george hudson's financial reporting practices: putting the eastern counties railway in context

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George Hudson's financialreporting practices:putting the EasternCounties Railway incontextSean McCartney & A.J. Tony ArnoldPublished online: 15 Oct 2010.

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George Hudson’s � nancialreporting practices: puttingthe Eastern Counties Railwayin context

Sean McCartney and A.J. (Tony) Arnold

Abstract

George Hudson was the most important railway promoter of his time. He had aparticular aptitude for visualizing and arranging spectacular company and lineamalgamations and his activities helped to bring about the beginnings of a moremodern railway network. In 1849 he exercised effective control over nearly 30 percent of the rail track then operating in the UK, most of it owned by four railwaygroups, the Eastern Counties Railway, the Midland, the York, Newcastle and Berwick,and the York and North Midland, before a series of scandalous revelations forced himout of of� ce.

The economic, railway and accounting literatures have treated George Hudson asan important � gure in railway history, although concentrating largely on the � nancialreporting malpractices of the Eastern Counties Railway, while Hudson was itschairman, which were incorporated into the in� uential Monteagle Committee Reportof 1849. Relatively little attention has been paid, however, to events at Hudson’sother major companies. This paper analyzes the available evidence, particularly thatproduced by the Committees of Investigation established at all four railway groups, inorder to provide a more balanced assessment of George Hudson’s approach to� nancial reporting and thereby place events at the Eastern Counties Railway in abroader context.

Keywords: � nancial reporting; railway accounting; George Hudson

Sean McCartney is Senior Lecturer and A.J. (Tony) Arnold is Professor of Accounting andBusiness History in the Department of Accounting, Finance and Management, University ofEssex, Wivenhoe Park, Colchester CO4 3SQ , UK (tel: +44 1206 872373; fax: +44 1206873429; e-mail: [email protected]).

Accounting, Business & Financial History 10:3 November 2000 293–316

Accounting, Business & Financial HistoryISSN 0958-5206 print/ISSN 1466-4275 online © 1999 Taylor & Francis Ltd

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Introduction

The railway companies, the economic giants of their age and the � rst to engage inlimited liability trading on a major scale (Lee, 1975: 20; 1979: 17), provided one ofthe most important in� uences on the evolution of accounting practices and ofregulatory arrangements during the nineteenth century.

The most important railway promoter of the early period, from 1821 to 1850,was the ‘Railway King’, George Hudson. At his peak, Hudson controlled fourmajor railway companies, the Eastern Counties, the Midland, the York Newcastleand Berwick, and the York and North Midland, which together operated almost 30per cent of the lines open in the UK. He was forced to resign his major of� ces in1849, following a number of damaging revelations about his � nancial reportingpractices and his approach to the trusteeship of company assets.

The accounting history literature generally suggests that the accounts of theearly railway companies were often seriously de� cient, partly because of the use of‘amateur’ shareholder-auditors but also because of the lack of consensus on howexpenditures (which in the case of the early railway companies were on anunprecedented scale) should be subdivided between capital and revenue, an un-certainty exploited by railway directors in order to in� ate pro� ts and support thehigh dividends that the shareholders expected to receive. This view has frequentlybeen supported by references to the well-publicized and highly notorious prac-tices of the Eastern Counties Railway while George Hudson was its chairman, as a(perhaps extreme) exemplar of the accounting and disclosure practices of therailway companies of that time. The literature has, however, paid little attention to� nancial reporting practices at Hudson’s three other railway groups, despite thefact that they also established Committees of Investigation which made equallycareful investigations into Hudson’s practices. This is the more surprising asaccounting practices are often shaped by the context within which they operateand the Eastern Counties Railway was a highly unusual, if not unique, railwaycompany with a record of chronic mismanagement and overspending well estab-lished by the time Hudson was asked to join the Board.1 Hudson also exercisedeffective control at the Eastern Counties for less than four years, the shortestperiod of any of his major railway interests.

The paper begins with a review of the relevant literature on the disclosurepractices of the early railway companies, examines the regulatory environment ofthe 1840s, provides a brief outline of George Hudson’s railway activities and thenanalyzes the available evidence, particularly that produced by Committees ofInvestigation at all four of Hudson’s railway groups, in order to provide a morebalanced assessment of his overall approach to financial disclosure and, in so doing,hopefully places events at the Eastern Counties Railway in a broader context.

The literature on the � nancial reporting practices of the earlyrailway companies

The success of the Stockton and Darlington Railway (opened in 1825) and thenof the Liverpool and Manchester line (opened in 1830) greatly encouraged

294 Accounting, Business & Financial History

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further railway promotions. More generally, the promotion and construction ofrailways transformed the British economy of the mid-nineteenth century,stimulating economic activity and bringing into being organizations of a sizewhich greatly changed the capital markets (Hunt, 1936: 101–7; Edwards, 1986:252, 1989: 104–5), management practices (Gourvish, 1980: 136–40) and the waysin which the State sought to regulate business practice in the private sector(Glynn, 1984).

The accounting practices of the early railway companies, and their in� uenceon the development of improved regulatory arrangements, have been discussedin a core literature of at least thirty articles and texts, in the related � elds ofaccounting, railway, economic, and business history. This literature stronglysuggests that depreciation practices were inadequate (e.g. Edwards, 1986: 253) orinconsistently applied (e.g. Edwards, 1985) and that directors manipulated thepublished accounts in order to in� ate pro� ts and thus support the desired levelsof dividend payment. Manipulation was seen to be most often achieved bycapitalizing revenue expenses and thereby exploiting the absence of ‘generallyacceptable accounting, reporting and auditing practices’ (Lee, 1979: 17). Thisled in turn to dividends being paid out of capital, contrary to general statutoryprovision (see Companies Clauses Consolidation Act, 1845: section 121) andsimilar arrangements in the private railway acts (e.g. Eastern Counties RailwayAct, 1836: section 171).

Some articles in the literature refer to these problems in very general terms,without evidencing them to particular instances. Thus Brief, for example, arguesthat ‘questionable tactics’ by railway company directors were commonplace, as aresult of which shareholders ‘often received dividends out of capital’ (1965: 16)and that the (unspeci� ed) ‘evidence suggests that capital consumption costs wereneglected in many cases’ (1965: 29). Similarly, T.A. Lee concluded that there was‘evidence to suggest that railway company directors were manipulating reportedpro� t and balance sheet data by the arbitrary treatment and classi� cation ofexpenditure in order to stabilise dividend levels’ (1979: 17), but did not identifythe evidence concerned. More often, however, the arguments have beensupported by reference to the practices of particular companies in speci� edperiods of time, by far the most frequent reference being to those under theeffective control of George Hudson. Where speci� c details are given, theseusually relate to the circumstances of the Eastern Counties Railway duringHudson’s time (1845–9) as Chairman.

