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JOURNAL OF RESEARCH IN NATIONAL DEVELOPMENT VOLUME 7 NO 2, DECEMBER, 2009

RE-EXAMINATION OF A TRUE AND FAIR VIEW OPINION IN THE MIDST OF PECUNIARY CRISIS FOR INVESTMENT DECISION-MAKING
Comfort E.Omorogbe
Department of Accounting, Crawford University,  Igbesa, Ogun State, Nigeria
E-mail: omorogbece@yahoo .com

Abstract
This paper is set out to examine the use of a true and fair opinion in audit reports with a view to proposing an alternative phrase that would limit the auditors’ liability on the audit, and create confidence for investment decision-making. The views of accountants and business administrators in academics and practice; and the public within the academic environment represented the sample used as respondents for primary data collection. Data collected were analyzed using statistical tools like simple percentages and Kendalls measure of concordance. Amongst others, it was found that a majority of the respondents are of the opinion that a shift from the popular ‘a true and fair view’ opinion would create more credibility on the audit function, and decision making.  The researcher advocates an alternative phrase that would reflect the independent auditors’ actual role in the financial audit along with standardized transparency rating-similar to the credit rating given to bonds, to enhance the integrity of the auditor, and dependability of prospective investor.     

Keywords:  Published report; true and fair; expectation gap; independent auditor; value.


Introduction
Over the years, the function of the auditors especially with regards to reporting has been quite remarkable. The auditors are seen as arms length third party not subject to management’s pressure, and providing reliable reports for portfolio management. Independent auditors have little to gain (and much to lose) from misrepresenting financial information provided to shareholders. Hence, while the law mandates the auditors to audit and certify financial statements to ensure that they comply with established legal requirements, the auditors try to do just that, aware that the potential liability is great and they have a reputation to protect. They are conscious of the fact that they are deterred from cooperating with management in providing requested certification where such certification should not be made.

Unfortunately as the economy experienced bubbles in the 1990s – 2000, with financial trading in securities, many corporate management adopted creative accounting practices to deliver the kind of predictable and robust earnings and revenue growth demanded by investors, governance fell by the way side. All too often, those whose mandate was to act as gate keeper were tempted by misguided compensation policies to forfeit their autonomy and independence (The American Assembly, 2003).

Consequent upon this, the auditors were thus perceived as the client’s partner as they observed investing personally in their clients business, set up internal accounting procedures and training their client’s staff. The public gradually lost confident in the independence and integrity of the auditor. The concept of a true and fair view was called into question. The acceptance of audited financial statement as an authentic and reliable document for validating investment portfolio gradually turned into a traditional concept, as a true and fair opinion on audited financial report were perceived as misleading.

The perception has been due to the collapse and bankruptcy of several big businesses shortly after unqualified report of true and fair view has been published. The concept of a true and fair view has been quite controversial probably because there is no statutory definition of a true and fair view and there is no agreement or authoritative court judgments on what a true and fair view means (Leibler, 2002). However, not having a one size fit all definition does not mean that the concept is totally devoid of content or useless. If a true and fair view requirement is ignored, the reforms designed to enhance independence and accountability might not achieve the desired

outcome. Accountants who serve as auditors of publicly traded companies have a complete different responsibility, as they aught not to be
just advocates, but gate keepers whose primary allegiance must be to the public. Auditing serve as the public protector of the integrity of financial statements, upon which rests public confidence in financial markets.

Sadly, a true and fair view in audited financial statement has been identified by many to mean compliance with Generally Accepted Accounting Principles (GAAP) and has been seen by others to represent the ritual to show the extent of financial reporting quality. This research is set out to investigate the publics’ general perception of the opinion of a true and fair view in audited financial reports issued by the auditors.       

The problem
The concept of a true and fair view in financial reporting has been perceived as superfluous rather than real. It has a literal rather than a technical interpretation (Kirk, 2006). Its interpretation has been the subject of controversy ever since it was formally introduced (Evans, 1990). The concept of a true and fair view has attracted the attention of several bodies and observers especially since the fall of Enron and World com in United States; in Australia  HIH, One. Tel and Harris Scarfe with so much indictment on the auditors with special reference to one of the Big 5 auditing firms, Arthur Anderson. This event shook the foundations of the accounting profession. While unraveling the issues surrounding the fall and finding a panacea to the hazy situation, yet more and more firms fell into bankruptcy with the big question “Where were the auditors?”    

Several researchers have looked at the concept from various perspectives: the legal (Karan, 2002); historically (Napier, 2002); as a cornerstone of financial reporting in United Kingdom (FRC, 2005); should override compliance with accounting standards (AICD, 1997). The true and fair view concept was investigated in the UK and “presents fairly” or fair presentation” was adopted to replace true and fair view, with no substantive change in the objectives of an audit and the nature of auditors’ responsibilities. This change simply reflected a change in style of reporting as both terms are equivalent in meaning.

