An Empirical Investigation of the True and Fair Override in the United Kingdom

30 Pages Posted: 27 Apr 2009

See all articles by Gilad Livne

Gilad Livne

University of Exeter Business School

Maureen F. McNichols

Stanford University

Abstract

The True and Fair View concept requires 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 UK public companies invoking a true and fair override to assess whether overrides are associated with weakened performance, earnings quality and informativeness. We find quantified overrides increase income and equity significantly, and firms that invoke more costly overrides report weaker performance. We also find that firms invoking the most costly overrides have less informative financial statements than control firms, and lower earnings quality. In contrast, firms invoking less costly overrides do not exhibit weaker performance, less informative financial statements or weaker earnings quality. These findings are relevant for the debate on principle- vs. rules-based accounting.

JEL Classification: M41, M43, M44, M47, M49

Suggested Citation

Livne, Gilad and McNichols, Maureen F., An Empirical Investigation of the True and Fair Override in the United Kingdom. Journal of Business Finance & Accounting, Vol. 36, Nos. 1-2, pp. 1-30, January/March 2009, Available at SSRN: https://ssrn.com/abstract=1378257 or http://dx.doi.org/10.1111/j.1468-5957.2008.02112.x

Gilad Livne (Contact Author)

University of Exeter Business School ( email )

Streatham Court
Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

Maureen F. McNichols

Stanford University ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-0833 (Phone)

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