Thus Pollins, in discussing problems concerning the treatment of the capital/revenue distinction in the pre-1850 period, cites four instances, ‘the mostnotorious case’ being the Eastern Counties Railway in 1845–8 (1956: 339–44).2

Similarly, Edwards (1985), in explaining that the accounts of the early railwaycompanies ‘provided considerable scope for manipulation’, that ‘managementoverstated pro� ts available for dividend by omitting liabilities, crediting a rangeof capital receipts to revenue and debiting revenue expenses to capital’ and that‘allegations of ‘‘cooked accounts’’ were a common feature at shareholders’meetings held in the mid-1840s’ refers to two instances, one being the EasternCounties.3

McCartney and Arnold: George Hudson’s � nancial reporting practices 295

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G.A. Lee’s account of ‘wilful manipulation of the accounts to justify in� ateddividends’ is referenced only to ‘the Eastern Counties Railway under GeorgeHudson’s management’ (1975: 21–2). In the railway history literature, Simmonsand Biddle express serious concerns about the quality of nineteenth-centuryrailway accounts and the practice of buttressing dividends by drawing fromcapital, as ‘typi� ed by George Hudson’s activities’ (1997: 5). Thus, after Hudson’sresignation from the Eastern Counties Railway an investigation ‘found that, inthree years, over £200,000 in dividends had been paid out of capital. Similarmalpractices quickly came to light on Hudson’s other lines’ (Simmons and Biddle,1997: 214). Two promoters are instanced as ‘scandalous manipulators’, the moreimportant being Hudson (Simmons and Biddle, 1997: 5–6, 214).4

Likewise, Glynn, in suggesting that, during the Railway Mania of 1845–7,‘gullible investors had been at the mercy of unscrupulous company promoters[who] doctored the books to improve balance sheets [and] paid dividends out ofcapital’, provides Hudson as his only example (1984: 107). Edwards (1989) repeatsthe observation made in his earlier (1985) paper that the end of the Mania, in 1847,‘was followed by a series of investigations which revealed numerous ‘‘fabrications’’of accounts, the most notable of which is detailed in Quilter, Ball & Co.’s report onthe Eastern Counties Railway’ (1989: 144, 167), but without citing any furtherinstances. In the economic history literature, Clapham claims that in 1841–2Hudson was ‘arranging – when necessary – to pay dividends out of capital’ (1964:390), while Checkland concludes that, after the end of the Mania, ‘the soundnessof the multitude of railway companies was called into question and frighteningrevelations [were made] of unwise and sometimes dishonest promotion, culminat-ing in the destruction of the colossus George Hudson’ (1971: 37).

Bryer (1991), in arguing (as part of his ‘swindle’ hypothesis) that railwaycompanies in� ated pro� ts during the Mania period by reducing their charges fordepreciation, sees Hudson’s behaviour as ‘not unusual’, even if his malpracticeswere perpetrated on a larger scale than other railway entrepreneurs’ (1991: 476). Incontrast, Gourvish argues that ‘[f] rauds of the kind committed by George Hudsonon the Eastern Counties and York & North Midland railways were exceptional’(1972: 25), but after the post-Mania crisis ‘the exposure of Hudson’s arbitrary� nancial management [especially of these two companies] brought further dis-credit on the industry’ (1972: 104). Only one source in our core literature providedspeci� c evidence or examples of serious � nancial reporting malpractices withoutmentioning Hudson. Heather Watts argued that many railway directors ‘tookadvantage of the lack of clear distinction between capital and revenue in the 1845Act’ (i.e. the Companies Clauses Consolidation Act) and manipulated the accounts‘to give the required pro� t � gure’ by reference to the affairs of the Lancashire andYorkshire Railway in 1850 (1979: 22).

The regulatory environment for � nancial reporting in the 1840s

The early railway companies were invariably established by means of a privateAct of Parliament, at this time the only means (apart from a Royal Charter) of


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incorporation. 5 Such statutory companies not only made arrangements for theprivilege of limited liability, but also obtained powers to purchase compulsorilythe land and property necessary for the construction of the lines for which theyhad obtained Parliamentary approval. There was nothing new in this: publicutilities such as canals and gas companies had been formed in this way for manyyears before the coming of railways, although the capital requirements of therailways were on an unprecedented scale.

For most purposes, until 1845, railway companies were governed solely bytheir own Acts of Parliament. Government regulation had already begun, theRailway Department of the Board of Trade was set up in 1840, but did notinvolve itself in � nancial reporting issues (Parris, 1965). Early private Acts mighthave made only the most rudimentary references to � nancial reporting mattersand perhaps none at all to audits, but the provisions gradually became moreelaborate and by the 1840s standard provisions were being inserted into railwayacts (Pollins, 1956: 337–9). These were effectively codi� ed by the CompaniesClauses Consolidation Act (CCCA) of 1845, which then applied to all newlyestablished statutory companies, unless particular provisions were speci� callyvaried by the private establishing Act. Of the four large companies controlled byHudson, only the York, Newcastle and Berwick (formed by an amalgamation in1847) was subject to the provisions of this general act (YNB 1847: section 24).The other three were instead governed by the provisions of their respectiveprivate acts: the Eastern Counties Railway Act (ECRA, 1836); the York andNorth Midland Railway Act (YNMA, 1836), and the Midland Railway Act(MRA, 1844).

The CCCA 1845, like the earlier private acts, attempted to imposeaccountability and reasonable standards of behaviour on directors, and preventabuses, largely by strengthening the hands of shareholders vis-a-vis their Boards.Shareholders had the right to inspect the books of the company at speci� edtimes (CCCA, 1845: section 117) and certain powers were speci� cally reserved tothem, including the election and remuneration of directors and auditors, theraising of capital by a further issue of shares or by loan, and the declaration ofdividends (CCCA, 1845: section 91). The directors were to appoint a bookkeeperand cause ‘full and true Accounts to be kept of all Sums of Money received orexpended on account of the Company’ (CCCA, 1845: section 115), with thebooks balanced half-yearly, at least fourteen days before each General Meeting.And:

Forthwith on the Books being so balanced an exact Balance Sheet shall bemade up . . . and a distinct view of the Pro� t or Loss which shall have arisenon the Transactions of the Company in the course of the preceding Half Year;and previously to each Ordinary Meeting such Balance Sheet shall beexamined by the Directors, or any Three of their Number, and shall be signedby the Chairman or Deputy Chairman of the Directors.

(CCCA, 1845: section 116)

The directors were to present the balance sheet to the General Meeting,together with the auditors’ report thereon and a ‘scheme’ showing pro� ts


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available for distribution and apportioning these among the shareholders(CCCA, 1845: section 120), although the Act said very little about how theaccounts themselves should be drawn up and, in particular, how the ‘distinctview of the Pro� t or Loss which shall have arisen’ should be determined,although no dividend was to be paid which reduced the capital or on shareswhich were in arrears of calls (CCCA, 1845: sections 121–3).

As noted above, broadly similar provisions were contained in private Actspassed before 1845, with the exception, however, of the requirements for audit.Like many Railway Acts in the 1830s, the ECRA and the YNMA made noprovision for the appointment of auditors, although they did make provision forthe shareholders, if dissatis� ed with the directors’ report, to set up a Committeeof Inspection (of shareholders) to investigate (ECRA, 1836: section 170; YNMA,1836: section 122). The ECRA speci� cally empowered such a committee toemploy accountants at the company’s expense (ECRA, 1836: section 170).

A provision for a routine audit had, however, become standard in Railway Actsby the early 1840s, while explicit provisions for a Committee of Inspectiontended to be abandoned, as in the CCCA of 1845, although the Midland Act didprovide for both (MRA, 1844: sections 113, 126). Routine audits were not,however, always welcome. As late as January 1841, when a certain Mr Coates, ata meeting of the York and North Midland, proposed that a clause providing forthe election of auditors be inserted into the company’s Act on the next occasionit was necessary to apply to Parliament for additional legislation, he provoked theanger of the directors, who saw it as a slur on their competence. In consequence,his proposal did not obtain the support of even one other shareholder (RailwayTimes, 1841: 125).

