A new legal opinion, issued to coincide with the report of the Banking Commission, is a damning indictment of International Financial Reporting Standards, and with it the accountants who promoted and endorsed those standards in the Big 4 firms of accountants. The opinion, by George Bompas QC of Lincoln's Inn begins as follows (all footnotes are included for the accounting and legal geeks amongst us):
1 For over half a century it has been established in domestic company law as a fundamental requirement that companies' statutory accounts should give a "true and fair view" of what is being reported on: in the case of a balance sheet, this will be of the company's position at the balance sheet date; in the case of a profit and loss account, this will be of the company's profit or loss in the period covered by the account.
2 However, as discussed below, there is now a tension between this fundamental requirement and requirements of international accounting standards, where those standards have been adopted as a company's applicable accounting framework.[1] “International accounting standards” is a defined expression in the Companies Act 2006 and means “the international accounting standards, within the meaning of the IAS Regulation, adopted from time to time by the European Commission in accordance with that Regulation”.[2] The “IAS Regulation” is the amended Regulation (EC) No 1606/2002 of the European Parliament and of the Council on the application of International accounting standards[3], discussed below.
3 In the Companies Act 2006 the true and fair view requirement is encapsulated in s.393: directors are not to approve their company's annual accounts "unless they are satisfied that they give a true and fair view of the assets, liabilities, financial position and profit or loss". It features also in s.495(3)[4] imposing on auditors a duty to certify whether in their opinion annual accounts among other matters give a true and fair view.
4 Where the applicable accounting framework is the Companies Act one[5], there cannot be any tension between the true and fair requirement and the requirements resulting from the accounting rules imported by the framework. This is because a statutory requirement forming part of that framework is the true and fair one: see CA06 ss.396(2) & 404(2). The accounts must give a true and fair view. This is paramount within that framework.
5 On the other hand it is questionable whether statutory accounts prepared in accordance with international accounting standards, where those standards form the applicable framework, will always give a true and fair view; and it is questionable whether international accounting standards admit the possibility of departure from any of their requirements, even where the requirements result in accounts not giving a true and fair view and a departure would be necessary for the accounts to give a true and fair view. The reason for this is that:
5.1 the application of international accounting standards, with additional disclosure where necessary, "is presumed to result in financial statements that achieve a fair presentation" (IAS 1, para 15)[6];
5.2 in consequence international accounting standards do not have any clear subservience to the true and fair concept, there being no articulated, and quite probably no implicit, over-arching requirement that IAS accounts should give a true and fair view (see paragraphs 47 to 59 below); and
5.3 international accounting standards have moved away from the central principle, that of prudence, entailed by the true and fair concept as applied to accounts.[7]
If that is true, and I think it undeniable, then it obviously follows that bank's accounts, at least (because this is what the opinion basically relates to) were illegal in the run up to the 2008 crash and maybe £50 billion of dividends paid by the banks from 2005 onwards were illegal as a consequence. If those dividends had not been paid bail outs may not have been needed: and that is key to this issue.
Now, it is only an opinion - but a powerful one. It also has massive ramifications: if there is no true and fair view in IFRS the whole basis of UK accounting and company law on accounting has been undermined and what other accounts may be illegal?
The time to bring accounting back under proper oversight - and not the oversight of those with vested interest in enduring they give an inappropriate view - has arrived.
Will the government and the EU now step forward and say what they're going to do to address this issue? Given the disaster it gave rise to - which has helped cost hundreds of millions of people in Europe their wellbeing and hope - it's the least they can do.
[1] By CA06 ss.395 & 403 individual and group accounts must be prepared either in accordance with specified provisions of the Companies Act or in accordance with international accounting standards. In certain cases there is no choice, and one or other accounting framework is obligatory.
[2] CA06 s.474(1).
[3] The standards promulgated by the International Accounting Standards Board (previously named the International Accounting Standards Committee) are referred to as International Financial Reporting Standards (“IFRS”) rather than International Accounting Standards (a point foreshadowed in recital 7 to the IAS Regulation). It is usual to use the more modern label, IFRS, when referring to the standards which form the applicable accounting framework for accounts prepared in accordance with EU adopted international account standards. In this Opinion, however, for convenience I use the expression which is continued in the Companies Act 2006 when prescribing the alternative accounting framework to UK GAAP. It is also the term used in Article 2 of the IAS Regulation: “For the purposes of this Regulation, ‘international accounting standards' shall mean International Accounting Standards (IAS), International Financial Reporting Standards (IFRS) and related interpretations (SIC-IFRIC interpretations), subsequent amendments to those standards and related interpretations, future standards and related interpretations issued or adopted by the International Accounting Standards Board (IASB).”
[4] Set out in paragraph 43 below.
[5] That is the one based on GAAP and prescribed by detailed legislation: the "stringent new accounting code" as it was termed by Robert Walker LJ in Bairstow v Queen's Moat Houses plc [2001] EWCA Civ 712 (see below).
[6] At the time of when Martin Moore QC gave his Opinion, referred to below, and before later changes to IAS 1 the paragraph was numbered 13. It was set out in full in paragraph 24 of that Opinion, and also in paragraph 49.2 below.
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And here is another Opinion from Counsel from 2008 explaining why he thought the terms “true and fair view” (the UK requirement) and “present fairly” (the IAS requirement) are synonymous.
http://www.frc.org.uk/FRC-Documents/FRC/True-and-Fair-Opinion,-Moore,-21-April-2008.aspx
And you will see that is completely rejected by the latest opinion as fundamentally flawed – which I think it is
In any event Bompas is not taking issue with whether “true and fair view and fairly presents are synonymous”. He is saying that IAS 1 neither requires nor permits either.
