Humpty 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
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