The approach to regulating the activities of companies
has been, at least in the UK, largely principles based; that is legislation is
kept to a minimum and directors, managers and auditors are expected to conform
to a standard of ethical behavior
has been, at least in the UK, largely principles based; that is legislation is
kept to a minimum and directors, managers and auditors are expected to conform
to a standard of ethical behavior
rather than be dominated by detailed
regulations.
In the USA the approach is quite the opposite. They
tend to adopt a stringent regulatory approach, which has, in the past
encouraged accountants and lawyers in the USA to devote a lay of time to trying
to circumvent the rules!
tend to adopt a stringent regulatory approach, which has, in the past
encouraged accountants and lawyers in the USA to devote a lay of time to trying
to circumvent the rules!
As the UK does not have that many rules, other than
those considered necessary, such as the companies act and the accounting and
auditing standards, accountants, and in particular auditors, tend to
concentrate on nature of each type of transaction or activity rather than how
it is described.
those considered necessary, such as the companies act and the accounting and
auditing standards, accountants, and in particular auditors, tend to
concentrate on nature of each type of transaction or activity rather than how
it is described.
This is known as ‘substance over form’.
For example: The directors may have found a way to
describe a small flightless bird with a beak and feathers as a chicken despite
the noise it makes and the way it walks like a duck and it quacks like a
duck-it’s a duck!’
describe a small flightless bird with a beak and feathers as a chicken despite
the noise it makes and the way it walks like a duck and it quacks like a
duck-it’s a duck!’
In other words the auditor will look past the form of
the transaction, i.e. what it appears to be or what it has been described as (chicken)
to its substance, i.e. what it really is (duck).
the transaction, i.e. what it appears to be or what it has been described as (chicken)
to its substance, i.e. what it really is (duck).
This doctrine of substance over form is fundamental
to corporate reporting but is also a fundamental aspect of corporate governance-it
requires the directors to tell the truth about what has happened and not to
attempt to present or disguise financial information, for whatever reason.
to corporate reporting but is also a fundamental aspect of corporate governance-it
requires the directors to tell the truth about what has happened and not to
attempt to present or disguise financial information, for whatever reason.