Auditors, like members of committees of inspection, were required to beshareholders, acting on behalf of their fellow shareholders as part of thepervasive rationale that it was the shareholders, not professional auditors orgovernment regulators, who should hold the directors to account. The CCCA1845 speci� ed that auditors, like directors, should hold at least one share in thecompany (CCCA 1845: sections 102, 85), while the private acts referred to aboveprescribed quite substantial minimum shareholdings for directors, members ofcommittees of inspection, and, in the case of the Midland, auditors: £1,000 forthe York and North Midland and Eastern Counties and £2,000 for the Midland(YNMA, 1836: sections 105, 122; ECRA, 1836: sections 143, 170; MRA, 1844:sections 91, 126, 109).

George Hudson’s railway activities

George Hudson received a substantial inheritance in the early years of adult lifethat transformed his business opportunities and enabled him to become involvedin the great venture of the time, railway construction. He started out in railwaypromotion and operation in York in 1833 and, ten years later, represented therailway industry in negotiations with the government (Bailey, 1995: 40–1, 45).During the next � ve years he put forward several extraordinarily ambitious


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railway promotions and, by 1848, he was the dominant in� uence on the fourmajor rail companies previously identi� ed: the York and North Midland (YNM),the Midland, the York Newcastle and Berwick (YNB), and the Eastern Counties(EC), which, with other lesser interests, including the Newcastle and CarlisleRailway, provided 1,450 of the 5,000 miles of rail track open in the UK.

Hudson’s � rst involvement in railway promotion and development was theYNM, promoted in 1835 and initially providing a short (32-mile) line, west ofCastleford, to connect with George Stephenson’s North Midland railway fromDerby to Leeds, and thereby provide a direct rail link between London andYork. Hudson was a major shareholder and had been elected chairman in 1836.The complete line opened in June 1840 (a section had been opened in May1839). For several years the capital involved was modest (about £370,000), butduring the Railway Mania of 1845–7, the company greatly extended its sphere ofoperations and Hudson also strengthened his personal control. In 1848, theYNM had control of 260 miles of track and a capital of over £4 million(Lambert, 1934: 239). At an informal meeting of London shareholders on 17May 1849, after problems at the YNB had been publicly revealed, a letterof resignation from George Hudson was read out. A week later a Committee ofInvestigation, which produced four reports in the period from July to November1849, was established.

Hudson’s involvement in the Midland Railway was quite different. He joinedthe Committee of Inquiry of the North Midland Railway, set up in August 1842,which recommended wide-ranging economies and led to Hudson becoming adirector (but not chairman) of that concern. Hudson’s brief was to achieveeconomies that would enable dividend payments to rise and he was partiallysuccessful, although the company’s accident record was censured by the Board ofTrade. Whether by way of a distraction or not, Hudson put forward the schemethat led to the amalgamation of the North Midland with the Midland Countiesand Birmingham and Derby Junction (B&DJ) railways (each of which wentthrough Derby) in June 1844, thus ending their bitter competition. Hudson,as Chairman of the newly formed Midland Railway, with his ally John Ellis asDeputy Chairman, and Peter Clarke as Secretary and Superintendent (Peacock,1988: 107), continued to expand the company’s operations, partly intoimmediately adjacent areas and partly into locations consistent with plans toprovide a line from London to the North alternative to the putative London andYork scheme promoted by Edmund Denison. In 1846, the Midland took over theLeeds and Bradford line which Hudson had helped to form in 1844 and, atthe end of 1848, operated 458 miles of track. During Hudson’s period of controlthe Midland more than doubled its capital base (Lambert, 1934: 239). However,at the end of 1848 there was an ‘excess of expenditure over receipt on capitalaccount, amounting to £461,404’ (Midland Report, 1849: 41) and, whenHudson’s letter of resignation was read out at an Emergency General Meetingheld on 19 April 1849, a Committee of Inquiry was immediately formed thatproduced one report covering the affairs of the Midland Railway from the


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amalgamation of the three merging companies in June 1844 through to 31December 1848.

In 1841, the Great North of England (GNE) had been operating a line fromYork to Darlington as part of a sound strategy to link York to Newcastle, but hadused up its capital. Hudson became involved in forming the Newcastle andDarlington Junction Company (N&DJ) to link several lines in the area anddevelop the line from Darlington to Newcastle, which opened in June 1844.Hudson invested heavily in the new company and, as Chairman with allies in keyadministrative positions,6 had effective control from the outset. The companypurchased several lines in the area, including the Brandling Junction Railway(from Hudson, who had bought it privately some months earlier), and theDurham and Sunderland Railway. Once a continuous line had been establishedfrom York to Newcastle, the Newcastle and Berwick Company was formed inJuly 1845 to complete the connection northwards to Edinburgh. The two linesconcerned, the York and Newcastle and the Newcastle and Berwick wereimmediately amalgamated into the York, Newcastle and Berwick, whichextended westwards to Carlisle in 1848, by which time it was operating 407 milesof track. During Hudson’s time, capital of £7,245,000 had been raised (Lambert,1934: 239). The way that Hudson handled his own interests, as distinct fromthose of the company, was seriously challenged for the � rst time at ashareholders’ meeting on 20 February 1849, when questions were raised aboutthe amounts paid by the YNB to acquire shares in another company.Unconvincing replies from Hudson led to the setting up of an initial committeeand then to a full Committee of Investigation. The � rst committee published onereport (hereafter, Prance Report) and the second produced � ve reports, over theperiod 26 May to 25 October 1849, of which the third and � fth (hereafter, MeekThird and Fifth Reports) are referred to in this paper.

The fourth major railway company in which Hudson was involved was againquite different from the others. For several years the Eastern Counties (EC),which operated a line from London to Colchester, had been the ‘scapegoat ofcompanies, the pariah of railways’ (Francis, 1968: 242), notoriously unreliableand accident-prone and paying only a miserable dividend to its increasinglyunhappy shareholders. The EC paid ‘less than any other company in existence’declared an irate shareholder at the half-yearly meeting in August 1845 (Peacock,1989: 198, quoting the Railway Times of 30 August 1845). Table 1, which showsthe dividends paid in 1844–5 by the ten largest railway companies in Britain(de� ned by paid-up share capital), reveals some justice in this complaint.Hudson was offered the Chair of EC in October 1845, and was promisedtangible support for his intended direct route to the North.7 He immediatelytripled the dividend (see Table 1). A number of the EC’s branch lines by thenwere nearing completion and further extensions were built so that, by 1848, theEastern Counties Railway had extended its track miles to 325. During Hudson’speriod of control, new capital of £9,335,000 had been raised (Lambert, 1934:239). Hudson resigned by letter sent to a meeting in February 1849 and the


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resulting Committee of Investigation, chaired by a prominent shareholder,William Cash, produced one report to the Shareholders in late April 1849.8

The � nancial reporting practices of the four main companies

York and North Midland (YNM)

The YNM prepared half-yearly capital accounts (Statements of Receipts andPayments) from 11 December 1835 and revenue accounts from 30 May 1839(when the � rst section of line opened).

