“In today’s environment there is an increasing onus on directors to take responsibility for the financial statements. This onus usually falls back on audit committees.”
The Australian Securities and Investments Commission (ASIC) has issued a new regulatory guide setting out the kinds of information that should be included in the operating and financial review (OFR) contained in annual reports. The ASIC guide was discussed at this series of Directors’ Roundtables.
There was a consensus that the boards of listed entities will ignore the contents of this guide at their peril. It was also agreed that most will doubtless look to their audit committees for reassurance about complying with the relevant disclosure obligations.
In a noteworthy development, the new ASIC guide outlines the Commission’s stance on the use of disclosure exemptions under s299A(3) of the Corporations Act in the context of an OFR. This section exempts listed entities from disclosing information about business strategies and prospects for future performance if disclosure of such information is likely to result in ‘unreasonable prejudice’ to the entity concerned.
Non-disclosure under the s299A(3) exemption is already on ASIC’s surveillance agenda. While decisions about non-disclosure remain a matter of judgement, the new regulatory guide clarifies the grounds on which such judgements should be made. That’s essential information for audit committees.
ASIC certainly regards the OFR (sometimes called the ‘management discussion and analysis’) as a significant disclosure issue. “High-quality OFR disclosure,” the regulator explains, “is important to ensure both confident and informed investors and fair and efficient markets.” 1
The OFR regulatory guide outlines what ASIC believes are the key features of a satisfactory OFR.
- The OFR should be consolidated in a single location in the annual report.
- Information disclosed in an OFR should be consistent with information in the financial report and in other documents issued by the entity.
- Disclosures should be ‘balanced’, focusing on both ‘good’ and ‘bad’ news. Disclosures should also be unambiguous.
- Information should be presented in a clear, concise and effective manner and it must not be false or misleading.
- The OFR only needs to contain information that shareholders would ‘reasonably require’ to make an informed assessment of the entity’s financial performance, position, business strategy and prospects.
“ASIC has acknowledged that some of the information required in the OFR might already be provided in other documents, but that this does not exempt its inclusion in the OFR.”
Some discussion participants noted that the regulatory guide doesn’t possess the force of law. Nevertheless it outlines ASIC’s interpretation of how listed entities should comply with the relevant sections of the Corporations Act. Failure to heed regulatory guidance could also form the basis of ASIC action against an entity for non-compliance.
It was agreed that in these circumstances audit committees would be well advised to review current OFR reporting practices and introduce changes that might be required as a result of the new guidance.
1 ASIC Regulatory Guide 247 Effective disclosure in an operating and financial review, March 2013, RG 247.11, Page 6