True and Fair
In many counties in the world, auditors declare that financial statements give a true and fair view of the company’s affairs. True and fair has become so common in accounting that no-one thinks about it anymore. They have become a natural expression similar to ‘fair and square’.
But why do auditors go out of their way to state that financial statements are both true and fair?
True on its own would be fine. True is strong. Fair has a connotation of honesty. Even on its own it would be acceptable.
However it must be important that they should be both fair and true at the same time. Is it possible for instance that some financial statements could be true but not fair and vica versa? If they are true, who cares if they might also be unfair! How could they be unfair anyway, if they are true.
It might be possible, in theory, because of degree, that they be fair but not true.
But what intellectual contortions would be necessary for an accountant to prepare three sets of financial statements, one set that is true and another that is fair, and yet another that is both true and fair? What change in the numbers would be necessary? I suspect none at all. All three are all exactly the same.
What then is the silly trick auditors play on us by stressing that their financial statements are both true and fair? I am certain they can’t explain it to us.
Watered down true and fair
Auditors have an absolute true and fair and a qualified true and fair. The vast majority of audit reports make the following statement, using the absolute true and fair:
“In our opinion the Financial Statements give a true and fair view of the state of the Group’s and of the Company’s affairs …”
These are emphatic and to the point. But a few, and one has to search to find them, water down the ‘true and fair’ with the following statement:
“In our opinion, the accompanying consolidated financial statements give a true and fair view IN ALL MATERIAL RESPECTS of consolidated equity and …”
These, of course, are my capitals. There is no effort on the part of these auditors to emphasise this qualification. They slip it in, I suppose, and hope that nobody, like me, will notice or comment on it.
What, I wonder, is the difference between a ‘true and fair view’ and a ‘true and fair view, in all material respects’? Should a shareholder worry about it? It doesn’t sound the same: one is clear and direct, the other is watered down. But why?
Could it be that some immaterial statements have been included in these financial statements which don’t make a difference, but should be highlighted? Readers are kindly asked to search for them.
If there is no difference, why put in the qualification? Auditors, after all, are intelligent, qualified people, and it cannot be an oversight. If the qualification is unnecessary, as I suspect it is, why leave it out, instead of putting it in and telling us about it? And why do a few decide to put it in?
But it’s not really a mystery; it depends where the directors register the company. Auditors reporting on companies registered in UK follow the Companies Act and are not allowed to water down their true and fair with ‘in all material respects’. These audits must be stronger and more complete that the others! And the others copy the Americans.
But some British companies do have ‘in all material respects’ in their audit reports. The International Consolidated Airlines Group, for instance (British Airways to the ordinary person), is registered in Spain, so their audit report does have the qualification, ‘in all material respects’. So British Airways is not so British after all.
In all material respects
I should note here that auditors in the USA qualify their auditors’ reports with ‘in all material respects,’ all the time.
Why is there a difference? Is it important? Perhaps it’s a convention or another auditor’s trick. Yet these same auditors in the same audit firm apply ‘in all material respects’ in their audit reports in USA, but not in the UK.
I suppose this relates to what I call the ‘Starbucks syndrome’. When you buy a coffee in Starbucks, there is a warning on the paper cup:
“Careful! The beverage you are about to enjoy is extremely hot!”
You know it is hot, even extremely hot, because that’s what coffee is and that’s what you ordered. If it was cold you would complain, unless you ordered it with ice. Nobody reads the warning anyway. The writing is small and at the bottom of the cup. If you try to read it, you spill the coffee and burn your fingers, but the point, of course, is customers are less likely to sue Starbucks, if they burn themselves.
In all material respects’ is the same. You know the financial statements are presented fairly or true and fair because the auditors say so. That’s what an unqualified audit report is all about. If there were minor errors, you wouldn’t care. They are not significant. If there were material errors, the auditors would not state that the financial statements were presented fairly, would they?
They don’t need to state ‘in all material respects’, yet they do, to show they are being open, prudent and clear with the reader, if they decide to read it, because, like the Starbucks warning, nobody ever reads audit reports anyway.
Research on ‘presents fairly’ and ‘true and fair’
Accountants have done empirical research on audit reports. How silly can that be!
They wanted to find out what people thought about the difference in ‘presents fairly’ and ‘true and fair’ in their audit reports. That is even sillier!
Research has shown, for instance, that most people prefer true and fair to presents fairly. Now I’m not sure how necessary that was. Any logical person, who was asked whether true and fair was better than fair on its own, would surely chose the phrase with both.
Not only do they prefer true and fair, but the research states, many people believe the two phrases have different meanings. This too is logical. If the same audit firm in UK states that financial statements are true and fair, but state that another set of financial statements in USA only presents fairly the results, any logical person would believe that one is truer than the other.
Difference between true and fair and presents fairly
UK audit opinions proclaim that financial statements give a ‘true and fair’ view, whereas in the USA they ‘presents fairly’ the financial statements. What is the difference between these two opinions?
Are for instance financial statements in the UK more accurate than those in the USA because they are not only fair but true? Using simple English this must be true. Both are fair but only one is true. Another subsidiary question is: what extra work do auditors do to make this additional claim? The answer is: nothing at all.
To show I am not making this up, in June 2014 the Financial Reporting Council wrote in a paper headed True and Fair:
“Fair presentation under IFRS is equivalent to a true and fair view.”
So in practice there is no difference at all between the two terms. Yet another silly trick accountants make on the users of financial statements.
It is true that the origin of the trick arose from the United Kingdom Companies Act of 1948 which put the ‘true and fair’ concept into law, but never defined ‘truth’ and ‘fairness’ in accounting terms. Accounting intellectuals have been trying to define it ever since. Many countries in the world, those that preparing financial statements under IFRS also decided on the true and fair concept, even if they don’t really know what it means: because there is no definition. And to complete the trick, in opposition, the Americans decided on ‘presents fairly.’
We now have two opposing camps saying different things that mean the same. I would have thought this would be the subject of discussion between the two accounting bodies. Let’s be clear and transparent instead of confusing. But of course it is not. And never will ever be. They want to keep the trick alive!
