The expression ‘true and fair’ is one of the most common expressions used in the financial industry today. It is used to describe the required standard of financial reporting but equally to justify decisions, which require a certain amount of arbitrary judgement making. It is the principle that is used in guidelines ranging from auditing and financial standards to the company law acts.
The term originated …
The aim of the financial statements is to report to the shareholders on the financial position at the year-end, and the performance of the company over the year. They are also important for tax computations, for management decisions and quotations from lending institutions. Thus, it can clearly be seen why independence and objectivity are important in the statements. Thus, some kind of measure is needed.
A true and fair view is one of the bedrock principles of preparing financial information. This can be linked back to the four basic concepts on presenting this information: going concern, accruals (matching), consistency, and prudence. As stated in Financial Accounting (Arnold, Hope, Southworth and Kirkham; 1994, p56):
…without some form of standardised accounting treatment of financial transactions, it would be very difficult for a user of accounts to compare the performance of an organisation either through time or with the performance of other organisations.
This is very similar to The Statement Of Principles for Financial Reporting (SOP, 1999) and Chapter 3, which details The Qualitative Characteristics Of Financial Information: relevance, reliable, comparability, understandable.
But how can the accountant be sure that the statements show a true and fair view, especially when there is no precise definition. There are many definitions and explanations in the Statement of Principles, but they are qualitative rather than specific measurements. Elliot & Elliot (1997, p189) offer the following explanation: ‘true and fair is a legal concept and can only be authoritatively decided by a court’.
They do give some specific attributes: -
Authority: all transactions are official and above board.
Accurate: all information provided is accurate, e.g. sales invoices give full details of vat, discount, and amounts payable Complete: there should be no missing dockets in the accounting system.
If the accounts hold the above qualities, they are likely to give a true picture. However, there has to be some inherent risk in financial reporting. It is not possible to be one hundred percent certain that the above qualities are complete, only a certain amount of sampling can be done by the auditor:
Although valuation practice is well established in the case of equity and asset values, it is historically the case that much less attention has been focused on the valuation of liabilities. (Lonergan, 1998)
This obviously questions the truth and fairness of the accounts, and displays the problems with arbitrary judgements. But can we expect the accountant to chase after every last euro in a multimillion-euro company? On the other side of things it must be recognised that immaterial items can add up to a substantial material item, and so the accountant should take reasonable care. Does one small error mean that the accounts don’t show a ‘true and fair’ view?
This argument follows on to the social responsibility of the accountant. Is he reporting on the financial performance of the organisation, or is he advising the shareholders that their investment is safe, the employees that their jobs are safe, the public that they are better off with the business in their area and the product or service being produced. A true and fair view of the business as a whole may suggest this to the reasonable man, but case law suggests the liability of the accountant/auditor is to produce the financial statements, provide for any future liabilities and...