Until 1845, according to the Committee of Investigation established in 1849,the Board of Directors functioned as a body, with each member having ‘somevoice in the administration of the company’s affairs’ but, at the time theLegislature began to give ‘every undue encouragement to new railway schemes’,Hudson became ‘almost sole and absolute manager, the rest retaining littlebeyond the bare name of directors’ (Railway Times, 1849: 911).

During the years 1839–45 (inclusive), while directorial control was reasonablybalanced, the YNM produced thirteen sets of half-yearly capital and revenue

Table 1 Dividends paid by the largest railway companies in 1844–5

Name of company Share cap. Annual rate of dividend (%)31 Dec. 1844 June ’44 Dec. ’44 June ’45 Dec. ’45

£000

Eastern Counties 2130 1.3 2.5 2 6Grand Junction 2599 10 10 10 10Great Western 3698 7 8 8 8London and

Birmingham4320 10 10 10 10

London andBrighton

1738 2.7 6 4.4 7.8

London and SouthWestern

1943 6.5 8 7.5 8.5

Manchester andBirmingham

1350 5 5 6 6

Manchester andLeeds

1437 7 8 8 8

Midland 4511 * 6 6 73�4South Eastern 1966 31�8 45�8 5 51�4

* The Midland was formed by an amalgamation on 30 June 1844.Sources: dividends for London and Brighton, Manchester and Birmingham:Railway Times; dividends for other companies: Lewin (1968: 365); return ofcapital, PP (Lords) 1847–8 (71) Vol. XIV: 1–27.


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accounts. The accuracy of these accounts in an absolute sense cannot bedetermined; during the early part of the 1840s, the Secretary ‘attended to hisof� cial duties only occasionally, and the Account Books of the Company wereentrusted to a person utterly incompetent for the task [so that] the books werea mass of confusion’. The Accountant arrived at the published accounts for 1845‘from entries put down on loose sheets of paper, with a view of being afterwardsposted into books’, which was not done (YNM Fourth Report, 1849:Accountant’s report vi). The new Secretary, appointed in the middle of 1845,decided to open a new set of books, but did not start these until the publishedbalances at July 1846 were known, during which time the ‘banker’s pass bookswere almost the only authentic evidence of transactions’ (YNM Second Report,1849: 4; see also PRO RAIL 770/91).

We have studied the accounts concerned and their discussion at the generalmeetings of the YNM (PRO RAIL 770/13). Ten were unexceptional; theaccounts produced were quite detailed, apparently sensible and raised no issuesat the meetings. This leaves the accounts for the half-years to December 1839,December 1840, and June 1842. In the earliest of these, capital expendituresincluded charges for clothing and coke, although the total cost of £255 seemstrivial in comparison with the published pro� t on operations of £9,000.

The meeting in January 1841, to consider the accounts to December 1840,represents a well-known but poorly recounted episode in Hudson’s career. Hisbiographer, Lambert (who incorrectly describes the meeting as being in January1840), says there

were, however, one or two awkward questions asked by shareholders whofound it dif� cult to make head or tail of the very odd accounts which werepresented to them with the secretary’s report. Mr. Hudson had such a strangeway of charging to capital account items that the ordinary man would haveexpected to see paid out of current revenue – clothing for railway police, woodsleepers, insurance, coke and even interest on debentures.

(Lambert, 1934: 59–60; see also Peacock, 1988: 77–9; Bailey, 1995: 25)

The Statement of Payments and Receipts was a cumulative statement coveringthe period from 11 December 1835 and which reconciled with the current bankbalance. It was not a balance sheet. The amounts charged in the last six monthsof 1840 (ascertained from a comparison of the statement with that for June 1840)on the items listed by Lambert were: clothing for police £93; insurance £120;coke £212; and debenture interest £2,461 (the accumulated spending of £26,513on timber, wood, and sleepers is clearly part of the (capital) cost of laying thetrack). In that same six months, the revenue account for the new line wascharged with clothing for police (as part of a composite item), coke £2,223, anddebenture interest £2,772, in arriving at a pro� t � gure of £14,255. Moreover,the shareholders did not appear to question the inclusion of these or any otheritems in the capital statement; the shareholder (Laycock) who complained of ‘anumber of items jumbled together which men like himself could not under-stand’, by his next question can be seen to be referring instead to the fact that


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‘the cost of repairing and cleansing the engines and the engineers salaries are allin one sum’ and suggesting that the revenue accounts ‘ought to go into moredetail’ (Railway Times, 1841: 124–5).

In the meeting to consider the accounts to June 1842, Hudson faced sustainedquestioning on whether any items in capital were really revenue. The capitalaccount presented to the meeting was a Statement of Payments and Receipts thatclassi� ed expenditures under thirty-four headings, subdivided between those inprevious periods and in the current half-year. Hudson gave very detailed answers,to the apparent satisfaction of the meeting (Railway Times, 1842: 817).

The position appeared to be quite different in 1846–9; all four of theCommittee Reports comment on accounting misrepresentations, particularlythe Fourth, which contains a detailed report and appendices prepared byAndrew Macewan of Glasgow, the Committee’s accountant, setting out theextent of the falsi� cation. The ‘general result of the [accountant’s] investigationinto the Revenue Statements for the three years preceding 1st January 1849, isthat during the currency of that period’ the pro� ts had been overstated by£68,036 (YNM Fourth Report, Report by the Accountant, 1849: ix). The meansby which this was achieved can be categorized as follows:

£1 Capitalization of revenue expenditure 14,2542 Expenditure omitted from the accounts 27,6963 Overstatements of traf� c income 26,086

£68,036

The main means of falsi� cation had been the opening of three specialaccounts in the Revenue Ledger (called ‘construction’, ‘stations’, and ‘sundries’)which, in the opinion of Mr Macewan, had ‘apparently been opened with noother view than as a cover to � ctitious entries, introduced into the Company’sregular accounts, for the purpose of increasing the disposable balance reportedin the statements furnished periodically to shareholders’ (YNM Fourth Report,Report by the Accountant, 1849: viii). Expenses were debited to these accountsand then either capitalized (£14,254) or simply omitted from the publishedaccounts (£27,696). For example, over the three-year period, £3,600 of theexpense of salaries for clerks and managers (including the Company Secretary)were debited to ‘construction’ and capitalized, while purchases of coke totalling£5,011 were omitted from the revenue accounts. Income was overstated eitherby simply entering false � gures in the accounts, or by utilizing the same threeaccounts to provide corresponding debit entries to � ctitious credits. Forexample, in the half year to 30 June 1847 a debit of £4,000 to the ‘stations’account (a capital account) was merely the result of a � ctitious credit to goodstraf� c receipts for that period.

