The need for small and medium-sized enterprises to re-evaluate their business practices in the light of US financial reporting regulations has been a recurring theme at recent BCS specialist group meetings.
The Sarbanes-Oxley anti-fraud legislation has been widely ignored by businesses that do not have links with the US, with many saying that, as it only applies to US quoted companies, it is not their problem.
However, BCS members have warned that firms may come under pressure from an amendment to the UK Companies Act 1985, which follows the US lead.
The Operating and Financial Review (OFR) and Directors Report Regulations 2005 came into force on 22 March last year. The Department of Trade & Industry said the regulations expanded the requirement for companies to include a fair review of their business in their directors report. It also stated that there needed to be:
- A requirement for auditors to express an opinion on the consistency of the OFR and directors report with the accounts
- A criminal and administrative enforcement regime for both the OFR and the directors report.
The OFR could also require information regarding the working environment, employees, and social and community issues. Directors will need to make judgements about what data and what analyses to include, and the level of detail that is appropriate.
The Institute of Chartered Accountants in England and Wales (ICAEW), which controls UK auditors, said these elements alluded to by the OFR must be audited to the same standards as financial figures.
In addition, a company must say that it has control of its business processes and that it is continually monitoring and improving them.
To measure these, companies will have to generate statistics that can be monitored and audited. There will be the need for effective and accurate control of business processes, and that includes new projects. The CIO will have to ensure that the systems are properly documented and any weaknesses identified.
Under the OFR, the CIO, or any person responsible, could be held personally liable and may be prosecuted if false, inaccurate or misleading statements are made.
A company will have to compare its performance in the 2006 accounts with its previous performance - so the data is required today. The ICAEW has warned that ticking boxes to check compliance is not enough. Companies are recommended to consider coaching the members of the supply chain.
The general view at BCS meetings has been that SMEs that fall outside the legislation should not get complacent. Your customers could ask for information about company performance, and you may need to conform - would your systems give you the information that is needed?