On economic reality, representational faithfulness and the ‘true and fair override’

Abstract

The concept of ‘representational faithfulness’ is related to notions such as financial statements ‘giving a true and fair view’ or ‘presenting fairly’, which form a key part of auditors' opinion statements, and to ‘creative accounting’. These considerations lead to some deep conceptual issues concerning the relationship between financial reporting and its objects. We argue that it is mistaken to consider this relationship as one of ‘correspondence’. It is a more subtle, reflexive relationship which needs to be explicated if both the power and the fragility of accounting and financial reporting are to be properly understood. A related issue with which accounting standard-setters are confronted is exemplified in IAS 1, namely the possibility that ‘compliance with a Standard would be misleading, and…therefore departure from a requirement is necessary to achieve a fair presentation’ (IASC, 1997 para. 13). This issue is sometimes referred to as ‘the true and fair override’ (TFO), whereby a guiding principle, or higher-order rule (meta-rule), is invoked to justify non-application of a lower-order rule. The issue of the TFO is related to that of representational faithfulness (RF) mentioned above because the standard justification given for the TFO implies ‘correspondence’ between financial reporting and what it seeks to represent. We argue that if the characterisation of the relationship between financial reporting and its objects as one of ‘correspondence’ is rejected, justification of the TFO is problematic. In other words, while such a meta-rule has a key role to play as a guiding principle, to use it as an ‘override’ raises serious philosophical problems, as well as potential problems of preparer opportunism.