Reliability (Accounting)

Reliability is a qualitative characteristic of financial information that formed part of the FASB and IASB conceptual frameworks until 2010. It described information that users can depend on because it is verifiable, neutral and faithfully represents what it claims to represent. In the current frameworks, the boards have replaced reliability with faithful representation, which now stands as one of the two fundamental qualitative characteristics alongside relevance.

The word is still widely used in textbooks, older accounting dictionaries, audit literature and everyday speech. The change was largely one of label and emphasis. The boards concluded that reliability was understood in different ways, often as meaning precision or verifiability alone, and that faithful representation better captured the intended idea. Verifiability survived as one of the enhancing qualitative characteristics, alongside comparability, timeliness and understandability.

A reliable bathroom scale shows your true weight, gives the same reading if you step off and back on, and does not shave off a few pounds to make you feel better. If any one of those failed, you could not trust it, however nice the display looked.

Reliable accounts work the same way. The figures should match what really happened, another careful person checking the same records should reach much the same answer, and the numbers should not be tilted to make the business look better or worse than it is. Investors and lenders rely on this when they cannot inspect the business themselves.

The FASB set out reliability in Concepts Statement No. 2, Qualitative Characteristics of Accounting Information, issued in 1980. It treated relevance and reliability as the two primary qualities and described reliability as having three parts:

• Verifiability. Independent measurers using the same methods would reach substantially the same result.
• Representational faithfulness. The numbers and descriptions agree with the economic events they are meant to show.
• Neutrality. Information is not chosen or presented to reach a predetermined result or to influence behavior in a particular direction.

The 1989 framework of the International Accounting Standards Committee, the IASB's predecessor, also listed substance over form, prudence and completeness under reliability. Both frameworks openly acknowledged a trade-off: more relevant information, such as an estimate of current value, was often less reliable than a figure based on an invoice.

In September 2010, after a joint project, the FASB issued chapters of Concepts Statement No. 8 and the IASB issued a revised conceptual framework, both using faithful representation in place of reliability. A faithful representation is complete, neutral and free from error. Free from error does not mean perfectly accurate. An accounting estimate can be a faithful representation if it is described clearly, its limits are explained and no errors were made in choosing and applying the process used to reach it.

The 2010 frameworks also dropped prudence, out of concern that it conflicted with neutrality. The IASB's revised framework of 2018 reintroduced prudence, defined as exercising caution when making judgments under uncertainty, as support for neutrality rather than as a licence for conservatism. The FASB framework does not include prudence as a qualitative characteristic.

In auditing, reliability remains a working term. Auditing standards discuss the reliability of audit evidence: evidence from independent outside sources, evidence obtained directly by the auditor and original documents are generally treated as more reliable than information produced internally or copies. The opinion on audited financial statements, given by a certified public accountant, states whether the statements are presented fairly in all material respects. For public companies, management must also assess internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002.

Some of the most decision-useful figures are the hardest to verify. Level 3 measurements in the fair value hierarchy rely on a company's own models and assumptions, so two careful valuers can reach different answers. The 2018 IASB framework addresses this by treating measurement uncertainty as one factor in judging whether information is useful, rather than as a reason to exclude it. Applying the same methods from year to year, the principle of consistency, also helps users trust trends even when individual figures are estimates. These ideas sit at the heart of modern financial reporting.

• Financial Accounting Standards Board
• IFRS Foundation
• Public Company Accounting Oversight Board