The Meaning of True and Fair View - Essay Example

Running header: Accounting Student’s name: Instructor’s name: Subject code: Date of submission: The meaning of ‘true and fair view’ The corporations act s.295 (4) (d) requires company directors to sign a declaration (that you will find in their annual report) to say that the financial statement and accompanying notes i) Comply with accounting standards AND ii) Provide a true and fair view Meaning of ‘true and fair’ The term ‘true and fair’ has been widely used in the accounting profession to describe the required standard of financial reporting while justifying decisions that call for some level of arbitrary decision making. This is occasioned by the fact that financial statements aim at reporting to the shareholders on the company’s financial position at the year end and its financial performance over the year. Such statements are also expected to be relied on in tax computations as well as making investment and managerial decisions (Staden, 2001). This calls for objectivity and independence in their preparation. In order to ensure that the statements can be used as stated above, then they need to show a ‘true and fair view’ of the company’s state of affairs. a ‘true and fair view’ is among the bedrock principles of preparation of financial information that is supposed to be observed if the financial statements are to serve their purpose. But what is the meaning of ‘true and fair’ from the accountant’s perspective? From the accountant’s perspective, ‘true and fair’ implies the obligation that the accountant has to prepare financial statements that are free of material (significant) misstatements and which faithfully represents the financial position and performance of the company/ organization in question. Despite the fact that there is no strict definition of the expression ‘true and fair view’, it can be concluded that the accountant’s understanding of the word ‘true’ in the expression is that the financial statements prepared should be factually correct and be prepared according to necessary financial reporting standards. They should also contain no material misstatements likely to mislead users of the financial statements (Financial Reporting Council, 2011). Such misstatements are likely to arise from omissions of balances or transactions and material errors in the financial statements. On the other hand, the word ‘fair’ from the accountant’s perspective implies the obligation to prepare financial statements that give information faithfully devoid of any form of bias while reflecting the economic substance of the transactions in question as opposed to just their legal form. From the above explanation, it can be implied that the accountant’s view of ‘fair and view’ expects the financial statements so prepared to contain certain attributes including authority. This implies that the transactions which form the basis of the financial statements should be official and above board. They should also be accurate implying that they provide accurate financial information. For instance, it would be expected that the statements will give full details of discounts, amounts payable and taxes (Lewis and Pendrill, 2000). The statements are also expected to be complete implying that there are no missing dockets in the accounting system that gives rise to the statement. It seems that if the statements prepared contain the above attributes, then they conform to the corporations act s295 (4) (d) requirement on ‘true and fair’ view. In December, 2013, the only reference to ‘true and fair view’ in the conceptual framework was removed. The concept of ‘true and fair view’ is not defined in the corporations act or in the Accounting standards or the framework. This brings to question whether the ‘true and fair’ requirement is useful or necessary. As stated above, the accountant would expect the financial statements prepared to possess such attributes as completeness, authority and accuracy for them to have been ‘true and fair (Arnold, 2004).’ But is it possible for the accountant to be completely certain that the accounts have the above attributes given that only some level of sampling is done by the auditor? In addition, although there is a well established criterion for measuring assets and the equity, there has not been much attention on the measurement of liabilities. Obviously this puts the truth and fairness of the accounts to question while displaying problems with arbitrary judgments’. The accountant can not be expected to account for every last dollar in a multimillion dollar company. On the other hand, it is good to appreciate the fact that immaterial items could add up to substantial material items calling for reasonable care from the accountants if the statements are to be ‘true and fair’. In addition, it is not clear what level of error compromises the ‘true and fair’ view. For instance, does a single small error imply that the statements fail to show a true and fair view? Stating that the financial statements provide a true and fair state of affairs is not enough. It is the integrity and the truthfulness of those that prepare