All but fair

In relation to “All in the taking“, concerning accounting principles being interpreted on the border, similar to the Criminal Code or the Income Tax Act, the issue was raised as to how auditors could be found at fault, when the practices adopted were borderline, but still onside.

Fundamental principle overlooked. Fair presentation. Where fairness in presentation is legally assessed from the perspective of the users of the financial statements, and where the initial oversight evaluation of fair presentation is that of the auditors, in agreeing or disagreeing with such determination by those who prepared the financial statements.

This goes back to the case of U.S. v. Simon, 425 F.2d 796 (2d Cir. 1969). where the appellate court rejected an argument on behalf of auditors that compliance with Generally Accepted Accounting Principles was a sufficient defence to an allegation of fraud. Instead, Judge Henry Friendly held that the critical test was whether the financial statements, taken as a whole, fairly present financial position and results of operations. Proof of compliance with generally accepted standards was “evidence which may be very persuasive, but not necessarily conclusive that [the auditor] acted in good faith, and that the facts as certified were not materially false or misleading.” As summarized by Harvey L. Pitt, then Chair of the U.S. Securities and Exchange Commission, in a 2002 speech, ”Judge Friendly held that if literal compliance with GAAP creates a fraudulent or materially misleading impression in the minds of shareholders, the accountants [and, presumably, the auditors who agreed with them] could, and would, be held criminally liable.”

Without referencing the Simon case, a similar concept has been developed in Canada. In the 1997 case of Kripps v. Touche Ross & Co. [1997] 6 WWR 421, the majority of the British Columbia Court of Appeal came to a similar decision: compliance with generally accepted accounting principles did not necessarily mean that the financial statements were associated with fair presentation. Writing for the majority, Mr. Justice Finch commented as follows, at paragraphs 65 and 66:

[65] …the paramount aim in auditing and in providing an unqualified audit is to ensure that the financial statements “present fairly” the financial position of the company being audited. GAAP is a tool to achieve that fair presentation. But in my view auditors intend unqualified auditor’s reports to mean that the financial statements present fairly the financial position. The tool used – GAAP – is intended to result in such fair presentation and when it does not the tool is revised…

[66] …auditors cannot hide behind the qualification to their reports (“according to GAAP”) where the financial statements nevertheless misrepresent the financial position of the company…


And where to


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