Accounting is an essential part of every business regardless of its size, nature or scope. The purpose of accounting is to communicate the financial position of the company and assist the shareholders, investors, creditors, and all other stakeholders in decision making. While it is mandatory for management to have a standard accounting practice in place, there are some crucial points that must be complied with and cannot be omitted unless under special circumstances.
By virtue of Section 128 of the Companies Act, 2013 (“Act”) it becomes a statutory obligation for every company to prepare and keep at its registered office, books of account and other relevant books and papers. The section further requires that these books of account shall reflect the “true and fair” view (“TFV”) of the company’s affairs.
But what exactly should be “true” and what shall be “fair”? We shall try to understand the meaning of both these terms through this article.
The concept of true and fair view has not been defined anywhere under any law. However, based on various judicial precedents, we are able to make out some inferences to these terms. In ordinary sense, the word “true” can be interpreted as requiring accuracy in detail, whereas “fair” requires the accuracy of overall impression, not derived for unjust advantage. A “true and fair view” of the company’s affairs is not an additional requirement for accounting standards. It is the whole esse of accounting, which allows the measurement of economic performance of the company to the stakeholders who can then analyze the financial position and prevent the economy from being paralyzed.
A plain reading of Section 129 of the Act lists out the following requirements for a financial statement to be considered “true and fair.” These are:
The section provides exception to certain companies from complying with the TFV requirement mandated in this section. These include Banking companies, Insurance Companies, Companies engaged in the generation or supply of electricity, or Comapnies governed by any other law. The reason for this exception is that these companies have their own special legislation governing them, and under which they are incorporated. So long as this governing legislation does not require a matter to be disclosed by that law, the financial statements of such company shall not be treated as not disclosing a true and fair view of the state of affairs of the company.
The Companies Act, 2013 creates a dual obligation on the Auditors and the Directors of the Company to ensure that this “true and fair view” of the financial statements are presented to the stakeholders. Section 143 (2) of the Act states that while preparing the audit report, the Auditor shall ensure that the information being presented by him is to the best of his information and knowledge, and gives a true and fair view of the state of the company’s affairs. On the other hand, Clause (5) of Section 134 sets down that the directors shall select and apply such accounting policies and make reasonable and prudent judgments such that it gives true and fair view of the state of affairs of the company and of the profit and loss of the company at the end of the financial year.
Accordingly, once the financial statements are prepared by the management, the statutory auditor and the auditing committee is entrusted with the responsibility of inspecting and examining the records to the best of their knowledge. Once audited, it is then forwarded to the Board of Directors for their approval at the Board Meeting, which is subsequently presented at the Annual General Meeting.
It should be noted that what is required by law is a “true and fair view” and not “true and correct view.” This is because assuring a “correct” view implies that there is absolutely no error in the Books of Account or Financial Statements. Every transaction recorded in such case, and every arithmetic calculation are all deemed to be free from error. This however is not humanly possible as humans are bound to err even if it is a minute inacuracy. Additionally, this would also create a substantial liability on the auditor for the inspection of accounts presented to him by the management.
Hence the whole purpose of having the TFV concept is so that the burden on the auditor is reduced and he only attests to the fact that every information presented to him is true to his knowledge which was exercised with due care and diligence.
In the case of J.K. Industries Ltd. v. Union of India (2007), it was stated that “a true and fair view is one which requires the Auditor to look at the substance rather than pure legal form.” So the Accounting Standards should place importance on the Substance being presented over the Form in which it is presented. When a company adheres to the principle of “substance over form,” its financial statements will reflect the economic substance of the organisation rather than just reflecting the record of transactions.
Therefore, based on our understanding so far, we conclude that “true” means presentation of the accounting information in a factually correct manner, where all underlying statutory requirements are complied with and “fair” means to have an unambiguous and unbiased presentation of the financial transactions.
These two terms are not independent of each other in respect of accounting, and so cannot be read or practiced separately. Only when faithful representation of reliable information is put forth to the viewers can one say that it is “true and fair.”
Duties of Auditor:
The role of an Auditor is to ensure that an independent examination of the accounts of an entity takes place and an impartial opinion is presented on the same. As required under Section 143, in order to ensure that the “true and fair view” of the accounts of the company are presented, the auditor needs to undertake the following compliance:
1. There should be arithmetic accuracy in the financial statements of the company vis-à-vis its Books of Accounts.
2. The Generally Accepted Accounting Principles (GAAP) are followed while preparing and presenting financial statements. Assets and liabilities should be valued accurately and a distinction should be made between Capital and Revenue expenditure.
3. The Generally Accepted Auditing Standards (GAAS) are followed while auditing in order to present reliable and independent assessment of the financial statements.
4. Exercise Professional skepticism and communicate his opinion through an audit report.
5. Ensure that material information is not omitted from the report.
This list is not an exhaustive one, but contains only those conditions that appear on the face of the law. Many other requisites arise while practicing accounting and auditing which can be conditioned to the type of accounting standard or policy adopted. The meaning of “true and fair view” can also change over time as the requirements and techniques of accounting progress. The basic essence however still remains same, that is, the auditors ought to have integrity and due diligence while preparing and examining the financial statements, and to present the true nature of business transactions and events. The “true and fair view” of accounts is not a subjective matter test, it is a statutory compliance that should satisfy the reasonable expectations of the stakeholders in terms of both quantity and quality.
1. Bharat Vasani AND Varun Kannan, How True is ‘True and Fair’ View? | India Corporate Law. (2023). Available at: https://corporate.cyrilamarchandblogs.com/2023/01/how-true-is-true-and-fair-view/#_ftnref1 (Accessed: June 4, 2023).
2. Andrew McGee, The True and Fair View Debate: A Study in the Legal Regulation of Accounting, 54 MOD. L. REV. 874 (1991).
3. PWC (2017) Understanding a financial statement audit. Available at: https://www.pwc.com/im/en/services/Assurance/pwc-understanding-financial-statement-audit.pdf (Accessed: June 5, 2023).