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History And Significance Of True And Fair

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Question:

Discuss about the History and Significance of True and Fair.
 
 

Answer:

Introduction:

Every concept has its own history whether it is related to the field of science or economics or commerce. In science the concept has history through the various experiments conducted by the scientists and in the field of commerce and economics the experiments are conducted by the experienced person but do not treat it as a scientific research project. In this way, every concept has its own meaning and discovery.

In the topic under the study, the background of the concept of true and fair view will be reviewed. The definition of the true and fair view have not been provided by any law, statute, rules, regulations or any other enactment for the time being in force. It has been judged and understood by applying the rule of the common parlance. All the businesses across the world prepare their books of accounts. Small businesses maintain as per their requirements and needs as some of them are not eligible to maintain mandatory books of accounts whereas in case of other business including large ones the books of accounts needs to be made in accordance with the relevant laws and regulations. The failure to do so will result in penalty in different sections. The main purpose of the enactments is to give the clear and correct picture of the affairs of the business. Thus, to some extent the true and fair view represents the clear and correct picture of the books of accounts in the older days. The view was further extended in the beginning of the era of eighteen hundred’s when the question was considered in the United Kingdom of getting all the documents of the company uploaded on the Government website through which the stakeholders of the company can view the documents and annual reports so as to ascertain whether the company is profit making or not. Thereafter the concept of true and fair view has gained significance and has to picture in the field of accounting and auditing in year of eighteen hundred and forty four. In the United Kingdom Companies Act for 1944, it is incorporated at the first that the directors of the company are liable to get the books of accounts prepared and ready and provide the same in the form of Balance Sheet, Statement of Profit and Loss and the Cash Flow Statement and that too shall be in full and fair (Chambers and Wolnizer, 2011). The said requirements was further abolished and it has been incorporated that the directors of the company are required to adopt the financial statement of the company for the year ending and it’s the duty and responsibility of the auditor to check the financial statements and give his opinion thereon stating that the financial statements represents the true and correct view of the affairs of the company. From this mentioning of the statement it is clear that the concept of true and fair view has stepped into the roots of the accounting system and that with the approval of the statutes and law. But as of now the definition of the same concept has not been given rather it has been stated that the concept of true and fair view will be used interchangeably with the phrase true and correct, full and fair.

 

With the inclusion of having the fair practices in the business, the company will ensure that there will not be any sort of cheating, fraud, embezzlement, etc. Apart from the statutes, the concept has gained importance in the agreements which are entered by various businessmen to expand their business. One such form of business which has received importance is the Partnership. Partnership firms are created by the agreements and on the basis of the mutual trust and the confidences which the parties to the partnership firm have gained over the earlier years. The partnership agreement includes the provision that at the end of the every year the actual books of accounts will be prepared and that should reflect the true and correct value of the profit and loss earned by the firm. Through this the partners of the firm will have the correct idea of how much the profit has been earned by the firm and how much loss shall be suffered by the firm and that too shall be shared between the partners. In this route, the true and fair view has been extended from government filings of the United Kingdom based company to the inclusion in the partnership and similar kind of the business agreements (Vladu and Matis, 2012).

The concept has further gained its existence when by the court of the order in England in relation to company – Mine Adventures, the board of directors and special officers so nominated by the government were asked to prepare the balance sheet and profit and loss of the company that will represent the true state of affairs of the company. It is so done because of the company being gone to liquidation and in order to safeguard the interest of the creditors and the lenders of the funds providers at the time of the liquidations (Deegan,2010).

Similarly the banking companies have included in its guidelines to represent the actual affairs of the company that too with the supporting documents and relevant facts. It will include not only the financial statements but also the loan processing documents and the fulfillment of Know your customer guidelines.

