A visitor asked:
why is true and fair override allowed in britain and nowhere else?
This is a truly fine question and one that's been searched for a few times. So, I'll have to apologise for it taking me a while to answer it.
Accounting history is pretty badly understood by accountants themselves, but it's an area where accounting academics are strong. There's a pretty rich tradition of digging through the annals of accounting standard setters and the official records of the accountancy bodies to work out just how on earth we got to where we are today.
One of the scions of this field is Stephen Zeff. Zeff knows everything that's worth knowing about accounting and quite a lot more besides. He's written some top-knotch material about the form of the US audit report and an extraordinary history comparing the development of accounting standards across five countries. Accountancy Magazine recently called him "the history man." So, if you really want to know the truth about "true and fair", he's the man to ask. But in the meantime, here's my hasty point of view. This is based on a skim through Zeff's fabulous Principles Before Standards: The ICAEW’s ‘N Series’ of Recommendations on Accounting Principles 1942-1969, which he edited for the ICAEW last year, and in particular the interview Zeff did with Michael Renshall, a former technical director at the ICAEW.
"True and fair" found its way into the 1947 Companies Act, following a recommendation in the 1945 Cohen Committee report suggesting improvements to company law. Renshall claimed that it was the ICAEW that had pushed for "true and fair" to be included in their recommendations. Renshall claims further that the ICAEW had made the term up:
I do not know who devised the term. It may have been [Sir Russell] Kettle [a former president], as you say. But another prominent accountant of the time, who was a very good draftsman – my guess, it’s pure guesswork – if there was a single begetter of that phrase, it may well have been Sir Thomas Robson. He was a brilliant draftsman, and many’s the time I have seen him in the [Parliamentary and Law Committee], which was deadlocked in discussion and unable to arrive at a solution. He would go sit in the corner and scribble some notes. Then he would produce his paper and put it in front of the Committee and say, ‘Try that, Chairman’. And he would have found the right formulation or one which led the way to a solution.
Having found its way into company law, it then formed a vital part of the mindset of chartered accountants for a good fifty years or so. Despite what accounting standards might say, the concept of a "true and fair view" was more important than any other in considering a set of accounts. If a set of accounts didn't give a true and fair view, any accounting standard could be overridden to fix the problem.
Yet, as Renshall makes clear, European countries didn't have a direct equivalent and didn't really understand what the Brits meant by it. Zeff has explained elsewhere that US accountants had "fairly presents" but that that quickly became confused as to whether "fairly presents" was more important than "in accordance with US GAAP" or, as has now become commonplace, vice-versa.
The concept of "true and fair view" lives on in IFRS, but in a much watered down form. Now, "true and fair view" is a yardstick against which new standards are measured to ensure that they're consistent with it. However, accountants are generally expected to follow standards slavishly once they're published. The idea of a true and fair override, although legally possible, has receded in the collective consciousness of accountants.
Filed under: Accounting, Auditing, Institutes with tags icaew, ifrs, michael renshall, sir russell kettle, sir thomas robson, stephen zeff, true and fair, uk gaap, us gaap, you wanted to know
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