Should Historians Trust Late Nineteenth-Century Company Financial Statements?

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<ul><li><p>This article was downloaded by: [University of Strathclyde]On: 18 November 2014, At: 10:16Publisher: RoutledgeInforma Ltd Registered in England and Wales Registered Number:1072954 Registered office: Mortimer House, 37-41 Mortimer Street,London W1T 3JH, UK</p><p>Business HistoryPublication details, including instructions forauthors and subscription information:http://www.tandfonline.com/loi/fbsh20</p><p>Should Historians TrustLate Nineteenth-CenturyCompany FinancialStatements?A. J. Arnold aa University of EssexPublished online: 24 May 2006.</p><p>To cite this article: A. J. Arnold (1996) Should Historians Trust Late Nineteenth-Century Company Financial Statements?, Business History, 38:2, 40-54, DOI:10.1080/00076799600000050</p><p>To link to this article: http://dx.doi.org/10.1080/00076799600000050</p><p>PLEASE SCROLL DOWN FOR ARTICLE</p><p>Taylor &amp; Francis makes every effort to ensure the accuracy of allthe information (the Content) contained in the publications on ourplatform. However, Taylor &amp; Francis, our agents, and our licensorsmake no representations or warranties whatsoever as to the accuracy,completeness, or suitability for any purpose of the Content. Anyopinions and views expressed in this publication are the opinionsand views of the authors, and are not the views of or endorsed byTaylor &amp; Francis. The accuracy of the Content should not be reliedupon and should be independently verified with primary sources ofinformation. Taylor and Francis shall not be liable for any losses, actions,claims, proceedings, demands, costs, expenses, damages, and other</p><p>http://www.tandfonline.com/loi/fbsh20http://www.tandfonline.com/action/showCitFormats?doi=10.1080/00076799600000050http://dx.doi.org/10.1080/00076799600000050</p></li><li><p>liabilities whatsoever or howsoever caused arising directly or indirectlyin connection with, in relation to or arising out of the use of the Content.</p><p>This article may be used for research, teaching, and private studypurposes. Any substantial or systematic reproduction, redistribution,reselling, loan, sub-licensing, systematic supply, or distribution in anyform to anyone is expressly forbidden. Terms &amp; Conditions of accessand use can be found at http://www.tandfonline.com/page/terms-and-conditions</p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f St</p><p>rath</p><p>clyd</p><p>e] a</p><p>t 10:</p><p>16 1</p><p>8 N</p><p>ovem</p><p>ber </p><p>2014</p><p>http://www.tandfonline.com/page/terms-and-conditionshttp://www.tandfonline.com/page/terms-and-conditions</p></li><li><p>Should Historians Trust Late Nineteenth- Century Company Financial Statements? </p><p>A.J. ARNOLD University of Essex </p><p>The views of business historians on accounting practices in general and on the informational value of company financial statements in particular are likely to have been influenced, if not shaped, by a series of articles in Business History on the subject in recent years.' This literature, in general, warns business historians against excessive reliance on accounting data.2 It is, of course, sensible for historians to be careful and cautious in their use of data produced within a set of unfamiliar conventions, although excessive caution can result in a failure to make proper use of the information available. The purpose of this paper is to review these claims and to argue, by reference to evidence obtained from the existing accounting and economic history literatures and from new archival sources, that the business history literature has failed to distinguish the accounting practices of the last quarter of the nineteenth century from those of the first half of the twentieth and may, therefore, have induced an excessively cautious approach to data of potential value to business historians. </p><p>Several of the papers in the Business History series provide encouraging perspectives on financial accounting data and practices. Lister provides an account of the 'structure of conventions which has influenced the form and content of financial reporting throughout a large part of its history', which he believed business historians should understand,' while, more recently, Parker discussed and illustrated the main ways in which accounting records and financial statements could mislead historians (and others) and recom- mended business historians 'not to discard accounts but to learn more about them'." Finally, Mason argued, by reference to the accounting records of firms in the brewing industry, that 'provided their limitations are acknowledged, accounting records can be an extremely valuable source of evidence for the business historian' and that 'like other forms of historical evidence they need to be asked the right questions and their replies treated with a proper, but not excessive, degree of scepticism'.' Business History. Vo1.38, No.2 (1995). pp.40-54 PUBLISHED B Y FRANK CASS. LONDON </p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f St</p><p>rath</p><p>clyd</p><p>e] a</p><p>t 10:</p><p>16 1</p><p>8 N</p><p>ovem</p><p>ber </p><p>2014</p></li><li><p>LATE NINETEENTH-CENTURY FINANCIAL