Over the years, the term ‘’True and Fair view has been a matter of debate for the accounting pundits with each asserting his own view over the term. The debate is based on the usefulness, importance and most importantly, the exact definition of the term. In this paper, we will unearth the view of various accounting academicians and accounting literature and will look if there exist a common definition or rule for ‘’True and Fair view’’. Later, we will also look forward to the role of ethical education in ensuring ‘’True and Fair view’’ of the financial statements. I am sure that by the end of this paper, we will be having a comprehensive overview of term ‘’True and Fair view’’ and role of ethical education in promoting it.
Part A: What is ‘’True and Fair view’’ in accounting terms?
The term ‘True and Fair’ is one of the most common term used in the financial reporting of all the public listed companies around the globe. In general, it guides the auditors and the makers of the financial statements to ensure that all the relevant accounting standards are followed and each assumption and transaction are accounted for on a justified decision. Thus, ‘True and Fair’ can said to be a benchmark principle for the preparation of the financial statements. A common definition for the term true and fair can be described as:
- True: It refers to high accuracy of the financial statements by ensuring that they have been prepared according to the relevant rules of the accounting standards being followed by the company, i.e. US GAAP or IFRS and they do not contain any material misstatements that could mislead the readers. Here the term, misstatements refers to material errors or omission of transaction that could hide the true image of the financial statements
- Fair: Fair representation of the financial statements implies that they present all the accounting information without any element of bias and they also reflect the economic as well as legal substance of the accounting transactions.
The importance of this accounting term can be judged from the fact that the preparation of the true and fair financial statements has been recognized as a core responsibility of the directors of the companies as laid by Companies Act of many countries around the world. An equal responsibility is also endowed on the external auditors to ensure that the financial statements provide a true and fair financial statement else they are directed to provide a qualified opinion on their audit report. Thus, True and Fair can also be referred to as a guidance principle used for auditing and financial reporting purpose and to the company law acts.
However, with abundance of accounting literature and each explaining True and Fair in its own view, we are still not sure what is the appropriate definition of the term ‘’True and Fair’’ and about its origin. For Instance, as stated in the Journal of Financial Accounting, the term originated from the basic concepts of presenting the financial information:
- Going Concern
And without some form of standardised accounting treatment of financial transactions, it would be very difficult for a user of accounts to compare the performance of an organisation either through time or with the performance of other organisations. (Arnold, 1994) Similarly, The Statement of Principles for Financial reporting also laid the The Qualitative Characteristics Of Financial Information: relevance, reliable, comparability, understandable as the basis of origin for ‘’True and Fair View’’ of the financial statements (Qualitative Characteristic of the Financial Statements, 1999)
In another view offered by Elliot and Elliot in their Statement of Accounting Principles, they have cited ‘’True and Fair View’’ as a legal concept and can only be authoritatively decided by a court’ in a detail description, they give following attributes:
- Authority: all transactions are official and above board.
- Accurate: all information provided is accurate, e.g. excise bill give full details of total production and excise tax at relevant rate.
- Complete: there should be no missing dockets in the accounting system.
Thus, if any accountant have the above qualities, he can said to be following a ‘’True and Fair’’ view of the financial statements being prepared by him. But, the critiques cite that with number of definitions and views over ‘’what is True and Fair view of financial statement?’’, an accountant can never be sure over if he is successful in providing a true image of the financial statements.
This leads to serious doubt regarding the truth and fairness of the accounts, and displays the problems with arbitrary judgements. While one group of critiques cites that in the absence of a precise definition, we cannot come to a common conclusion over ‘’true and fair view’, other cites that even if an accountant follows the qualitative and legal characteristics of providing true and fair view of the financial statement, does it mean that even one small error in the financial statement leads to conclusion that the accounts do not provide a ‘true and fair’ view?. Continuing the debate the critiques cite that it is impossible for an accountant or an auditor to ensure that every dollar in a multi-million income statement is truly accounted for and thus, a certain amount of risk is always inherent in the financial reporting as it is not possible to be 100% assure that financial statements are made with high accuracy and perfect true and fair view is ensured. For Instance, they cite fault in accounting principles as although valuation practice is well established in the case of equity and asset values, it is historically the case that much less attention has been focused on the valuation of liabilities. (Lonergan, 1998)
After referring to some of the academic journals and accounting academicians, we can conclude that unlike accounting standards as US GAAP and IFRS, there is no set rules on the term ‘’True and Fair view’’ and it is largely based on the judgment of each individual as how he perceives the term. According to Kirk(2001), true and fair view in financial reporting is closely associated with judgment. Similarly, as cited by (Blake, et al., 1996), the definition of ‘’True and Fair view’’ is not fixed and thus involves professional judgment and the useful meaning of the phrase ‘True and Fair’ can only be unearthed through usage. Thus, this discussion has now built the true and fair view as a social responsibility for the accountants as the intention behind the use of financial statement is associated with the wider moral stances within the society. But yet again different scholars pursue that accountants cannot be blamed as ‘True and Fair view’ can never have a certain definition. For instance, truth has a nature to be either absolute or relative. However, despite this fact, the concept of truth has been applied in accounting and research. Similarly, the term fairness also varies courtesy individual interpretation and application. For this reason, both truth and fairness in the financial statement are more related to the circumstances/ professional judgments rather than a fixed definition of the concept.
