1 Disclosure in accounts & Review of accounts preparation Week 5.

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Disclosure in accounts & Review of accounts preparation

Week 5

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Why do we need rules on disclosure?

Corporate Governance Conflict between Owners (shareholders) and Managers (directors) The system by which businesses

are run. This includes the director's duty to ensure that the business is properly and honestly managed.

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Sources of regulation

Companies Act 1985

Stock Exchange Regulations

Accounting Standards

Audit

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Companies Act 1985 Section 221 Every company shall keep accounting

records which are sufficient to show and explain the company's transactions and are such as to (a)  disclose with reasonable accuracy,

at any time, the financial position of the company at that time, and

(b)  enable the directors to ensure that any balance sheet and profit and loss account prepared under this Part complies with the requirements of this Act.

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Companies Act 1985 Section 234 The directors of a company shall for

each financial year prepare a report (a)  containing a fair review of the

development of the business of the company and its subsidiary undertakings during the financial year and of their position at the end of it, and

(b)  stating the amount (if any) which they recommend should be paid as dividend and the amount (if any) which they propose to carry to reserves.

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Directors’ duty to prepare accounts

Section 226 The directors of every company shall prepare for each

financial year of the company (a)  a balance sheet as at the last day of the year, and (b)  a profit and loss account. Those accounts are referred to

in this Part as the company's "individual accounts".

The balance sheet shall give a true and fair view of the state of affairs of the company as at the end of the financial year; and the profit and loss account shall give a true and fair view of the profit or loss of the company for the financial year.

A company's individual accounts shall comply with the provisions of Schedule 4 as to the form and content of the balance sheet and profit and loss account and additional information to be provided by way of notes to the accounts

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Chairman’s statementContents

Results Summary of company’s results

Dividend Interim and final dividends

Prospects Assessment of financial outlook

Employees Details concerning company’s interactions

with employees and generally including Board’s thanks

Directors Notes about changes in directors and

thanks to outgoing directors

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Tesco 2003 DELIVERING OUR STRATEGY Following a strong performance last year, the Tesco Group has

delivered another year of outstanding results. For the full year, Group sales have risen by 11.5% to £28.6bn. Underlying pre-tax profit is £1.4bn up 14.7% and underlying diluted earnings per share is 13.98p up 15.2%.

DIVIDEND The Board propose a final dividend of 4.33p. This, together with the interim dividend of 1.87p, gives a total dividend of 6.20p, up 10.7% on last year. Dividend cover increases from 2.17 to 2.25 times.

PERFORMANCE Our customer focused strategy for long-term growth has already increased sales by 61% and underlying pre-tax profit by 68% over the last five years.

We first set out our strategy six years ago. All four elements of the strategy have contributed to outstanding growth, a strong UK core, non-food, retailing services and international. Our strategy for growth is underpinned by the Tesco core purpose and values.

This year we have reported excellent UK figures with sales up 7.9% and underlying operating profit† up 6.9%. Our non-food market share has increased to 5%. We have delivered our international targets that we set out in 1999 for 2002/03. We achieved underlying operating profit† of £141m and cash return on investment of 9.7%.

Profit has grown significantly in retailing services. Pre-tax, post minority interest, Tesco Personal Finance achieved profit of £96m and tesco.com grew profit from £0.4m last year to £12m this year.

Our people are key to delivering for our customers. Without their efforts we would not have delivered such strong results. I would like to thank everyone in the Tesco Group for their contribution. We now employ 296,000 people worldwide, of whom 75,000 are overseas. We will create a further 20,000 new jobs worldwide in the coming year.

BOARD CHANGES David Reid will be taking over as Non-executive Chairman in March 2004. We are also appointing Rodney Chase as Deputy Chairman and senior Non-executive Director at the same time. David has been at the heart of the business for many years and continuity will be valuable at a challenging time for the industry.