In this world everyone has the right to know each and everything about his estate, firms, businesses and others. If he does not have the power to do so then the basic assumption of having the rational behavior of the people will be defeated. Therefore, everyone should have knowledge of everything what he possess and actually have in the books of accounts. If the books of accounts gives different figure then the figure which is as per the owner of the business is correct then the use of keeping the books of accounts will have vain. In the Universal Dictionary of Trade and Commerce, it is mentioned very clearly that the worth of anything will be equivalent to the benefits it will give to the readers and the society. This phrase has led the transformation of mere keeping books of accounts to the true and correct representation of the affairs and performance of the company.   

Thus, the true and fair view though has not been defined in any act or statutes, but has been referred by other names and has been gaining the importance since then. 

 


Australian government has taken major four decisions in the year of 1997 which are:

  • An institution or the board shall be set up for setting the accounting standard
  • The members of the board so set up shall be of the person who can take independent decision without any bias in the area of finance and accounting
  • To develop the council as the central council which will coordinate with the board so constituted and gives the grants and approve the budgets so as to ensure the effective working of the board and also selects the members of the boards after following the due recruitment process and
  • To develop the accounting standards which can be applied by all the organizations operating across the world and specifically the companies operating in the country of Australia. (Australia Australian Government Official Website, 2017.) From the year 1997, itself thus the board has decided to develop the accounting standards for the companies and the central council informed the general public and the companies that the accounting standards so developed by the accounting standard board shall be complied with at each level of companies and that will be effective from the year of two thousand and five. Thus, the mandatory provision, being incorporated in the Corporations Act of the year 2001, has informed the companies to comply the requirements of the accounting standards. The same though will be effective from the year 2005 but as the previous figures will also be required to mention in the financial statements, the same will become effective from the year 2004 in the context of presentation of the financial statements as per the defined disclosure requirements of the relevant accounting standards. Further, in accordance with the requirements of the Corporations Act, each and every company is required to maintain the books of accounts and financial statements along with the schedule and notes to the financial statements in order to provide the true and fair view of the conduct of the business (Parliament of Australia, 2009).
  • .Along with this requirement, the Corporations Act has laid down the following provisions in regard to the preparation of the financial statements:
  • The company shall prepare the financial statements including the necessary disclosures as per the provisions of the relevant accounting standards
  • The true and fair view shall be presented by the company of the state of the affairs and the performance of the company for the period ending as on the relevant date.
  • If the financial statements so made are not as per the relevant notified standard then the same fact shall be disclosed as per the disclosure requirements of the relevant accounting standard in order to give the true and fair view of the affairs of the company
  • Along with the above, the auditors are required to audit the books of accounts along with the financial statements of the company and shall give the report stating their opinion as to whether the disclosures so made or financial statements so prepared are in accordance with the relevant financial statements (FRC, 2014).
 


But the provision of the Corporations Act is in disagreement with the concept of the true and fair view as envisaged since its inception or coming into existence. The Corporations Act have laid down that if the financial statements are in compliance with the accounting standards then no disclosure is required and in case it does not comply with the relevant accounting standards as applicable to the company then the disclosure needs to be made as to represent the true and fair view of the financial position and financial performance of the company. The same has been argued by many authors and persons. The Institute of Directors located in Australia has argued that the mandatory provisions as envisaged by the Corporations Act is the applicability and the compliance with the accounting standards and to have the financial statements represented the true and fair view, the necessary disclosure will be required when the standards are not applied and hence regarded the true and fair view as secondary compliance. Further the Chairman of the board has argued and stated that the two concepts – true and fair view and the accounting standards are two distinct and separate and cannot be equated with one another. This fact is further supported by committee of the Auditing and Assurance Board of Australia when it is stated that the true and fair view is the concept which has over riding effect in almost all of the accounting standards and no requirement of any accounting or auditing standard can equate with the same. One of member of the same committee has further argued that in common parlance if the company is maintaining the books of accounts and preparing the financial statements in accordance with the accounting standards then the same in itself communicate the fact that the company’s financial statements reflects a true and fair view of the financial position and the financial performance of the company. The committee and Australian Exchange Commission members in consortium has further argued it’s the duty of the auditors to verify the books of accounts and check whether the financial statements have been prepared in accordance with the relevant accounting standards. After checking and verifying the same the auditor shall give his or her opinion in the audit report stating the flaws or discrepancies if any noticed and the non compliance with the relevant accounting standard if any comes into place during the audit. Thus, these arguments reflect that the accounting standard has been developed and maintained only for reflecting the true and fair view of the conduct of the company. Without the accounting standards the financial statements cannot represent the true and fair view and also will not be helpful for the users if the financial statements. In this way, the concept of true and fair view has gained significance and has got support from various boards and committees and has over riding effect over all the statutes and regulations and governance.

