RSS feedsHumpty Dumpty told Alice in Wonderland: “When I use a word it means just what I choose it to mean – neither more nor less.” Although it would be hard to compare Humpty Dumpty to the Financial Reporting Council, the UK’s corporate reporting watchdog is taking a Humpty Dumpty-like stance over the transformation of “true and fair” into “presents fairly” as the overarching test that financial statements should satisfy.
In the early 1990s at the height of public concern over British corporate collapses (BCCI, Polly Peck, et al), the BBC’s Panorama interviewed senior British accountants over the state of financial reporting. At one point in the programme, the interviewer asked what “true and fair” actually meant. It was interesting seeing the hesitation and stumbling as Britain’s best accounting brains struggled to explain the familiar phrase.
“True and fair” is redolent with meaning. And it is that redolence which the FRC insists will be retained by British financial reporting. The words may change, says the FRC, but the meaning stays the same. The move to international accounting standards is resulting in changes to key measures such as profit and net assets, the format of financial statements and the terminology used in statements. And although “true and fair” is due to be replaced by “presents fairly”, the FRC argues that “true and fair” remains the cornerstone of financial reporting and auditing. The new standards, according to the FRC, usher in no changes in the way preparers of accounts exercise their professional judgement.
The fear the FRC is trying to allay is that “presents fairly” is not so rigorous a condition as “true and fair”, which for many people represents a bulwark against legalistic rules-based accounts. The FRC insists that “presents fairly” carries equal weight.
Under IFRS, “presents fairly” is coupled with the phrase “in accordance with international financial reporting standards”. The sense conveyed is that if the accounts obey the letter of the standards, then they are correct. This is a far narrower definition than the meaning which most financial directors would attribute to “true and fair”.
In many instances it seems that the UK has travelled a different route from other European countries, so it is worth pointing out that “true and fair” is not just a British concept; the French image fidèle conveys a similar depth and complexity. In Europe more than in the US, accounts have always tried to portray the accounting effects of business transactions, rather than simply following the rules laid out in the accounting standards.
However, the FRC argues that while the requirement for a “true and fair view” makes no reference to accounting standards, in practice and in effect, the legal requirement in the UK has for a long time been to prepare accounts which give a true and fair view of the business in accordance with accounting standards.
That may be the case but the effect of the more complex phrase can be seen in the “true and fair override” – an uncommon scenario that occurs when a company’s directors decide that a departure from accounting standards or a detailed accounting requirement of the Companies Act is needed to ensure that the accounts provide a true and fair view of the financial position of the company. There is an implicit higher standard of truth demanded here than mere accurate reporting. The FRC argues that IFRS carries the same escape clause as that provided by the true and fair override.
Ultimately, of course, it is not financial directors, auditors or even the FRC (however hard it may fight its corner) who determine what is meant by “presents fairly” – that’s for the courts to decide. But it will be years, if not decades, before the term is tested by the lawyers. The FRC has simply got its oar in first.
In her 1993 legal opinion on what was meant by true and fair, Mary Arden QC wrote: “The true and fair view is a dynamic concept. Thus, what is required to show a true and fair view is subject to continuous rebirth and in determining whether the true and fair requirement is satisfied, the court will not in my view seek to find synonyms for the words ‘true’ and ‘fair’ but will seek to apply the concepts which those words imply.”
If Arden is right, then the courts will not seek to find synonyms for “presents fairly” but will seek to apply the concepts which those words imply. And whatever Humpty Dumpty may say, different words do have different meanings and that might mean different concepts.
Peter Williams is a chartered accountant and freelance journalist