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Honesty

Due to the provisions of section 234 and the need to provide a FAIR review

Directors must be transparent about prospects

Even if it is apologetic See African Gold plc attached

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Operating and Financial Review (OFR)

Cadbury Report on Corporate Governance 1991

Suggested review of operations be included in annual report

Not currently mandatory But The Government is currently considering

responses to its July 2002 White Paper ‘Modernising Company Law’

This proposes that, in due course, the publication of an OFR should be mandatory for large companies

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OFR Contents

Operating Review Review of business environment Prospects Expansion Returns

Financial Review Capital Taxation Cash flows Liquidity Ability to remain a going concern

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London Stock Exchange requirements for listed

companies

Listing on LSE requires additional reporting

Interim Reports Disclosure of Price Sensitive

Information

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Audit ReportCompanies Act obligations

Section 235  A company's auditors shall make

a report to the company's members on all annual accounts of the company of which copies are to be laid before the company in general meeting during their tenure of office

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Audit ReportCompanies Act obligations The auditors' report shall state whether in the auditors'

opinion the annual accounts have been properly prepared in accordance with this Act, and in particular whether a true and fair view is given

(a)  in the case of an individual balance sheet, of the state of affairs of the company as at the end of the financial year,

(b)  in the case of an individual profit and loss account, of the profit or loss of the company for the financial year,

(c)  in the case of group accounts, of the state of affairs as at the end of the financial year, and the profit or loss for the financial year, of the undertakings included in the consolidation as a whole, so far as concerns members of the company.

The auditors shall consider whether the information given in the directors' report for the financial year for which the annual accounts are prepared is consistent with those accounts; and if they are of opinion that it is not they shall state that fact in their report.

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Extract from Audit ReportMajestic Wine plc

We report to you our opinion as to whether the financial statements give a true and fair view and are properly prepared in accordance with the Companies Act 1985.

We also report to you if, in our opinion, the Directors' Report is not consistent with the financial statements, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding Directors' remuneration and transactions with the Group is not disclosed.

We read other information contained in the Annual Report and consider whether it is consistent with the audited financial statements. This other information comprises the Directors' Report, Chairman's Statement and Review of Operations.

We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the financial statements. Our responsibilities do not extend to any other information.

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Extract from Audit ReportMajestic Wine plc

In our opinion the financial statements give a true and fair view of the state of affairs of the Company and of the Group as at 31 March 2003 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.

Ernst & Young LLP Registered Auditor Luton 16 June 2003

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Environmental Reporting Companies have a responsibility

for the damage that they (may) cause to the environment

The (potential) effects depend on the type of company

Companies should deal with this in the accounts In the annual report

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Why? Whether for moral, economic,

legal or pragmatic reasons, every organisation is having to make an increasingly explicit assessment of its environmental and social impact and to attempt to re-position itself as the terms of the social contract between business and society come under increasing scrutiny

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Should accounts & reports deal with these issues?

Pragmatic – accounting Provision for the costs of remedying

past contamination should be recognised when an entity is legally or constructively obliged to rectify the damage

Abandonment costs - full provision for the total costs should be made when the environmental damage is inflicted.

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Should accounts & reports deal with these issues?

Moral Responsibility There is no FRS that deals with

Environmental Reports Individual accounting bodies and

environmental groups have provided guidance

Environmental Report can appear In annual report or As distinct report circulated with

annual report

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Suggested Contents CEO statement Organisational profile Key environmental impacts Environmental policy statements Management system and procedures Performance and compliance Targets and achievements Independent verification statement

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Objective should be… The provision of information about the

environmental impact and operational performance of an entity that is useful to relevant stakeholders in assessing their relationship with the reporting entity

It should be transparent information on the company’s policies and successes

Which means….

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Concern for the planet…(or profits?)

Benefits from this greater transparency may include:

an increase in the number of customers who consider, respect or share the same values

being placed on ‘preferred suppliers’ lists of companies that consider environmental responsibility upstream to their own operations

stronger relationships with stakeholders by involving them in the reporting process and

general public approval, thus lowering reputational risk.

ACCA Singapore advice publication

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Examples – the pathetic..

African Gold plc No policy Firestone Diamonds plc A detailed environmental

management programme report covering rehabilitation of both historical and planned mining operations has been completed and submitted to the Department of Minerals & Energy for approval.

Why? RSA legislation.

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Examples – and the top notch

EMI

The Body Shop

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Crawling on the bandwagon?

Yearly percentage of companies producing a corporate environmental report

1993 13% 1996 17% 1999 24% 2002 28%

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The Audit Problem Auditors have no guidelines on

auditing the Environmental Report Social Audit Ltd – hidden agenda Role Conflict – auditors as employees

of shareholders/stewardship of funds

Do we need audit guidelines? Do we need environmental reports? Should they be highlighted as simply

public relations?

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Accounts PreparationWorked Example

Westbury Ltd