It’s been said many times that the difference between US and UK accounting
standards is that the US standards are rule-based and the UK standards are
principles-based. The old adage adds that the British have no rules and the
Americans have no principles.
Jokes aside, the underlying notion starts to wear a little thin when you
consider how accounting standards have been progressing in recent years. Back in
the days of SSAPs it was usual for any topic to be dealt with in just a few
pages of A4. Modern standards are the size of small novels and, while they may
still be “principles-based”, are usually accompanied by a fistful of guidance
notes, appendices and interpretations that you ignore at your peril.
But one over-arching principle has served well and has, like the mousetrap,
never been bettered. The concept that a set of accounts must be both true and
fair has always presented an almost insuperable obstacle to those seeking to
bend generally accepted accounting principles beyond breaking point. Asked by
audit seniors whether an “iffy” accounting treatment would be allowable, one
former technical director of a Big Four firm always used to reply: “If you have
to ask, you already know the answer: no.”
As of January this year, listed companies’ accounts switched from UK GAAP to
IFRS. Auditors switched a couple of weeks previously to international standards
of auditing (ISAs). But only in August did we receive a paper from the Financial
Reporting Council examining whether “true and fair” still works in the brave new
world. It matters because IFRS dictates that financial statements “present
fairly” a company’s financial position, performance and cash flows. Our own
Companies Act has even been amended to relieve companies reporting under IFRS of
the burden of presenting a “true and fair view”.
The FRC invites comments on these issues but believes there is still plenty
of life in the “true and fair” concept, which will remain a cornerstone of
financial reporting and auditing in the UK. Fortunately, this is one principle
that isn’t going to be ruled out.