Auditors do not bear any responsibility for the preparation and presentation of the financial statements. It is the responsibility of the directors. They simply report upon what has been presented to them. Since that is the case, why should an auditor say it is true and fair when he has no responsibility of faithful representation and the spin-off effect of the transactions thereof? 

The Term True connotes that in all material respects, the statement is not deceitful; is not false; it can be relied upon; it is dependable. While the term ‘fair’ connotes faithfulness; precision; and satisfies over arching test. The question now is who should bear the brunt when a financial statement is discovered to be misrepresented? Is it the preparer of the financial statement who was silent after his presentation or the one who countersigns true and fair aloud? The auditor traditionally is not responsible for detecting fraud although noticed fraud can be reported to management. They do not check every figure in the financial reports, they simply audit based on selective testing only. They do not look at every transaction carried out by the organization, or test the adequacy of all of the organization’s internal controls, then why should the auditor affirmatively say it shows a true and fair view? Is it just because it is a requirement spelt out in the Generally Acceptable Accounting Practice (GAAP)?
This research work examines the reporting function of the independent auditor and the usage of a true and fair view, with a view to suggesting an alternative term that would reflect the auditors’ actual role played in the audit of financial report.

Objectives of the study
The broad objective of this study is to re-examine the usage of a true and fair view opinion in financial reports with a view to proffering an alternative term that connotes a different meaning to close up the expectation gap and build confidence for investment decisions, in this period of financial meltdown.

 Associated objectives are: to examine the events creating the expectation gap; identify the

implication of a true and fair view usage; and examine the public’s perception of the expression of a true and fair view usage in audited financial reports.

Research methodology

The purposive sampling technique was applied. Patton (2002), explains that “a purposive sample method can be used when one can ascertain what is to be found out, what will be useful, what will have credibility and what can be done within available resources. Structured interview questions were constructed to reflect the basic objective of this study. It was a respondent interview section (Robson, 2002); although due to the large number involved, it was administered as though a structured questionnaire. Respondents were required to agree, disagree or state uncertain to key issues on a true and fair view concept. The structured interview question had a checklist of five major variables, and five ancillary questions.

A structured questionnaire was the basic instrument used. It was administered to professional and academic accountants and business administrator, and the public within the academic environment. A total of one hundred and eighty questionnaires were administered and one hundred and fifty three were retrieved. The secondary data were obtained from published studies on accounting profession. The data gathered were analyzed using such statistical tools as simple percentages, and Kendall’s

 

measure of concordance at a 0.05 level of significance, to ascertain whether or not there is an agreement in their views concerning the subject matter. 
 
 Historical development of a true and fair view
A ‘true and fair view’ (FTV) concept whose origin can be traced back at least to the Joint Stock Companies Registration and Regulation Act of 1844 (UK), that required preparation of ‘full and fair’ balance sheets (McGregor, 1992) is still integral to corporate financial reporting regimes in the UK and many other English speaking countries of the world (Kenley, 1985). It evolved as a device for curtailing the unscrupulous activities of corporate capitalism - a modern western European phenomenon which originated in the sixteenth century and was exported to the rest of the world by political colonialism and economic empire-building (Hadden, 1977). Since the issuance of the European Community’s Fourth Directive in July 1978, this concept has also been extended to the nations of the European Economic Community (Blake; Higson,1993) and more recently adopted by the Nordic countries as well (Nobes;Aistitt, 2001). Notwithstanding the widespread application of this term, its interpretation has been the subject of dispute between accountants and lawyers ever since it was formally introduced by the Companies Act 1948 (UK) (Evans, 1990) and the purpose served by it remains unclear.  


 Data presentation and analysis

Table I                              Distribution of respondents


Work category

No. of respondents

% response

Professional accountant

18

11.76

Academic accountant

42

27.45

Practicing business administrator

12

07.84

Academic business administrator

40

26.14

Others (the Public)

41

26.80

Total

153

100

 Source: Questionnaire administration, 2009.

Table 2:   Summary of responses on key issues on the use of a true and fair view

Variables for considerations

Accountants

Business administrators

The public

S/n

 

Y

U

N

TOT

Y

U

N

TOT

Y

U

N

TOT

1

Misleading to  
independent  
audit function

23

-

37

60

20

02

30

52

20

12

09

41

2

 No longer
adds credibility to financial  statement

10

10

40

60

14

03

35

52

20

11

10

41

3

Cannot be  relied upon for Investment Decision

40

-

20

60

10

02

40

52

20

0

21

41

4

Change away from a true and fair would close expectation gap

33

-

27

60

52

-

-

52

15

08

18

41

5

Financial statement insurance scheme would not add credence to published accounts.

