THE Institute of Chartered Accountants of Scotland has reinforced its commitment to principles-based accounting by republishing a 25-year-old paper on this topic.
The accountancy body is keen to emphasise that it prefers principles-based accounting to the rules-based (or “tick-box”) approach favoured in many overseas markets including the USA.
‘A True and Fair View in Company Accounts‘, written by Professor David Flint, a former professor of accountancy and vice-principal at Glasgow University and past president of ICAS who was a partner in the accountants Mann Judd Gordon & Co for 20 years, was first published in 1982.
A quarter of a century on, the topic still resonates with accountants. This is partly because the Companies Act 2006 requires financial reports to include “responsibility statement” in which directors must confirm that their published figures give “a true and fair view”.
The move was welcomed by UK beancounters who have interpreted this as a swing back towards the principles-based accounting that many of them cherish.
One reason they favour principles-based accounting — as opposed to the rules-based system favoured by accountants in the US and many overseas markets — is it gives scope to exercise professional judgment rather than just checking whether a formulaic list of rules has been adhered to.
A principles-based approach therefore places greater value on accountants’ skills — meaning they should also enjoy more prestige and earning capacity.
“Allowing users and preparers of accounts free access to professor Flint’s paper will reinforce the cornerstone of financial reporting — the true and fair view”, said Isobel Sharp, vice-president of ICAS and a partner in Deloitte.
“Why re-issue a paper written more than two decades ago? Quite simply, it stands the test of time and everyone with an interest in financial reporting should refer to Professor Flint’s paper.
“Even though a quarter of a century has passed since it was written, its relevance is undiminished, demonstrating the lasting value of the ‘true and fair’ principle.
“At a time when parts of the global profession seem to seek more rules as the answer to everything, it is vital to remind standard-setters, regulators, professional accountants and auditors of the importance of placing on preparers the simple test of ‘do my accounts show a true and fair view?’. The ‘true and fair view’ is the best and supreme principle and Professor David Flint‘s explanation is unsurpassed.”
The government’s decision to adopt the phrase “true and fair view” in the Companies Act 2006 followed lobbying from, among others, ICAS, investors and other users of financial statements. It is an accounting concept that owes its origins to the 19th century.
However the supremacy of “true and fair view” has comes under attack recent years, for example by the onset of International Financial Reporting Standards (IFRS), which do not require directors to state that their figures provide a “true and fair view”.
In an interview with The Herald last year, ICAS chief executive Anton Colella said: “Rules-based standards would only undermine the professionalism of the sector, limiting the scope for the exercising of professional judgement. Clients don’t want their accountants to be mere box-tickers.”
Colella added that the technical team at ICAS is working on case-studies that will demonstrate the merits of a principles-based approach.
This article was published in The Herald on 5 February 2007