STATEMENTS 4 1 </p><p>The earliest and probably the most influential of the papers in Business History concerned with financial accounting statements and practices, that by Marriner, has however identified a large number of accounting deficien- cies and advised historians to exercise 'the utmost caution in drawing conclusions' from published accounting data.6 </p><p>Some of the defects identified in this paper are general and derive from ideas central to financial reporting, namely the summarisation of individual events, which are said to have 'robbed statements of a good deal of their value', and the use of 'artificial' reporting periods (typically a year), which do not 'coincide with the natural rhythm of business operations and ... give a misleading impression' of business events. Other deficiencies in the construction and content of Profit and Loss Accounts and Balance Sheets, although fairly general, were less central to accounting as a discipline, 'arising from the legal requirements ... from the absence of strict definitions of terms in the Acts and ... from accounting conventions, especially those derived from "double-entry" accounting'.' </p><p>Maniner also criticised several more specific accounting practices; the use of single valuations for large groups of assets,8 the concealment of profits and losses by 'manipulating the statements of subsidiary com- pan ie~ ' ,~ and the 'very widespread practice of building up hidden reserves by depreciating assets very quickly or by deliberately under-valuing assets'.1 There can be no doubting the unhelpfulness of these practices, but Mamner's paper does not place them within their own historical context and, as a result, implies that they were influential within both the nineteenth and twentieth centuries. It will be argued below that this was not the case and that such practices were rather more confined in their impact than has been alleged. </p><p>The first criticism, that the summarisation of individual events robs statements of much of their value, in some senses is bound to be correct, since all forms of aggregation involve a loss of informational content, but implies the existence of a world in which data collection and processing are relatively costless. If information and the time of those who analyse it are viewed instead as costly goods, then the aggregation of like items is unexceptionable. The practice does, of course, open up the possibility of the aggregation of dissimilar items, either through failing to recognise the distinctive qualities of particular items or as a means of deception, but this is surely the result of mis-classification rather than a consequence of summarisation per se. Similarly, the use of 'artificial' reporting periods </p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f St</p><p>rath</p><p>clyd</p><p>e] a</p><p>t 10:</p><p>16 1</p><p>8 N</p><p>ovem</p><p>ber </p><p>2014</p></li><li><p>42 BUSINESS HISTORY </p><p>(typically a year), which do not 'coincide with the natural rhythm of business operations' is bound to provide an imperfect representation of business events although, again in a world in which data collection and processing are costly and in the context of industrial processes where the natural rhythm of successive individual business event cycles endlessly overlap the preceding, any alternative approach may be simply unecono- mic." On the other hand, the willingness of the legislature to refer to but not to define even concepts as central as 'profit', undoubtedly encouraged an excessively flexible approach by practising accountants to asset recognition and profit measurement that has not helped historians and other users of financial accounting information. </p><p>This was particularly regrettable in the context of an organisational form in which the liability of one party, shareholders, was 'artificially' reduced through the operation of the legal powers of the state, since the involvement of the state in the regulation and definition of the information flows concerning that organisation was a simple, logical corollary.12 The Joint Stock Companies Act of 1844 had included compulsory reporting and auditing provisions but the equivalent, consolidating Act of 1856 removed these and left the level and reliability of reported information largely to the discretion of the company concerned.13 During the period l856-l9W, an important one for the development of incorporated businesses and of the capital markets, England had the 'most permissive commercial law in the whole of Europe',14 at least as far as general manufacturing companies are concerned, although the railways, utilities, municipal authorities and banks were subject to far more specific regulation.lJ The position under general company legislation began to change with the 1900 Companies Act, which made an annual audit obligatory for all registered companies, and with the B907 Companies Act, later incorporated into the Companies (Consolidation) Act of 1908, which required public companies to file an annual Balance Sheet containing a summary of its capital, liabilities and assets, 'giving such particulars as will disclose the general nature of such liabilities and assets and how the values of the fixed assets have been arrived