(True and Fair View" Versus ooFair Presentation" Accountings:Are They Legally Similar or Different?

MD ANOWAR ZAHIDX

1. Introduction

Principally the Fourth Accounting Directivel and the Seventh Accounting Direc-tive2 constitute the accounting law for the European Union. The former governsthe preparation of annual financial statements and the latter consolidated financialstatements. Their main feature is that they made a compromise between two op-posite currents of accounting in Europe, namely rule-based accounting (eg in Ger-many) and principle-based accounting (eg, in the UK).3 The rule-based accountingrequires that financial statements be prepared in compliance with statutory provi-sions. No departure from them is allowed. The latter requires financial statementsto be prepared applying generally accepted accounting principles (GAAP) recom-mended by an accounting body (as in the UK the Accounting Standards Board-ASB). However, in a given situation the application of the GAAP may be

* Associate Professor of Law, University of Dhaka, Dhaka-1000, Bangladesh. dr.m.a.zahid@hot-mail.com.

1 Fourth Council Directive on the Annual Accounts of Certain Types of Companies, 78/660/EEC

[1978] OJ L222/ll. (hereinafter Amual Accounting Directive). This Directive has been amended byDirective l999l60lBc, OJ L162, 26.6.1999, and Directive 2006/46/EC, infra note 12.

2 Seventh Council Directive 83/349IEEC of 13 June 1983 based on the Art. 5a(3Xg) ofthe Treatyon consolidated accounts, [1983] OJ L193l1 (hereafter Consolidated Accounts Directive). This Direc-tive has been amended by Directive 90l605lEEC, OJ L317, 16.1 1.1990.

3 Divergent accounting pmctices were '(h)igh on the list of problems faced by inte$ated Europeanmultinationals'. Paolo Cecchini, The European Challenge 1992: the Benefit ofa Single Market (Alder-shot, Brooldeld USA, Hong Kong, Singapore and Sydney: Gower, 1988) at p 32. In order to removethis impasse a proposal for a directive on accounting, prepared by a working group formed n 1969,was put forward by the European Commission to the Council in 1971. EC Bull. Supp. 7171. That wasfounded on the creditor-oriented prescriptive continental approach prevalent in Germany and France,which requires accounting reports and information to be prepared according to a standard format definedby law in detail. vanessa Edwards, EC company Law (oxford: clarendon Press, 1999) at p I 1 7. In thesame year the Groupe d'Etudes (the EEC Accountants' Study Group) invited the representatives oftheUnited Kingdom, Ireland and Denmark, the then would-be members of the EC, to discuss the proposal.Those representatives explained their Anglo-Dutch accounting philosophy that is distinguished from theFranco-German counterpart in that in the former financial statements are to be prepared according to therules defined by law (statutory provisions) and accounting standards recommended by the professionalbodies (sometimes called customary rules of accounting). The Groupe was persuaded of many Anglo-Dutch concepts, principally the "true and fair view" (TFV) discussed in the text.

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4. Conclusion: TFV Equals FP

The discussion pursued above shows that TFV is the hallmark of the EU account-ing. Both the fourth and seventh accounting directives require corporate accountsto give a TFV, which the Community Court upholds by way of interpretation.Ta Atnational level the same honour is given to the TFV principle. For example, the UKthe Companies Act 2006 requires consolidated financial statements of publiclytraded companies to be compliant with IAS (by way of implementation the IASRegulation). For annual accounts ofpublicly traded companies it provides an optionof compliance with IAS or national GAAP. And for other companies it grants thesame option. However, whatever accounting standards are applied to make financialstatements, the paramount requirement of the Companies Act is that they mustimpart a TFV, which aims at furnishing reliable information to their users. If IASor GAAP compliance does not give a TFV in a given economic circumstance, itpermits exit from them. Thus IAS/GAAP compliance is a rule under the CompaniesAct and exiting it is an exception. Therefore, the law courts will consider accountsmade in accordance with GAAP as prima facie (but not conclusive) evidence thatthey are true and fair.Ts Similar is the demand of "fair presentation" (FP) principlein North America. Notwithstanding that GAAP compliance is required there, it(GAAP compliance) is not the end in itself. The end is presentation of financialstatements free from falsity or distortion and hence reliable their users, which per-mits deparhrre from GAAP on case-by-case basis. As such this study leads to theconclusion that both TFV and FP are similar in three respects:

(a) The goal of TVF and FP is the presentation of reliable financial state-

ments;(b) GAAP is the primary tool to make financial statements to reach that

goal;(") Provided GAAP compliance fails to serve the goal, departure is allowed/

required.Therefore, from legal angle of view there is no difference between these two prin-ciples; they are identical and interchangeably useable.T6

1a Supra note 16.75 L Hoffmann and M Arden, "Legal Opinion on True and Fair" (1983) 94 Accountancy 154-156,

cited in Kirk, supra r,ote 43, at p 4.76 In this connection, see Foreword to New Zealand Society of Accountants (now the Institute of

Chartered Accountants of New Zealand, New Zealand Audiling Standards and Guidelines, (Welling-ton: 1995), where "true and fair view" and "fair presentation" have been used in the same sense. Kirk,supra note 43, at p 6.