RE-EXAMINATION OF A TRUE AND FAIR VIEW OPINION IN THE MIDST OF PECUNIARY CRISIS FOR INVESTMENT DECISION-MAKING
Keywords: Published report; true and fair; expectation gap; independent auditor; value.
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
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.
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)?
Objectives of the study
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.
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.
Data presentation and analysis
Table I Distribution of respondents
Source: Questionnaire administration, 2009.
Table 2: Summary of responses on key issues on the use of a true and fair view
Source: Researchers findings, 2009.
KEY: Y-yes, U-uncertain, N-no, TOT-total.
Table 3 Σ ‘yes’ response
Where RT = row total
SSR = 1634
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.
The findings from the ancillary set, in the structured interview questions, administered are set forth here:
Conclusion and recommendations
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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