subsection (6)(b))
• Which? How many?

9
Section 417 Content of directors' report
business review (non small companies)

• May omit information about impending developments
  or matters in the course of negotiation where
  directors consider that disclosure would be
  seriously prejudicial to the interests of the
  company (subsection (10))
• May omit information about a third party
  otherwise required for quoted companies by
  subsection (5c) (essential contractual or other
  arrangements) where in the directors opinion it
  would be seriously prejudicial to that third
  party and contrary to the public interest
  (subsection (11))

10
Section 417(5) Business review (new bits for
quoted companies)

• Must include information "where necessary for an
  understanding of the business" on
• Future trends and factors likely to affect future
  performance etc environmental matters
  employees social and community issues
• Including policies and effectiveness of those
  policies
• Describe essential contractual or other
  arrangements
• If nothing to report on environmental, employee,
  social and community matters or essential
  contractual or other arrangements, directors must
  say so

11
The guidance

• ASB Reporting Statement 1 Operating and
  Financial Review www.frc.org.uk/asb
• ASB review of narrative reporting by public
  companies www.frc.org.uk/asb
• DEFRA suggested environmental KPIs (76 pages)
  www.defra.gov.uk/environment/business
• Larger firms have put out briefing papers as well

12
What is the minimum required?

• It is what the law says
• Think about your stakeholders do they look for
  more than the minimum?
• Why not use the business review to "sell" your
  business, be positive?

13
If you want to publish a proper business review,
tell the story of your business

• Set out where you want the business to get to
• How you plan to get there (strategy)
• Risks and uncertainties around your plan
• Controls/plans in place to mitigate those risks
• How you will monitor progress along the way
  (KPIs)
• In your own way, reflecting how you manage your
  business.

14
Liability

• Outline of statutory regime for directors
  reports
• Periodic reporting liability regime
• There are complex issues that are still under
  consideration

15
Section 463 Statutory liability regime for
Directors' Report and Directors' Remuneration
Report

• Safe harbour" provision
• Liability of the director to the company
• Documents sent to members (approval date is not
  applicable) on or after 20 January 2007
• Directors' report, directors' remuneration report
  (where required) and summary financial statements

16
Scope of the safe harbour provisions
17
Section 463 Statutory liability regime for
Directors' Report and Directors' Remuneration
Report

• To compensate the company for loss suffered by it
  as a result of
• Untrue or misleading statements, if made
  knowingly or recklessly, or
• As a result of omissions known to be a dishonest
  concealment of a material fact
• No liability to a person other than the company
• No effect on existing civil or criminal
  liabilities

18
Section 1270 Liability for false or misleading
statements in certain publications

• Statutory liability regime for Transparency
  Directive periodic reporting plus related
  preliminary announcements
• Inserts sections 90A and 90B into Financial
  Services and Markets Act
• Establishes a regime for civil liability to third
  parties by issuers admitted to trading on a
  regulated market (full list)
• With effect from 8 November 2006

19
Section 1270 Liability for false or misleading
statements in certain publications

• Applies to reports and statements required by
  Articles 4, 5 or 6 of the Transparency Directive
• These are the annual and half year reports,
  including the associated management reports and
  interim management statements
• Plus information in voluntary prelims that will
  subsequently be included in those reports have
  been brought into the scope

20
Section 1270 Liability for false or misleading
statements in certain publications

• Liability to investor who suffered loss as a
  result of reliance on that statement, when and
  where reliance was reasonable
• Liability is limited to where the person
  responsible knows the statement to be untrue or
  misleading, or is reckless, or where omission is
  known to be a dishonest concealment of a material
  fact

21
What applies to whom
22
How to be compliant

• Responsibility statement
• Can be signed by one board member on behalf of
  board
• Named persons liability no greater than that of
  other board members
• Cautionary wording over forward looking
  statements
• Time line of new reporting deadlines,
  particularly in transition
• Holistic approach, particularly to narrative
  reporting
• Corporate governance issues
• Systems and controls, clear reporting lines up to
  the board
• Finance function up to strength
• Right expertise on the board and audit committee
• Time and attention of board members

23
The Davies Review of Issuer Liability questions

• Trigger for liability
• Which information should be caught
• Timeliness
• Which companies should it apply to
• Who should be liable
• Who should be able to claim
• Priority of claims

24
The Davies Review of Issuer Liability answers?

• Extend to cover ad hoc disclosures
• Extend to cover AIM and PLUS markets (i.e.
  non-regulated)
• Apply to all RIS announcements
• Extend to encompass liability for dishonest delay
• Extend to both buyers and sellers of shares, but
  exclude holders