Semiotics, Hermeneutics and Cash: An Essay on the True and Fair View

LAWRENCE A. CUNNINGHAM
Boston College - Law School
Boston College Law School Research Paper No. 06
North Carolina Journal of International Law and Commercial Regulation, Forthcoming

The cash flow statement can substantially meet the otherwise intractable semiotic challenges posed by the "true and fair view" requirement of accounting.

The US Sarbanes-Oxley (SOX) requires CFO/CEO certifications that financial statements "fairly present" condition and results. This is akin to the "true and fair" requirement introduced in the EU's Fourth Directive in 1978 and still provoking disagreement and alternative interpretations. The broad split is whether compliance with accounting rules is enough, whether overrides are necessary or whether supplemental disclosure is enough. SOX adopts the US/UK view denying that compliance is enough, still not the global view (for example, German accounting scholars defend compliance coupled with supplemental disclosure by invoking the philosophy of hermeneutics).

It is ironic that SOX's "fairly presents" officer certification - like the EU Fourth Directive - applies the requirement to the balance sheet (condition) and income statement (results) but not to the cash flow statement. This is ironic because the cash flow statement is uniform globally and presents a true and fair view without even trying (SEC rules implementing SOX's officer certification requirements do extend the fairly presents requirement to the cash flow statement).

One consequence is that the cash flow statement offers the greatest avenue of promise for global accounting harmony - perhaps a fait accompli. This is a triumph for global accounting considering the broad utility of the cash flow statement to reveal critical information ranging from liquidity to value.