should historians trust late nineteenth-century company financial statements?
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Should Historians TrustLate Nineteenth-CenturyCompany FinancialStatements?A. J. Arnold aa University of EssexPublished online: 24 May 2006.
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
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Should Historians Trust Late Nineteenth- Century Company Financial Statements?
A.J. ARNOLD University of Essex
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.
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
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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
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'.'
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.
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
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42 BUSINESS HISTORY
(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.
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.
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
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exert real influence. Accounting definitions and practices used in the preparation of financial
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.
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
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^.^'
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
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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.
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 for 1899 was 21.3 (standard deviation 10.1) for the balance sheet and 12.5 (standard deviation 8.8) for the profit and loss account. The balance sheet of the company which, in each sector, disclosed the lowest number of items was then examined. In one case, John Crossley & Sons Ltd, all assets were grouped together as one item but the lowest disclosing shipping company, Cunard, instead subdivided assets into eight categories and provided six further items of information on fixed asset m~vements.~ Although there are difficulties in making generalisations across a wide range of businesses, from the evidence seen the use of single valuations for groups of items did not appear to be a significant financial reporting problem at the end of the nineteenth century.=
The concealment of profits and losses by the manipulation of the statements of subsidiary companies2' has been a serious problem in financial rep~rting.~' According to Edwards,% the earliest known British example of a consolidated balance sheet is the one produced by the Pearson & Knowles Coal & Iron Coal Co. in 1910, with little experimentation taking place before 1922,'O before the publication of a consolidated balance sheet became a legal requirement in 1948. During the nineteenth century, however, investment by one company in another was far less common than it was to become. Hannah described the merger activity of the period 1880-1918 as
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'of relatively small dimensions'" and showed that the rise of the corporate economy did not gather momentum until the years immediately following the First World War.32
Again, in order to provide more systematic data, the investments in other companies by the 25 companies referred to above, in 1899, was analysed. Even at the very end of the nineteenth century, inter-company investment by the brewing companies was very small; none had so committed ?S much as two per cent of their net assets. In the commercial and industrial sectors the average was nine per cent, with three out of the eight companies holding quite substantial investment^,'^ but only 3.6 per cent amongst the iron, coal and steel companies. The average for shipping of 9.3 per cent was due largely to the substantial investments of one company; three of the five had virtually no investments at all. Inter-company investments were to become a central aspect of commercial life after the First World War but in the nineteenth century this was not the case. As a result, any misuse of the commercial relationship with and accounts of subsidiary companies for reporting purposes could have been of only minor importance in this earlier period.
One of the most serious informational deficiencies in the history of financial accounting has been the use of secret reserves. Mamner viewed the 'very widespread practice of building up hidden reserves by depreciating assets very quickly or by deliberately under-valuing assets' as arguably 'the largest single factor distorting the accuracy of financial statements', since 'not only were hidden reserves created in good times but, in addition, it was common practice to cover up trading losses by reversing the process'. She thought it 'very doubtful whether any business historian could now make the corrections necessary to eliminate the very considerable bias introduced into accounts in this way'."
This was undoubtedly true.of a substantial period of time prior to the passing of the 1948 Companies Act3J but it is less clear when the problem first became seri~us.'~ Mamner does not define this precisely, but uses the phrase 'it was not until 1906 that the legality of hidden reserves was tested', which suggests that this had been a problem of some duration that the courts were slow to confront." This view is consistent with G.A. Lee's observation that secret reserve accounting was prevalent around 1900.38 Moreover, without access to internal records the business historian would indeed be unable to correct the reported results. It may therefore be helpful to review the practices involved and to consider the available evidence on its incidence, so that historians are better able to assess the likelihood of this
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form of accounting being present. Secret reserves have been defined as the 'undisclosed understatement of
net worth resulting from [for example] the excessive writing-down of assets, the overstatement of provisions and liabilities and the writing-off of additions to fixed assets as expenses'.3y In other words, net assets can be understated either by under-representing assets or by exaggerating liabilities.