Every company is required to prepare the financial statements at the period end and as per the provisions of the Corporations Act 2001; the company shall comply with the relevant accounting standards. This is done so as to reflect the true and fair view of the affairs and position of the company as at the year end. The concept has come into existence in the year of 1844 through the enactment of Joint Stock Companies Act, 1844. From then the development have taken place in almost all the different types of industry and the same have been followed consistently throughout the life of the company and cases have been seen where at the time of liquidation adoption of the true and fair view has been emphasized so as to protect the interests of the investor and the creditors. Thus, to conclude the review the concept of true and fair view is very important for every company.

True and fair view though defined by any law, regulation or rules but still has gained importance from all over the years. The aim of the study at the first instance is to know from where the concept of true and fair view has come and later the aim was to know what was the purpose of understanding the meaning of the concept and how it has gained importance. Therefore, to fulfill this objective, the review has been started with the history of the concept true and fair view. From where the term has come into origin and what is the intent of using it in the financial system has been discussed. In the beginning the light has been thrown in the cases of early eighteenth century and thereafter the importance if true and fair view in the business agreements, formal agreements and partnership agreements has been detailed. Thereafter, the support that the concept has received have been discussed from the Australian Government and reached to the level where the concept has given the overriding effect. The review has been bifurcated into the different heading so as to provide the better understanding of the concept and have obtained the data for relevant sources.

 


The financial statements of every company should be prepared in such a manner that the company’s financial position and financial performance can be best viewed. Thus, there arises the need of having the understanding of the concept – True and Fair view. The users can obtain the relevant information and take the decision on it only when the financial statements so prepared will give the true picture of the health of the company otherwise the users will end up with choosing another company for their purpose.   

The literature review so conducted and explained has stated that the accounting standards so framed by the Australian Accounting Standards Board are very important in preparing the financial statements. It’s because the accounting standard help in ensuring that the financial statements reflects the true and fair view of the position and performance of the company in financial terms. Thus, to summarize the financial statements shall reflect the true and fair view at each point of time.

 

References

Australian Government Official Website, (2017), “Strengthening the Financial Reporting Framework” available at https://archive.treasury.gov.au/documents/403/HTML/docshell.asp?URL=Ch6.asp accessed on 13/04/2017.

Chambers R and Wolnizer P, (2011), “A True and Fair View of position and results: the historical background” available at https://sydney.edu.au/arms/archives/chambers/chambers_onlineitems/10-USA-P202-2-09640.PDF   accessed on 12/04/2017.

Deegan C, (2010), “An Overview of the Australian External reporting Environment”, available at https://www.slideshare.net/joshuatuisawau/deegan5e-ch01   accessed on 13/04/2017.

FRC, (2014), “True and Fair Statement” available at https://www.accaglobal.com/in/en/technical-activities/technical-resources-search/2014/june/frc-true-fair.html  accessed on 12/04/2017.

Parliament of Australia, (2009), “Financial Reporting” available at www.aph.gov.au/Parliamentary_Business/.../House_of_Representatives_Committees? accessed on 12/04/2017.

Vladu A and Matis D, (2012), “True and Fair View and Creative Accounting Conceptual Delimitations Based on Papineau’s Tree Methodology”, available at https://www.oeconomica.uab.ro/upload/lucrari/1420121/09.pdf   accessed on 12/04/2017.

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