 

 

 

 

34

 

 

 

 

14

 

 

 

 

12

 

 

 

 

60

 

 

 

 

26

 

 

 

 

12

 

 

 

 

14

 

 

 

 

52

 

 

 

 

13

 

 

 

 

25

 

 

 

 

03

 

 

 

 

41

 

 

140

24

136

240

96

19

119

260

88

56

61

164

Source: Researchers findings, 2009.

KEY: Y-yes,  U-uncertain, N-no, TOT-total.

Table 3                Σ ‘yes’ response

s/n

Acct

Admin

Public

RT

RT2

1

23

20

20

63

3969

2

10

14

20

44

1936

3

40

10

20

70

4900

4

33

52

15

100

10000

5

34

26

13

73

5329

 

 

 

 

Σ  350

Σ 26134

Where RT = row total
            RT2 = square of row total
The sum of the square of row
SSR = ΣRT2 – Σ (RT)2
                              N
Where ΣRT2 = sum of the square of row total

N = number of question examined

SSR = 1634
Computation of Kendall’s W
Using the sum of the squares computed to obtain Kendall’s W:
W =        3 SSR     .      
                  K2N(N2-1)
 Where K = number of observed constituencies
SSR = Sum of square
Computed W = 0.18
Using X2 table to measure
X2 =     K(N-I) W
15(5-1) 0.18
= 10.8
df = N – I = 5 – 1 = 4
Level of significance = 0.05
The table value of X2 = 9.49
 

At 0.05 level of significance and 12 degree of freedom (df) the computed X2 is 10.8. Since it is more than the critical X2 (9.49), we conclude that there is significant agreement among the respondents that the use of a true and fair view in published financial statement is misleading.

Findings
The result from Kendalls measure of concordance reveals

  • That the use of a true and fair view in audit report is misleading the independent audit function. This means, the use of a true and fair view opinion can indict an auditor, and can call his integrity to question if information/representation is misleading.
  • That the term a true and fair view as an opinion, no longer adds credibility to the financial statement.
  • Published unqualified accounts so decorated, can no longer be relied upon for investment decision making.
  • That a shift from the term a true and fair view to a completely different term with different connotation would close the expectation gap.
  • The financial statement insurance scheme will not add credence to published unqualified accounts.

The findings from the ancillary set, in the structured interview questions, administered are set forth here:


  • 54% respondents state that they do not rely on audited reports to make investment decisions for reasons varying from inability to study results and forecast, inability to obtain certain economic information they desire, to annual report been seen as a routine corporate activity with no serious implication.
  • 46% responded that an unqualified financial report with a true and fair view expression cannot be misleading and that some factors can affect a true and fair view without necessarily having a misleading representation. The factors include management of investment, management of information in corporate governance and non-independence of the auditor.
  • Despite the lack of confidence expressed by users of audited financial statement, respondents believe that the term a true and fair view should still be in use because it is a requirement in the generally acceptable accounting practice. It places a prima facie value on the accounts.
  •  About 60% recommended a shift from the usage of a true and fair view to save the auditors from embarrassment as a result of the expectation gap. The following terms were summarized as
  • substitute suggestions from respondents: ‘fairly only’; ‘A view only’; ‘A considerable view’; ‘A fair account’; ‘Accounts at users risk’.

 

Conclusion and recommendations
This study has succeeded in examining the concept of a true and fair view used in unqualified audit report. The term gives a prima-facie value to the financial statement. With the failure of businesses even after such expression has being used by the auditor, the term has continued to send wrong signals on the independent function of the auditor. The sensitivity of the auditors’ function requires accuracy, transparency and integrity, hence the need to change the term to one that buttresses the actual audit function performed by the auditor.  The auditors’ legitimate duty is to report upon accounts presented. They are not engaged to detect fraud although they can report fraud if detected in the course of the audit.

Nonetheless, users expect auditors to detect all false misrepresentation and report thereon. To close this expectation gap, we advocate that there should be a shift from the usual ‘a true and fair view’ opinion to a considerable view at users’ risk.  This phrase is of great significance because the auditors simply examined what was presented to them by management, to ascertain whether the accounts have been prepared in consonance with relevant accounting standards and practices. So, the auditors simply claim that the financial statement has been considered in line with the necessary guidelines, and users of such information are doing so on their judgment as the auditors have no mandate to uncover all unnoticed frauds or misrepresentation. That should be accompanied by a public and standardized transparency rating-similar to the credit rating given to bonds. This would allow the users of the financial statements to better assess the quality of the financial statement prior to any investment decision.

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