The published and actual revenue accounts for the half-years concerned canbe compared as follows:


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(a) (b) (c)

Half-year to:Published profit

£Actual profit

£Difference(% of a)

30 June 1846 67,303 51,709 23.1731 December 1846 94,163 93,794 0.3930 June 1847 74,654 61,603 17.4831 December 1847 127,466 123,905 2.7930 June 1848 83,152 49,352 40.6531 December 1848 100,247 98,586 1.66

546,985 478,949 12.44

Of the amounts of pro� t reported, 12.4 per cent was � ctitious, 9.9 per cent in1846, 8.22 per cent in 1847 and 19.34 per cent in 1848. The exaggerations weremuch higher in the � rst half of each of the years concerned, as can be seenabove, and mainly concerned revenues from traf� c (2.3 per cent of which was� ctitious) and working expenses (which were shown at 89.9 per cent of their realamount). The Accountant’s Report also identi� ed an overall (debit) balance of£83,792 (to which the pro� t falsi� cations of 1846–9 of £68,036, as above, hadcontributed), which had been placed in suspense until the shareholders could‘determine in which way it is to be liquidated, whether out of the Capital Stockor out of the future Revenue of the Company’ (YNM Fourth Report, Report bythe Accountant, 1849: 5).9

Midland

The Report of the Midland Committee of Inquiry effectively reviewed theaccounts from the inception of the Midland Railway Company on 1 July 1844through to the end of 1848 and proposed further charges to the revenue accountin connection with several accounting issues which they identi� ed, as follows:

a) The upgrading of the main lineSome 77 miles of the main line had been re-laid with heavier rails consequent onthe introduction of heavier locomotives, with the earlier rails removed to newbranch lines and sidings. The accountants engaged by the Committee, QuilterBall and Co., identi� ed the total cost of relaying the track at £390,000, all ofwhich had been charged to capital. They agreed that ‘credit must be given forthe additional value imparted to the road. . . and also for the value of thedisplaced materials’ but felt that some portion of the total cost should have beencharged to revenue (Midland Report, 1849: 47). The resident Engineer of theMidland, Mr Barlow, argued however that the reused light rails were asserviceable as new ones, and thus only those costs (mostly labour) relating to theremoval and replacement might have been chargeable to revenue; his estimate ofthis amount was £24,255 (Midland Report, 1849: 5). He also argued that the


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replacement rails required less maintenance than the original ones, a factor thathad helped to produce a return in the region of 7.5 per cent p.a. on thisinvestment. The Committee thought that Mr Barlow’s report should begenerally accepted in explanation of the revenues concerned, although they alsoconsidered that ‘the cost of labour [was] as properly chargeable to capital, underthe circumstances, as the additional weight of the rail itself ’ (Midland Report,1849: 8).

b) Rolling stockThe accountants were concerned at the treatment of engines awaiting repair,light engines that had been taken out of service, light engines, carriages andwagons that had been sold and where the disposal proceeds had been credited tothe capital account (their view being that the excess of original cost over suchproceeds was a revenue charge), and, � nally, of over � ve hundred carriages andwagons that had been broken up (where they felt that the original cost shouldhave been credited to capital account and charged to revenue). As a result, theyargued that a total of £170,000 should be charged to revenue as at 31 December1848 in order to cover these items.

The Locomotive Engineer, Mr Kirtley, disagreed with this assessment, andwas supported by Robert Stephenson, whose advice the Committee hadsolicited. As far as the � rst item was concerned, he disputed the suggestedcharge of £20,000 as some rolling stock was always defective: the number ofengines requiring repair at 31 December 1848 was not unusual, and the costswould be charged to revenue as they arose. As far as the light engines sold ortaken out of service and replaced by heavier locomotives were concerned, heaccepted the principle but argued that the estimated further expenditure of£45,000 to replace the light engines should be reduced by the expected saleproceeds, resulting in a charge of £16,417 to make good the de� ciency (MidlandReport, 1849: 9). Similarly, the cost of replacing wagons and carriages wasindeed of the order of £40,000, as claimed by the accountants, but after allowingfor disposal proceeds and the reuse of parts of those broken up, the net costwould be reduced to £18,220.

It should be emphasized that the Midland did not depreciate its rolling stock.Its policy, which the Committee fully supported, was that it should be repairedas necessary:

so long as perfect ef� ciency can be kept up by such repairs; when that is nolonger practicable, then the engine, wagon, or whatever it be, should bereplaced by a new one, and both repairs and renewal should be paid for out ofrevenue.

(Midland Report, 1849: 21)

Thus, only the initial acquisition of rolling stock, either at the commencement ofoperations, or subsequently to cater for increased traf� c, needed to becapitalized.


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c) The capitalization of interest paidThe accountants also raised the perennial question of the distinction drawnbetween interest chargeable to capital and that properly chargeable to revenuewhere a line was in the course of construction � nanced by an issue of new shares.The policy followed by the Company in such a case was to ‘pay interest [i.e. a � xeddividend equivalent to the prevailing rate of interest on loans, say 4 per cent] uponall paid-up calls out of capital, until a main line for which such capital is intendedis completed [and then] to pay dividends.. . out of revenue’ (Midland Report,1849: 11). The policy preferred by the accountants, which would have increasedthe total charge to revenue over the four years by £141,241, was that interestshould be chargeable to capital only from the time the monies were actuallyexpended (not when the call was paid) until some portion of the line concernedwas opened to traf� c. The Company Secretary pointed out that, if the company’spolicy had been to charge interest to revenue when only small sections of line wereopened, the directors would ‘doubtless have postponed such opening till the linewas completed throughout’, so that the problem would not have arisen, althoughcustomer bene� ts and to some extent net revenues would have been less (MidlandReport, 1849: 12). The Committee of Investigation supported the existing policyand rejected the accountants’ proposal.

d) Shares held in other companiesSince shares in other companies were included in the books at the amount theyhad cost, a number of holdings would sustain losses if sold at current marketvalues. The accountants estimated the loss at 31 December 1848 to beapproximately £100,000 (Midland Report, 1849: 51) and suggested that therevenue account be debited with that amount, a proposal that the Committeerejected, given the long-term nature of the investments made (Midland Report,1849: 13–14).

e) Bad debts and accrued expensesSome of the company’s account balances were seen as doubtful (to the extent ofperhaps £50,000) but the Committee reaf� rmed their belief that the ‘best way ofdealing with this subject is for the accountant of the company to write off fromtime to time any bad debt as it may turn up’, given the considerable uncertaintiesinvolved (Midland Report, 1849: 13). Similarly, the company did not estimateyear-end debts for which no accounts had been received, but included them inthe year in which the documentation was received. The Committee supportedthis practice, as it seemed to them that each year thereby ‘bears its fair amountof expenditure’ (Midland Report, 1849: 14).

f) Depreciation of the permanent wayThe Committee noted that the ‘proper mode of providing for the support of thepermanent way was to make all necessary repairs from time to time fromthe current revenue and to put aside an annual sum, also from revenue, toaccumulate at interest for the purpose of a general renewal whenever it shall be


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required’ (Midland Report, 1849: 19). The company had begun, in February1848, to set aside £20,000 p.a. for this purpose, although Mr Barlow’s view(supported by Stephenson) was that the provision should be £30,000 a year. TheCommittee agreed that, in future, it might be prudent to increase the sum setaside each year, although they did not criticize past practice in this regard(Midland Report, 1849: 19).

The Report of the Midland Committee of Inquiry was thus quite different inits overall conclusions from the reports of the other Committees of Investigation:at the Midland, if the published accounts were ‘not suf� ciently comprehensive,yet in respect of the matter they do contain, [were] in due accordance with theauthentic books of the Company’ (Midland Report, 1849: 2). The accountantsemployed by the Committee had suggested additional charges to revenue,totalling £501,000 (replacement of rolling stock £164,000, capitalization ofinterest £141,000, losses on shares in other companies £100,000, estimated baddebts £50,000, and accrued charges as at 31 December 1848 of £46,000), but theCommittee itself saw most of these suggestions as representing an excessive andunwarranted caution and they accepted only the (modi� ed) proposals to chargerevenue with £34,637 (£16,417 and £18,220 as above) in respect of the rollingstock. This represented some 2 per cent of published pro� ts over the period(July 1844 to December 1848) covered by the report.