Depreciation is an estimate of the cost of fixed-asset consumption during an accounting period. Whereas some assets are entirely used up within a given accounting year, fixed assets last for several years so that the attribution of their cost to particular periods is far less certain. If depreciation charges were based upon changes in estimated market values, then they would approximate the opportunity cost of the use of the asset, but it has been normal accounting practice instead to calculate depreciation as the estimated proportion of the recorded cost of the asset used up in the period in question. This cannot, of course, be known. Moreover, under this process the estimates made cannot be compared with any actual referent until the asset is sold, so that the accuracy of the estimated charge remains uncertain. Finally, the necessity (as opposed to the desirability, particularly in years of high profitability) of reducing profits in order to recognise the using up of an asset which is unlikely to be replaced in that precise form has been viewed by many businessmen as less than wholly persuasive. Depreciation was being charged in the accounts of some industrial businesses from the 1770~.~" Its usage was extremely irregular but by 1883 the controversy amongst accountants, at least in the context of industrial, commercial and financial companies, appeared to have moved on beyond disputing the 'fact of chargeability' to matters of methodology and precise intention so that, by the end of the nineteenth century, depreciation was a widely established, if inconsistently applied, practice.'"
There have been a number of theories advanced in the accounting history literature about the overall effects of depreciation accounting but the amount of empirical underpinning has been quite modest. Brief, for example, argued that depreciation charges were generally inadequate during the nineteenth century and that, by contributing to an overstatement of profits, this may have accelerated economic growth, although this conclusion was not supported by any substantial body of quantified evidence."' Mamner, on the other hand, has argued that depreciation charges were so excessive as to function as a form of secret reserve accounting.
In order properly to assess the effects of depreciation practice, it is necessary to look at the internal records of the companies concerned. Edwards and Boyns examined the archival records of several firms in the iron and steel industry over the period 1865-1914 and found 'no real evidence that any systematic attempt was made to mislead external users by manipulating the trend of reported profit'; instead, the sole objective
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appeared to be 'to give financial effect to a cautious financial policy and retain money within the business for re-investment'."
The classic method of creating secret reserves does not concern depre- ciation, however, but involves the exaggeration of liabilities, through undisclosed transfers which do not appear on the face of the balance sheet," typically being included within an ambivalent caption such as 'Creditors and Sundry Balances'. This form of secret reserve accounting is far more apparent from the internal records of the companies concerned and is also far more flexible in terms of reversal in years of low profitability. The extent of secret reserve accounting at particular points in time can be assessed by reference to three main sources, contemporary texts and professional journals, subsequent published research and new empirical sources. The contents of articles and correspondence in the Accountant, the earliest professional accounting journal, for example, help to date the emergence of the professional debate on secret reserve accounting. The first article on the subject was published in 1895, on the 'undisclosed reserves' of a joint-stock bank which had arisen from an intentional under-valuation of marketable government securities. The journal found it 'not easy to justify' such a sys-
By 1899 it appeared from an article and subsequent correspondence in the same journal that there was a belief among Manchester accountants that the practice of secret reserve accounting was widespread among manufacturing companies and that this view was shared by neither the editor of the journal nor by other London accountants. Furthermore, the actions of the directors of the Birmingham Small Arms Company in 1906 in seeking powers to establish inner reserves were seen as following the example set by 'one or two other large limited companies', but not as reflecting generally established practice.46 "Iivo reliable texts written in the early years of the twentieth century provide further indications of the usage of secret reserves. Dicksee thought that secret reserves were 'very generally countenanced by most thoroughly sound businessmen', but went on to say that it was 'especially in connection with banks and other allied undertakings that secret reserves are most prevalent', usually taking the form of excessive provisions for losses by way of bad and doubtful debts, and that such other forms as the deliberately excessive writing-down of fixed assets (such as premises) were 'certainly less defen~ible'.~' Lisle's view was generally consistent with this. He identified secret or hidden reserves as arising from excessive provisions against depreciation or bad debts, and from writing-off assets that still existed, such as bank premises, but thought that 'the practice cannot be recommended for it is quite as incorrect in principle to understate a company's position as it is to overstate it'. By way of summary, Lisle added that 'leading accountants having special knowledge of banking accounts report approvingly of the practice
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among the principal banks of the c0untry'.4~ Secret reserves were, therefore, clearly in use by the end of the
nineteenth century, at least among banks, but the frequency and extent of their use by industrial firms is difficult to determine from contemporary sources. Subsequent published research has, however, produced relatively little concrete evidence. The best example of the use of secret reserves is probably Napier's work on P & 0 , which used secret reserve accounting from as early as 1878, and on an extensive scale from 1892.4' Edwards and Webb found that John Summers & Sons Ltd (between 1923 and 1937), Guest Keen & Co. (between 1902 and 191 8) and Wigan Coal (from 1925 to 1929) used secret reserves, although they also noted that the latter company did report its depreciation charge in every year of the period 1865-1929 and, despite the trading conditions of the First World War, did not use secret reserves until 1925.50 The most widely quoted example of secret reserve accounting is the Royal Mail Steam Packet Company, arising out of the prosecution of the company's chairman, Lord Kylsant, in 1931, although Ashton, using the records of the court case, and Arnold, using the company's archival records, have both argued that the case does not successfully evidence any widespread use of secret reserves."