So this leads to another question, how an accountant can be assured that he is following an appropriate professional judgment relating to ‘’True and Fair view’’. According to Jo & Kim, 2008, the appropriate true professional judgment while preparing the financial statements is related to presentation of accounting data that can be easily understood by the users and most importantly, the presentation should be in an impartial manner. However, this view is contradictory to the view of other authors. Blake et. al., 1996, asserts their view that instead of describing the concept of ‘’True and Fair view’’, accountants and auditors should source their professional judgment from rules and standards that are already established. Other authors have also supported the view of Blake and propose the idea that accounting standards as IFRS and US GAAP should be the source of description of ‘’Truth and Fair view’’
Finally, from the detailed discussion of the concept of true and fair view in the accounting theory and general reporting, we can conclude that true and fair view of the financial statement is a relative concept and is largely based on individual interpretation as there is no certain definition of the concept and only circumstances or following rules of the accounting standards seems to be an efficient solution to ensure their application while preparing the financial statements.
Part B: Does ethical education lead to a true and fairer view of the financial statements?
Ethics in financial reporting refers to the standards that ensure transparency by accountants, auditors and corporate individuals or any other member who is involved in the preparation of the financial statements. According to Staubus, ethics in financial reporting were given least importance until the million dollar accounting fraud of Enron took place in the United States (Staubus, 2005). He pointed to the fact that every believed the financial statement to provide true and fair view as they were provided with an unqualified opinion from the auditors. However, with Enron case, it was disclosed that even auditors could be involved in unethical practices and post that period, it was confirmed that without ethical practice, it is impossible for the accounting profession to maintain true and fair view of the financial statements. The phrase from a well known accounting author indicates the importance of ethical education in the accounting profession and in true and fair view of the financial statement.
In another view of Stolowy and Breton, it is of extreme importance to have ethical standards in accounting and financial reporting as in their absence, professionals do strange things. (Stolowy &Breton, 2004). The basic structure of accounting itself allows the professionals to use the number just the way they want and in their own favour. Thus, in response to avoid such practices and to ensure that the financial statements being prepared are providing true and fair view, ethics and ethical education play a great role. May academicians and authors support this view as they assert that in the absence of ethics, it will be rare to see a financial statement providing a true and fair view. For Instance, in the words of Frecka, without considering ethical standards in reporting, it is hard to create limitations or boundaries to corporate culture ( Frecka, 2008). Many authors have also linked management decisions and ethics as a factor that might lead to unethical reporting. Since, financial reports are made under the observation of the management, it is possible that the management decisions impact true and fair view of the financial statements and in the absence of ethical education, they might produce completely biased financial reports (Kalbers, 2009).
The three most common ethical models which are commonly used in relation to financial reporting are:
- Virtue Ethics
The model of utilitarianism gives due consideration to the consequences of an action and directs the users to perform only those actions that will produce the best results. For Instance, if an accountant understands that only a true and fair view of the financial statements will produce the best results rather than immaterial or fraudulent declaration of the financial statements, he or she will choose the action that will produce the best outcome.
As for virtue ethic model, it is in complete contrast to utilitarian approach as while latter focus on the consequence of an action, former is laid on moral characters or virtues. For Instance, ethically an accounting professional should always give true and fair view of the financial statements, which as per virtue ethic model is based on moral virtue’ It is good to be honest’’
Thus, with the above discussion we can conclude that although, academicians and accounting professionals do not agree over an appropriate definition of the true and fair view of the financial statements. However, what they agree over is that ethics in accounting do lead to true and fair presentation of the financial statements and their absence could lead to multiple accounting frauds just as Enron.
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