Accountants sometimes say that if accounts have been prepared to comply with accounting standards, they must give the 'true and fair view' of a charity's financial position and activities required by law. But is compliance with accounting standards always enough to ensure that the 'true and fair view' required from accounts is met?
Compliance was introduced into company law in 1947 and has become shorthand for the qualities we expect of good financial reporting in the UK. Accounting standard-setters have developed standards directed at delivering this sometimes contentious and ever-changing concept.
The first UK accounting standard was issued in 1971, and standards have developed into the 2,000-plus pages of requirements and disclosures that form UK Generally Accepted Accounting Practice, or GAAP. In that time, the renowned lawyers Lord Hoffman, Dame Mary Arden and Martin Moore have all offered opinions on what the concept of 'true and fair' might mean and what its proper relationship with accounting standards should be.
As standards have developed, we accountants may have been tempted to view compliance as an end in itself, rather than a means to achieve 'true and fair' reporting.
In an opinion for the Financial Reporting Council, Moore noted: "The preparation of financial statements is not a mechanical process where compliance with relevant accounting standards will automatically ensure that those statements show a true and fair view. Such compliance may be highly likely to produce such an outcome but it does not guarantee it."
So simply complying with accounting standards might not guarantee 'true and fair' reporting. Judgement is always important, as is standing back at the end of the process and looking at the accounts in the round, rather than merely ensuring 'checklist' compliance with standards.
A recent charity sector debate about accounting for pension deficits illustrates the dynamic quality of financial reporting and perhaps the need for accounting to occasionally look beyond the requirements of issued standards.
At present, if your charity is a member of a multi-employer defined-benefit pension scheme, you have to account only for the contributions payable in the year. But there might be a deficit in the scheme, which the participating employers have said they will make good through an agreed payment schedule.
Some people have argued that a liability should be included in accounts for these agreed payments, even though this is not required by the relevant UK accounting standard (FRS 17).
Others might argue that if the relevant standard does not require the recognition of a liability, then an explanation of the situation and of the payments due is sufficient.
Accounting standards are now catching up - the Financial Reporting Council is consulting on this very question. It is an issue of interest to the many charities that are members of multi-employer, defined-benefit pension schemes, some of which will have agreed a schedule of payments to fund a deficit in the scheme.
Regardless of your views of pension accounting, the important message is that accounting standards are a means to an end and - as the FRC has stressed - even if accounts comply with standards, it is always important to stand back and ask whether the accounts as a whole give a true and fair view.
Ray Jones is policy accountant at the Charity Commission