An Empirical Investigation of the True and Fair Override
LBS Accounting Subject Area Working Paper No. ACCT031
Rock Center for Corporate Governance Working Paper No. 44
Journal of Business, Finance and Accounting, pp. 1-30, January/March 2009
49 Pages Posted: 19 Feb 2003 Last revised: 29 Sep 2009
Date Written: July 23, 2008
Abstract
The True and Fair View (TFV) concept requires UK and EU companies to depart from GAAP or the law if necessary to present a true and fair view of the corporation's financial affairs. We analyze a sample of UK public companies that invoked a TFV override during 1998-2000 to assess whether overrides are used opportunistically. We find overrides increase income and equity significantly, and firms with weaker performance and higher levels of debt employ overrides that are more costly. However, market-based tests indicate that the financial statements of such firms are not less informative than those of the control sample.
Keywords: principles- vs. rules-based accounting, earnings quality, informativeness of financial statements, true and fair override.
JEL Classification: M41
Suggested Citation: Suggested Citation