The Committee also proposed taking a more conservative position in futureon the depreciation of the permanent way, but it did not criticize the positiontaken in the past (early) years of the group. At an overall level the accountingpractices at the Midland appear to have been no less satisfactory than those atany other well-run railway company of the time.

York, Newcastle and Berwick (YNB)

Accounting falsi� cations were dealt with primarily in the Meek Third and FifthReports, which included a tabulated report from Samuel Cottam, a Manchesteraccountant employed by the Committee. Despite the poor state of the company’sbooks, the Committee was clear that the accounts of the YNB and itspredecessor companies, particularly the Newcastle and Darlington Junction, hadbeen systematically falsi� ed by its of� cers from the very commencement of theoperations of the Newcastle and Darlington Junction in 1844, and estimatedthe total discrepancy at £121,924 (Meek Fifth Report, 1849: 3). The variousfalsi� cations can be categorized as follows:

£1 Capitalization of revenue expenditure 31,1312 Expenditure omitted from the accounts 59,8123 Fictitious assets 16,4284 Overstatements of traf� c income 14,553

£121,924

Over half the capitalized expenditure (some £17,958) consisted of interest ondebentures which should have treated as productive capital, i.e. the construction


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for which the loan was raised was complete and in operation. The remainder(meticulously listed by the accountant) was plainly revenue expenses, includingthe purchase of tickets from the printers, of candles, and even £2.5s paid to oneEliza Powell as compensation for lost luggage. Items omitted from the accountsincluded an amount of £10,756 for ‘Locomotive repairs’, £11,256 for ‘Fuel, Gasand Water’ and the income tax liability of the company for 1848 (£5,249). Thelargest � ctitious asset was a sum of £11,630 ‘entered in the Balance Sheet 30thDecember, as a debt due by Mr. Harrison when he did not owe the company anysum whatever’ (Meek Fifth Report: 19).

This overall discrepancy can be related to the published pro� t � gures of theindividual half-years, as follows:

The Report pointed out that ‘these increased dividends again enabled Mr.Hudson to realize increased pro� ts by the sale of the Shares which he took fromthe Company, for his own bene� t, at higher prices than he could otherwise haveobtained; and thus he had a deep personal interest in the falsi� cation of theaccounts’ (Meek Fifth Report, 1849: 3), although the effect on dividend levels isperhaps slightly less than might be assumed at � rst sight. The total pro� toverstatement to December 1848 of £121,924 meant that 19.64 per cent of thepro� ts as published were false (rising from 6 per cent in 1845 to 29.25 per centin 1848), with slightly reduced effects on dividends, since not all pro� ts weredistributed.

(a) (b) (c)

Half-year to:

Publishedpro� t

£

Actualpro� t

£Difference(% of b)

Companiesincluded

31 December 1844 21,149 17,512 17.20 N&DJ30 June 1845 36,721 36,271 1.23 N&DJ inc. BJ31 December 1845 43,062 38,756 10.00 N&DJ + BJ30 June 1846 38,988 33,141 15.00 N&DJ + BJ31 December 1846 50,877 46,980 7.66 Y&N + N&B30 June 1847 76,149 56,544 25.75 Y&N + N&B31 December 1847 128,626 110,303 14.25 YN&B30 June 1848 89,157 64,269 27.91 YN&B31 December 1848 135,964 94,993 30.13 YN&BTotals 620,693 498,769 19.64

Key to companies:N&DJ Newcastle and Darlington JunctionBJ Brandling JunctionY&N York and NewcastleN&B Newcastle and BerwickYN&B York, Newcastle and Berwick


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Eastern Counties (EC)

George Hudson had been appointed to the Eastern Counties Board in October1845 on condition that he had sole control and management of the affairs of thecompany, although this was subsequently amended so as to give DavidWaddington managerial control of traf� c matters and chairmanship of theTraf� c Committee (EC Report, 1849: 104). The Directors, as they explained ina reply to the Committee Report, found Hudson’s condition of appointmentdif� cult for ‘whenever Mr. Hudson was thwarted in his views, he threatened toleave the Direction of the Company and it was considered that it would not beagreeable to the Proprietors that he should do so’ (Response of the Directors,1849: 3–4).

On 22 December 1845 it was resolved that a dividend of 9 shillings per sharebe paid for the second half of 1845 (compared to 3 shillings in the � rst half), andan advert was drafted to that effect the following day, with the advert appearingin the railway press on 10 January 1846. The accounting period did not end until4 January and could not have been examined before the advert was placed.Instead, the ‘whole of these transactions were carried into effect without anyreference to the accounts’ and, when the accounts were made up and ‘did notshow that any such dividend had been earned’, they were altered and the traf� cexpenses ‘squared to suit the dividend’ (EC Report, 1849: 104).

The same system was adopted in each succeeding period up to and includingthe half-year to 4 July 1848 (EC Report, 1849: 104). The EC Accountant, Davis,thought that this was � rst done in the year to January 1846 and con� rmed that‘items of expenditure were diminished and those of receipts were increased’ inthe statements laid before the shareholders (EC Report, 1849: 109). Asubsequent meeting of the shareholders heard the evidence of two employeesthat Hudson had written in the amended � gures he wanted to see in theaccounts, contrary to his ‘total denial’ that he had made any such alterations(Railway Times, 1849: 607–8). The Assistant Accountant, Owen, con� rmed thisand argued unpersuasively that the company’s system was perfectly sound,requiring that ‘blue checks be issued for traf� c and red checks for constructionexpenditure’, even if ‘some of the blue checks were afterwards charged to capital’(EC Report, 1849: 109).

The Quilter Ball Report (which more than covered the period that Hudsonwas on the EC board) identi� ed an overall pro� t overstatement of £353,459.This consisted of a range of accounting mistreatments, which can be categorizedas follows:

£Revenue expenses charged to capital 202,341Expenses omitted from the accounts 92,597Fictitious revenue 58,521

£353,459

The charging of revenue expenses to capital account constituted the majority,though by no means all, of the overstatement of pro� t. It would be misleading


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to describe this as misallocation, since the overwhelming majority of the items sodealt with were plainly operating expenses, including, for example, wages ofengine drivers, porters, and other employees (over £39,000 under this headalone), of� ce expenses, stationery, locomotive repairs, postage, bad debts,solicitors’ bills for general business, the costs of keeping horses, and evenPassenger Duty. The bulk of the omitted expenses consisted of arrears of interestnot taken into account (£61,013), while the � ctitious revenue largely resultedfrom an overstatement of amounts due to the EC from other railway companies(EC Report, 1849: 127–45).10

The overstatement of pro� ts of £353,459 can be related to the publishedpro� ts of the individual half-years as follows:

The total pro� t overstatement to 4 January 1849 meant that over 54 per cent ofthe pro� ts as published were false (39.19 per cent in 1845, 66.68 per cent in1846, 42.69 per cent in 1847, and 51.34 per cent in 1848), with almost identicaleffects upon dividends (since dividends at EC of £638,324 over the four yearsrepresented 97.9 per cent of the published pro� ts).

