An Empirical Investigation of the True and Fair Override

Livne, G and McNichols, M (2001) An Empirical Investigation of the True and Fair Override. Working Paper. London Business School Accounting Working Paper.

Abstract

The True and Fair View (TFV) concept requires UK as well as EU companies to depart from the letter of the law or a promulgated accounting standard in special circumstances. A similar requirement for an override appears in IAS 1. This paper analyzes a sample comprised of UK public companies during 19982000 that invoked a TFV override to assess whether the override has been used opportunistically. The results of the paper suggest that the TFV override is not invoked in reaction to a decline in performance. Furthermore, overriding firms appear to exhibit similar performance to that of a sample of firms matched on industry and size who did not invoke an override. At the same time, it seems that the ability to override offers a mechanism through which a generally accepted accounting practice may develop. The findings of this paper may be useful to the debate about the implications of the override required by International Accounting Standards to standardssetters in the US and around the world.