at'. The extent of the changes should not, however, be exaggerated; no particular format was prescribed, there were no specific regulations governing the contents of the accounting reports and a Profit and Loss Account was still not a legal necessity. </p><p>The reluctance of the state to define concepts as basic as '~apital"~ meant that, during the period 1844-89, there were a series of legal cases concerning dividends, capital maintenance and depreciation in which the courts were asked to discuss accounting principles and methods." Greater uniformity might have been brought about had the accounting profession strongly and consistently lobbied the state, but the professional accounting bodies in England were not formed until the 1880s, and were too new to </p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f St</p><p>rath</p><p>clyd</p><p>e] a</p><p>t 10:</p><p>16 1</p><p>8 N</p><p>ovem</p><p>ber </p><p>2014</p></li><li><p>LATE NINETEENTH-CENTURY FINANCIAL STATEMENTS 43 </p><p>exert real influence. Accounting definitions and practices used in the preparation of financial </p><p>statements during the second half of the nineteenth century were, therefore, highly diverse rather than ~niform,'~ although the difficulties that this causes historians could be overcome where the levels of disclosure were sufficient- ly high. </p><p>The use of single valuations for large groups of items is one of the most destructive aspects of financial accounting practice and Maniner was rightly critical of this. She went on to say, however, that 'it is quite usual to find a single valuation given to a group of items such as 'land, water rights, reservoirs, effluent works, buildings, plant, machinery, horses, wagons, office furniture and goodwill' or 'beer and casks, malt, hops, horses, forage, coals, buildings and sundries'.lY Until the passing of the 1948 Companies Act, it could certainly be argued that 'the legal requirements governing managerial behaviour and the disclosure of company affairs were so minimally drawn as to place the company's directors in virtually unchal- lengeable and unchecked possession of the company's a ~ s e t s ' . ~ In 1925, the Institute of Chartered Accountants in England and Wales, in evidence to the Company Law Amendment Committee, said that it thought that directors were honest, such that </p><p>if in some cases they disclose less than some people desire, the absence of detail is in most cases wise and is generally supported by shareholders. To give in a Balance Sheet such detailed information as would afford full protection to creditors might mean the giving of a mass of detail of material value to competitor^.^' </p><p>Although the legal system provided little or no guarantee that disclosure levels would be satisfactory, the level of information provided in financial statements at particular points in time has not been a simple function of (minimum) legal requirements. A longitudinal study of the published financial statements of probably the most notorious company in British accounting history, the Royal Mail Steam Packet Company, for example, reveals very wide changes over time in the amount of information provided. In 1850, the published accounts identified nine categories of income, 18 of expense and appropriation of profit and, on the balance sheet, seven categories of liability and 13 of assets, with further detail provided on the important area of fixed assets. Given the relatively unsophisticated nature of the company's business at that time, such a level of disclosure seemed to be at least adequate for most historical purposes. By 1899 the level of </p><p>Dow</p><p>nloa</p><p>ded </p><p>by [</p><p>Uni</p><p>vers</p><p>ity o</p><p>f St</p><p>rath</p><p>clyd</p><p>e] a</p><p>t 10:</p><p>16 1</p><p>8 N</p><p>ovem</p><p>ber </p><p>2014</p></li><li><p>44 BUSINESS HISTORY </p><p>disclosure was noticeably higher than in 1850 and appeared to have kept pace with greater business complexity, with detailed information made available on the provisions for depreciation, insurance and deferred shipping repairs. A general working (or trading) account was published until 1906, providing information on trading incomes and expenses, but thereafter disclosure levels declined. In 1909, the depreciation charge was indicated in only general terms at the annual general meeting and thereafter omitted.* Complaints that the company had 'adopted the vicious principle of concealment', and that its accounting practices were unhelpful, were made in the financial press in 1913 and 1914,*' even before the use of 'omnibus' headings for current liabilities in 1916. </p><p>The adequacy of the level of disclosure is an empirical issue, however, and individual examples do little more than suggest the range of outcomes that may have existed. To provide a more systematic frame of reference for examining this, the published accounts of a set of 25 quoted companies for 1899 were examined, covering four of the main sectors used for stock exchange listing purposes at the time, brewing (five companies), commercial and industrial (eight), iron, coal and steel (seven) and shipping (five).24 The average number of items shown in the published accounts of this set of companies...</p></li></ul>