The Committee of Investigation also drew the attention of the shareholders to� ve further items, as follows:

a) £2,000, charged to ‘Extensions’ but which represented a payment toWaddington for services rendered to the Company which had not been thesubject of any resolution by the Board;

b) four payments made in April 1846, totalling £7,607 and described as‘Parliamentary expenses’. Waddington and Duncan refused to tell theCommittee what the money was spent on, lest this ‘implicate other parties’(EC Report, 1849: 105), a defence which prompted suspicions that MPsmight have been bribed to advance the railway company’s interests;

c) interest charged to capital instead of revenue, totalling £84,591;d) the probable expense of renewing the permanent way could be estimated at

£100 a mile, which would total £32,200, a sum which should be charged

(a) (b) (c)

Half-year to:Published profit

£Actual profit

£Difference(% of a)

4 July 1845 21,835 17,631 19.254 January 1846 64,006 34,565 46.004 July 1846 64,946 30,510 53.024 January 1847 72,094 15,148 78.994 July 1847 105,567 62,137 41.144 January 1848 111,774 62,415 44.164 July 1848 114,330 32,370 71.694 January 1849 97,686 70,801 27.52Totals 652,238 298,779 54.19


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against revenue and ‘set apart to uphold the value of the railway’ (ECReport, 1849: 106);

e) the advisability that locomotive engines and rolling stock should be ‘keptup and renewed out of the earnings of the Company, than that anydepreciation fund should be created for the purpose’, particularly since theCompany had extensive repairing and rebuilding facilities at Stratford (ECReport, 1849: 106).

The payment to Waddington is considered more fully below; the payments inApril 1846 led to an investigation by a Select Committee, which was satis� edthat no attempts had been made to bribe MPs,11 and the former directorsobserved that interest on unproductive capital was charged by all railwaycompanies to capital (and that, in any case, the practice had been sanctioned bythe shareholders), that the amounts spent on rolling stock were properlychargeable to capital and that the Committee’s ‘true complaint’ should have beenthe lack of an adequate depreciation fund (particularly since the depreciationfund of the company of £6,345 as at 4 January 1845 had been written back to thecredit of revenue at 4 July 1846 in order to support the dividend payment forthat half-year (Directors Response, 1849: 4).)

Discussion

In this paper we have demonstrated that the existing literature on the � nancialreporting practices of the early railway companies places considerable emphasison George Hudson’s practices, particularly as Chairman of the Eastern CountiesRailway. We then outlined both the regulatory environment within whichHudson’s companies operated and the scope of his railway activities as a whole,in order to provide appropriate context for a detailed analysis of the Hudson’saccounting practices at all of the four major companies he controlled in 1845–9,making particular use of the Committee of Investigation Reports of 1849.

The analysis that followed shows that the accounting practices used at thesefour companies varied considerably, in terms of both their detailed compositionand the level of their effects upon reported pro� tability. In particular, the extentof the accounting deceptions at Eastern Counties, a venture almost ruined byspending decisions made prior to Hudson’s arrival, was quite different from thatat the other three companies: at Eastern Counties 54 per cent of the publishedpro� ts were false, compared with 19.6 per cent at the YNB, 12 per cent at theYNM, and perhaps only 2 per cent at the Midland. Furthermore, at the YNMand YNB, accounting misrepresentations did not transform operational failureinto apparent success but instead tended to exaggerate relatively satisfactoryoperating returns.

A further point concerns the nature of the accounting misrepresentations atEastern Counties. G.A. Lee argues that from a general

laxity in classi� cation [i.e. of expenses between capital and revenue] it was novery long step (particularly for less-scrupulous directors during the boom


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years) to wilful manipulation of the accounts to justify in� ated dividends, andso keep up the price of the shares (as on the Eastern Counties Railway underGeorge Hudson’s management). The scandals of the later 1840s were theresult.

(Lee, 1975: 21–2)

We believe that the evidence in this paper reveals the extent to which thisargument is false and misleading. Although over half the overstatement of pro� ton the Eastern Counties was indeed achieved by capitalizing expenses, most ofthe expenses in question were precisely the kind about which there was noambiguity. Appendix B of the Accountant’s Report takes over four pages to list‘Items of Expenditure chargeable against Revenue, and so treated in the Books at� rst instance, but � nally charged to the Debit of Capital’, totalling £115,278 (ECReport, 1849: 133). Some items are substantial, e.g. £9,300 of ‘cash paid wages’to ‘Porters, guards, and gate-keepers’ (EC Report, 1849: 135); many are relativelysmall, e.g. £170 paid as compensation to the � rm of Coles, Child & Co. ascompensation for ‘lost coke sacks’ (EC Report, 1849: 137), but all arequintessential revenue charges. For Hudson, the capital–revenue distinction wassimply a device: others, such as the inclusion of � ctitious income, would servejust as well, and indeed were much more extensively used on the YNM andYNB. It is therefore far more accurate to see Hudson’s EC accounts, as Edwardshas done, as mere ‘fabrications’ (1989: 144) or simply ‘cooked’ (1989: 167).

Indeed, the contested nature of the capital/revenue distinction in early railwayaccounting is most relevant at the Midland, which, paradoxically, is not reallydiscussed in the literature in connection with Hudson.12 The disagreementsbetween the accountants and the Committee of Investigation concerned issueswhere there were wide variations in the accepted practice of the time. Howeverthe Midland’s accounting policies may look to modern eyes, there was nothingunusual about its treatment of unproductive capital or enhancement of thepermanent way (Pollins, 1956) or rolling stock (Pollins, 1956; Edwards, 1986),and the preparation of accounts on a cash basis was likewise common practice atthat time (Edwards, 1985). The Midland did not provide any depreciation on thepermanent way until 1848, and the amount was regarded as insuf� cient by theCommittee of Investigation, but it was, in 1849, one of the relatively smallnumber of railway companies which made any such provision, the � rst to do sobeing the London and North Western in 1847 (Edwards, 1986: 253, 255–6). Inshort, whereas Hudson’s accounting practices at the EC were covert, and causeda scandal within and without the company when disclosed, those at the Midlandwere public knowledge, within the parameters of accepted practice, and largelyreaf� rmed by the Committee of Investigation, whose report was endorsed by theshareholders at a meeting on 22 August 1849. There was criticism of the Report,but this related to allegations that the directors, including Hudson, had offeredover-generous terms when making two acquisitions because they personally hadpro� ted from these arrangements (Railway Times, 1849: 848–52).

It seems plausible to ascribe the differing accounting practices followed atHudson’s four main companies to the different pressures he faced in each case.


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Hudson had his own strategic reasons for taking over the EC, but theshareholders had invited him on to the Board as someone with the � nancialacumen to transform their fortunes. This he promised to do, and so wasobviously under pressure to produce results quickly. The situation at the YNMwas rather different: Hudson’s reputation had been built on the 10 per centdividends paid by the YNM in the early 1840s, and it was important to maintainthe level of distribution, which the in� ation of pro� ts enabled him to do whenoperating performance began to decline. At the Midland, on the other hand,operating results and dividends remained at an entirely satisfactory level,without accounting manipulations, for virtually the whole of Hudson’s period ofcontrol.

