Rules on how companies are audited, drawn up by the International Accounting Standards Board (IASB), are mandatory in Britain and elsewhere in the European Union, but a decision in 2010 to drop a specific reference to prudence has been questioned by some investors.
Prudence requires accountants to err on the side of caution when treating something not covered by a specific IASB rule and the investors said its omission from the foundation for the IASB's rules, known as the conceptual framework, was inconsistent with some EU and British laws.
They argued it could help banks mask any problems they were suffering, a particular concern given banks were given a clean bill of health just before taxpayers had to rescue them in the financial crisis.
The coalition is “entirely satisfied that the concerns expressed are misconceived”, consumer affairs minister Jo Swinson said in a statement.
Melanie McLaren, a director at the Financial Reporting Council (FRC) said the government statement, backed by a legal opinion for the FRC, ended the uncertainty over accounting practices. “We felt we needed to listen to the investors and give the matter due consideration. Having done that we needed to make sure we were quite firm to close that uncertainty down as we approach the financial year-end,” McLaren said.