UK Companies Acts since 1947 have stipulated that audited accounts of companies should give a ‘true and fair view’. After 66 years the meaning of that elusive formula continues to be hotly debated by accounting bodies, regulators, representatives of investors and pension funds, civil servants and politicians.
Prior to that time the Acts used the expression ‘true and correct’, but it was recognised that published accounts might, factually and arithmetically, be beyond reproach yet could nevertheless convey a misleading picture of results and financial position.
In 1993 Dame Mary Arden QC offered an opinion to explain the concept of true and fair, linking its permitted dynamic content (not meaning!) to accounting standards. It was then a short step for standard-setters to assert, wrongly, that the meaning of true and fair is itself changeable – a fatal error in logic and language.
‘True and fair’ is a concept, and concepts are of the same genre as Plato’s “forms”. They belong in the abstract world of ideas. There is a world of difference between the concept of, say, a machine that can fly and its countless manifestations, from Piper Cherokee to Concorde.
Compared with the rapidly obsolescent contraptions filling the sky, the concept of aircraft is eternal and immutable.
So it is with true and fair. In law its meaning is fixed but because accounting standards are inherently subject to changes in circumstances, the content of what may be considered true and fair is dynamic. As an eminent QC put it in 2001 ‘the meaning remains the same over time, but the contents could be expected to change’.
True and fair is the standard of accounting for the discharge of directors’ governance duties, not only in the UK but in the EU and various Commonwealth countries, embracing capital maintenance and distributable profits, taking in prudence (not booking unrealised profits, as happens in mark-to-market accounting) and accruals (accounting for costs irrespective of timing of payments).
Can IFRS be trusted?
One perverse consequence of conflating the meaning of true and fair with its content is therefore to lend credibility to accounts that, astonishingly, comply with IFRS but disregard capital maintenance, prudence and stewardship criteria. Had banks and their auditors properly applied the true and fair standard they would hardly have condoned the erosion of their capital base so cavalierly that successive Basle directives are needed to prop up what’s left of it. IFRS compliance can itself be lethal.
A further result of disregarding these elementary principles is the desperation of banks to regain profitability at any cost, from the mis-selling of millions of payment protection insurance policies, insurance to cover card or identity theft already provided by their banks, to the infamous LIBOR interest-rate manipulation.
The lapse of accounting and auditing rigour that has allowed IFRS-compliance to dissemble truth and fairness has brought shame on our profession and, once again, begs the question of exactly what is our purpose. Why did we need to wait for a House of Lords Select Committee on Banking Standards, and yet another legal opinion, to tell us to ‘reassert prudence as the guiding principle of audit’?
But what would auditors make of follies at the level of government institutions? The European Central Bank continues to show its holding of Greek bonds in its accounts at their face value of 250 billion euros – after the bonds were subjected to a 70% ‘haircut’ in the second bailout. No doubt the ECB is supported by some arcane fair value rule in the standard on derivatives – after all, that’s how the Greeks got into the Eurozone in the first place.
Compliance – in spades!