Conclusions

The literature on early railway accounting asserts that there was widespreadmalpractice by directors, and, in providing evidence or illustrations, refers toHudson more than any other entrepreneur, and to the Eastern Counties (whileunder his control) more than any other company. The latter is sometimes the soleexample given (Lee, 1975: 21–2; Edwards, 1989: 144, 167) or one of very few. Ina few cases, Hudson’s malpractice is mentioned without reference to speci� ccompanies. Thus Glynn refers to ‘[m] any instances . . . of fraud on a grand scale’(1984: 107) perpetrated by promoters during the Mania, and cites Hudson only,in general terms, while Bryer argues that many directors committed similaroffences (1991: 476). Taken as a whole, the literature tends to generalize fromHudson’s behaviour, particularly at the Eastern Counties, to railway directors asa whole.

In this paper we have attempted to show that there was considerable variationin accounting practices across the four companies: accounting malpractice(determining malpractice by the standards of the time) was carried out on a largescale at the Eastern Counties, on a much smaller scale at the two York-basedcompanies, and hardly at all at the Midland. As well as providing further insightinto Hudson’s behaviour, this must cast doubt on the validity of the suggestion,met frequently in the literature, that Hudson’s malpractice at the EasternCounties has a wider signi� cance, as an example, perhaps extreme, of widespreadaccounting manipulations by other railway directors. Hudson’s career, and thescandal which followed his exposure, were unique. Bryer suggests that he wasmade the scapegoat for more general failings of the system (1991: 476) but apriori it seems more plausible that his downfall and disgrace arose because hisfrauds were also ‘exceptional’ (Gourvish, 1972: 25).

We have also argued that the Eastern Counties was an unusual railway, evenbefore Hudson became its Chairman. His brief period of control (from October1845 to February 1849) coincided with the Railway Mania (1845–7) and thecrisis that followed its collapse (1847–8). It seems to us that, without a moresystematic examination of the accounting practices of early railway companiesthan has been made hitherto, the suggestion, implicit or explicit, that George


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Hudson’s accounting practices at the Eastern Counties were indicative of moregeneral practice, is highly suspect, and logically unsound.

Acknowledgements

We are grateful to the three anonymous referees for their helpful comments on earlierdrafts of this paper.

Notes

1 ‘The legacy of the construction stage for companies such as the Eastern Counties wassuch that no traf� c manager could produce satisfactory pro� ts, however gifted he was’(Gourvish, 1980: 138–9).2 Pollins notes that the company ‘paid out in dividends some £115,000 more than thepro� ts earned and charged some £200,000 of expenses to capital’ (1956: 340).3 Edwards notes that at the Eastern Counties there were ‘revelations of cookedaccounts’ (1985: 26) and the wrongful omission of £318,144 from the debit of therevenue account and unjusti� ed credits thereto of £35,315 (1985: 34).4 The other, William Chadwick, was described as one of a number of ‘mini-Hudsons(but) without his brains or vision’ (Simmons and Biddle, 1997: 119).5 General registration was permitted under the Joint Stock Companies Act of 1844,albeit with unlimited liability (until the Act of 1855).6 Including John Close, a former apprentice in Hudson’s drapers shop, as Secretaryand two York and North Midland directors, George Dodsworth and Sir John Simpson,as auditors (Peacock, 1988: 89).7 It was widely believed that Hudson engineered the invitation (Peacock, 1989:198–9).8 The page numbers cited are of the copy attached to the Select (Monteagle)Committee Report.9 The suspense account also contained items that went back to 1845, when the booksof the Company were very poorly kept (see above), those resulting from changes toexisting accounting practice which the Accountant thought advisable, and capital items.The overall balance (of £83,792) was clearly intended to provide a safe basis for thefuture.10 The Committee did also claim that there were further amounts of £64,478 spent onlocomotives, carriages, etc., which should have been charged to revenue (and whichwould have reduced the pro� ts of the last half-year from £103,687 to £6,503) but thesefurther claims were not supported by Quilter Ball, in their section of the report and seemlargely vexatious, perhaps because the Committee chairman, William Cash, and Hudsonwere not on good terms.11 Instead, the (covert and scurrilous) purpose of the payments turned out to be settingup and funding a shareholders’ action group of the rival London and York Company(L&Y) that would lobby for an amalgamation of the L&Y, the EC and the DirectNorthern, in order to advance Hudson’s strategic plans for the Eastern Counties Railway(Report of the Select Committee, 1849).12 Pollins (1956: 348) and Edwards (1989: 118) both refer to the Midland’s earlyintroduction of depreciation of the permanent way, but make no mention of Hudson inthis connection.


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References

Primary sourcesCompanies Clauses Consolidation Act (1845) 8 & 9 Vict. c. 16.Eastern Counties Railway Act (1836) 6 & 7 Wm. IV c. 106.Report of the Committee of Investigation to the Shareholders of theEastern Counties Railway (‘EC Report, 1849’); reproduced as Appendix ‘A’ ofthe Second Report of the House of Lords Select (Monteagle) Committee onthe Audit of Railway Accounts; BPP (1849, Cmd. 371) Vol. X: 381–427.Response of the Directors of the Eastern Counties Railway to the EasternCounties Report (1849), London, LSE Reference Library.Midland Railway Act (1844) 7 & 8 Vict. c. 18.Report of the Committee of Investigation to the Shareholders of theMidland Railway (‘Midland Report’); Derby Mercury (Extraordinary Edition),15 August 1849: 1–62; Derby City Reference Library.York and North Midland Railway Act (1836) 6 & 7 Wm IV c. 81.Financial records, York and North Midland Railway; (Capital) Receiptsand Payments accounts, 1836–45, Public Record Of� ce, Kew (hereafter PRO)RAIL 770/13; Revenue Accounts 1839–45, PRO RAIL 770/13; Ledgers1836–45, PRO RAIL 770/91.Reports of the Committee of Inquiry to the Shareholders of the York andNorth Midland Railway (‘YNM Second Report’ et seq.); Second, Third, andFourth Reports, York, 1849, Goldsmith’s Library of Economic Literature,University of London.York, Newcastle and Berwick Railway Act (1847) 10 & 11 Vict. c. 133.Report of the Committee appointed by the proprietors of the York,Newcastle and Berwick Railway, to investigate the Great North of EnglandPurchase Account (‘Prance Report’); attached as Appendix ‘B’ to the SecondReport of the House of Lords Select (Monteagle) Committee on the Audit ofRailway Accounts; BPP (1849, Cmd. 371) Vol. X: 428–61.Reports of the Committee of Investigation to the shareholders of theYork, Newcastle and Berwick Railway: Third Report (‘Meek Third Report’);PRO RAIL 772/15; Fifth and Final Report . . ., (‘Meek Fifth Report’); TheHerald (York) Extraordinary Edition, 22 October 1849; PRO RAIL 772/15.Report of the Select Committee into Expenditure of Certain Sums under theHead of Parliamentary Expenses; BPP (1849, Cmd. 366) Vol. X: 647–816.Report of the House of Lords (Monteagle) Select Committee on the Auditof Railway Accounts; First, Second and Third Reports; BPP (1849, Cmd. 371,421) Vol. X: 1–646.

Secondary sources

Bailey, B. (1995) George Hudson: The Rise and Fall of the Railway King, Stroud:Alan Sutton.Brief, R.P. (1965) ‘Nineteenth century accounting error’, Journal of AccountingResearch, Spring: 12–31.


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george hudson's financial reporting practices: putting the eastern counties railway in context

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