the statements that guarantee that the statements actually do provide the true and fair view (Rayman, 2006). In other words, does just stating that the statements provide a true and fair view imply that a true and fair view has actually been presented? The case of the collapse of such companies as Enron proves otherwise. The fact that the company manipulated figures and still stated that a true and fair view has been presented proves that the ‘true and fair’ view is not enough since this did not present the directors from issuing misleading statements. It should also be noted that auditors are also required to state whether the statements presented to them do actually present a true and fair value of the company’s state of affairs as at the date of their preparation. Yet the responsibility of preparing the statements is that of directors (Underdown, 2005). The term true implies that the statements are not deceitful in all material respects, they can be relied upon and they are dependable. On the other hand, fairness implies precision, faithfulness and satisfying overarching test (The economist, 2014). The issue is who should be held responsible if misrepresentations are discovered. The fact that organizations can present a true and fair view while knowing the centrally to be true is questionable. The fact that auditors can collude with management to present misleading statement to the users as in the above cases proves that just stating that the statements provide a true and fair view is not as important as the statements themselves being actually true and fair. The term ‘true and fair’ is not useful neither is it necessary. This is because it may encourage creative accounting and hence lead to users of accounting information being presented with misleading information (Elliot, 2008). The term ‘true and fair’ can be viewed as a term of art implying presentation of accounts that have been drawn up in accordance with relevant accounting principles, making use of accurate figures as much as possible as well as reasonable estimates and arranging them in a bid to show as objective picture as possible that is free from willful bias, manipulation or concealment of material facts. Using reasonable estimates and within the limits of current accounting practice in itself implies tolerance of some unavoidable imprecision. In this respect, although the statements may present a true and fair view, this may not be ‘correct’. This is in itself incitement to creative accounting since it offers some level of flexibility as to what ‘true and fair’ may be. It should also be noted that the ‘true and fair’ view allows organizations to overlook some accounting standards where they deem it necessary in order to arrive at the ‘true and fair view’. Thus, it should be noted that the true and fair view is not necessary as it encourages creative accounting in a number of ways. The concept of ‘true and fair’ relaxes the conventional rigidity of accounting regulations thus increasing the opportunity for choice of accounting policy (Economia, 2014). In addition, it empowers organizations by giving them the right to use own discretion in choosing accounting policy as opposed to accepting the professional accounting bodies authority. Conclusion It is the expectations of the users of financial information that the directors/the organization would present to them financial information that is accurate and that is free of deceit. Hence the removal of the only reference to ‘true and fair’ view in the conceptual framework in December 2013 may have seemed unfortunate. However, considering the fact that financial fraud and financial misrepresentation has been happening despite the requirement, there is a need for reviewing the necessity of such a requirement. It has been established that the requirement for stating the ‘true and fair’ view is not enough. The statements themselves need to be accurate and correct (Judie, 2011). Furthermore, it has been established that the ‘true and fair’ requirement may encourage creative accounting by introducing flexibility in accounting. As such, the requirement may not achieve the desired results and hence is not necessary. References: Staden, J2001, True and fair view versus present fairly in conformity with generally accepted accounting principles, Massey University Press, New Zealand. Financial Reporting Council, 2011, true and fair. Lewis, R& Pendrill, D2000, Advanced Financial Accounting, Prentice Hall, London. Arnold, J2004, Financial Accounting, Prentice Hall, London. Underdown, B2005, Accounting Theory & Practice, London, Pitman. Elliot, J2008, Financial Accounting & Reporting, Oxford, Oxford University Press. Economia, 2014, The trouble with true and fair, Retrieved on 5th April 2014, from; http://economia.icaew.com/opinion/october-2013/the-trouble-with-true-and-fair Judie, B2011, True and fair is a legal need, The International Journal Of Accounting, vol. 52, no. 3,pp. 56-59. Rayman, A2006, Accounting standards true or false? London, Rutledge. The economist, 2014, True and fair, Retrieved on 5th April 2014, from; http://www.economist.com/node/12284475 Read More