It is, as they say, a bit more complicated than that. The “true and fair view” is a requirement of company law. The requirement for some companies to account under IAS is imposed by company law. When two laws conflict one is not simply free to disregard one; rather, one looks for interpretations that are consistent with both. The conclusion to Bompas’ opinion reflects that – the statement above that banks’ accounts were “illegal” does not, and is simplistic and wrong.
It isn’t according to my sources – very close to Bompas
Nor is the interpretation inconsistent in any way with what he said
I am not an accountant or a lawyer. But this seems to me to muddle things up. As I see it the opinion you cite argues that the standards required under domestic law include an overarching principle that the accounts give a “true and fair” picture of the position of the company: and that the IAS standards do the same. I think that is argued persuasively, and I accept what is said there.
The question as to whether the accounts actually prepared are illegal is, it seems to me, quite separate. If we assume, as the opinion you cite contends, that both methods are identical in their requirement, then if the accounts are illegal under the one then so are they under the other. Therefore, on that reasoning, they are illegal if they would be so under domestic law. That is a question of fact
If, on the other hand, the IAS standards are not identical in this sense, then it is possible they would be legal under those standards and not under domestic law. That is the case made in the opinion cited in the OP.
To me this looks like what we have come to expect from tax avoiders: you will recall the evidence given to the PAC by some who are engaged in devising and selling avoidance schemes: in essence they said that what they do is look for a possible interpretation of any given statute which will allow a reduction in the tax due: encourage clients to adopt it; and wait for the revenue to notice and close the loophole. One witness acknowledged that none of the schemes he promoted are now legal but this is worth doing because even a temporary reduction is a saving for the client. HMRC may not notice or may not notice timeously; the proceedings may take a long time; and the imposition of tax may not be retrospective
Is this not just another instance? If challenged the accountants will claim there is a significant difference so that “true and fair” does not apply under IAS provisions. According to the opinion you cite that is not true. But it is wriggle room which may allow a tax saving and provides a figleaf for the accountant when the issue is debated in court: thus pretending there was a genuine confusion and preserving their reputation and their worth to the client.
You say that “where two laws conflict one is not simply free to disregard one” and I agree. But your cite says the laws do not conflict. So what is your case?
Well argued
It’s clear in the conclusion to the opinion. You keep doing this – being picked up that you are misreporting something and then claiming that it doesn’t matter what the original document says, your mysterious sources tell you something different. Doesn’t help people take you seriously.
The Times agreed with me
I’m guilty of reaching the same conclusion as them again
And the same conclusion as Tim Bush who most would consider the foremost expert on this issue
All I think I am actually guilty of is disagreeing with someone with such courage of conviction they hide behind pseudonyms and provide no evidence to support their case. Some lawyer
Did you read the opinion?
Yes
So did they
Funny – because it looks like the organisation that commissioned the opinion press released it as saying IAS is “illegal” and you and others simply accepted this uncritically. Certainly the part of the opinion you excerpted merely says it is “questionable”. The conclusion to the opinion says (in 75.1) that a court would strive to find a consistent interpretation between IAS and statute. He goes on (75.2) that where this wasn’t possible, it would be “open” to the director to file on a different basis, supported by a claim that the adoption of IAS was illegal under EU law. This is not a very strong conclusion – indeed it is referred to in the last paragraph as “possible” confusion.
You made two mistakes. First, you misrepresented the strength of the conclusion. Second, you suggested it followed from his conclusion that a bank’s accounts would be illegal. That is wrong – if he is correct then the adoption of IAS was contrary to EU law. That would give directors a defence in law against any failure to follow IAS. It does not mean that anyone who follows IAS breaches the civil or criminal law (because, after all, they have been following the law, and private citizens and companies are entitled to rely on UK legislation even if it subsequently turns out to be contrary to EU law)
Sadly I suspect you will not reply to the substance of this post, but either insult me (“neo-liberal” seems your term of choice) or claim that “sources” tell you the opinion means something totally different to what it says. Or you could just not publish the comment.
Please do feel free to surprise me by actually engaging with the points above.
Others have already done so
See the discussion in the Banking Commission report by people more expert than me
The Banking Commission was not happy with IFRS, or the way it had become a requirement of EU law, but certainly did not suggest IFRS was illegal.
Your post was not about the Banking Commission’s report. You made a claim about the content of the Bompas opinion. You have been unable to support it, and the text you excerpted and the conclusion I excerpted do not support it. If I am missing something in that opinion, it would be helpful if you could point it out. If I am not then you should have the grace to admit you got this wrong.
I am entirely happy with the conclusions I have come to
So are you
And I’m happy to differ and get on with life
What in the opinion led you to that conclusion? Can you cite anything at all? Are you not bothered by having made a claim you can’t support?
I am more bothered by a long way with my gardening
So, now it is Monday and let’s summarise this. The key things from the Opinion I hope we can agree on are:-
1) The FRC Opinion can’t be relied on, at the time it was given, and is now out of date. It needs to be revisited.
2) True and fair view requires prudence and distributable profits. IFRS requires neither and IAS 39 in particular is contrary to it.
Those are what I think the opinion says.
The resulting conclusion is that distributable profits were reported when there were none – making dividends illegal in the circumstance.