Indications obtained from the contemporary and more recent accounting literatures were, therefore, tested against information obtained from a comparison of the published and internal records of the set of 25 companies referred to above, again for 1899. The internal records consisted of internal management accounts andfor private ledgers. It is never, of course, possible to be sure that internal sources are complete, since further complications and deceptions are always possible, but the internal information provided a great deal of information beyond that which was published, and was generally designated as 'confidential'. Moreover, considerable care was taken to check the structural linkages within the internal recording system used by each firm, as this provides its own assurance on the completeness of the data. Finally, whatever the doubts about the necessity to reveal the existence and size of secret reserves to shareholders, the law did require that this information be provided to the company's auditors.52
These archival sources meant that the total figure for reserves, including retained profits, according to the internal and published records of each company, could be compared. Of the 25 companies, 21 identified the same figure for internal and external purposes. For the other four, the following two ratios were computed: (a) internal to published total reserves; (b) hidden reserves to (internal) net assets, as follows:
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(a) (b) Birmingham Small Arms 1.24 0.04 John Crossley & Sons 1.09 0.02 Armstrong Whitworth 1.10 0.02 P&O 1.21 0.06
In two cases the hidden reserves were specifically related to stock values and the risk of fluctuations therein, and in the other two cases they were viewed as more of a general contingency arrangement?"
It is entirely reasonable to suggest that financial reporting was frequently 'incomplete, arbitrary and subject to manipulation'," but equally it is the case that the nature and extent of such problems changed over time. The major deficiencies of nineteenth-century accounting practice have been seen by Brief as the 'failure to systematically distinguish between capital and revenue expenditures and the failure to periodically allocate the original cost of fixed assets to expense'," yet during the first quarter of the twentieth century conservatism is widely thought to have become the more common bias. Clearly, there were considerable changes over time.
Maniner has been particularly concerned at a number of defects in published financial statements 'in order to impress upon the business historian who may consider using them as a source of information, just how many pitfalls await him'.% She saw as the 'largest single factor distorting the accuracy of financial statements', the use of hidden, or secret, reserves arising from initially excessive depreciation and implied that the practice had been in use for an extended period prior to the Birmingham Small Arms case of 1906, a position consistent with that of G.A. Lee.
Mamner's criticisms are, in general, entirely appropriate as a com- mentary on the accounting practices of the first half of the twentieth century:' but the evidence cited in this paper suggests that they are far less applicable to those of the later years of the nineteenth. Although accounting practices were highly inconsistent, levels of disclosure in published state- ments were far better than they were to become in, say, the second quarter of the twentieth century. The use of omnibus headings did not appear to be at all common during this earlier period, nor did the misuse of subsidiary company accounts, since inter-company investments, even at the end of the nineteenth century, were still at a comparatively low level. Depreciation charges were not independent of company profitability, but still appeared to function more as a (relatively overt) method of conservative financing than as an important and secret form of misrepresentation. The accounting
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literature of the time suggests, rather inconclusively, that secret reserves were in use by the end of the nineteenth century, by banks and some northern industrial companies. New empirical evidence relating to 1899 was obtained and analysed and this showed secret reserves being used by four of the companies examined and only to a relatively moderate extent, possibly because the amounts that could (secretly) be retained would have been constrained by the need to report satisfactory profits in the first place. While these reserves undoubtedly provided management with welcome flexibility they would not, for example, have had a major impact on calculations of annual profitability (as a return on capital).
The purpose of this paper has been to review the writings in Business History on financial accounting statements and relate this to evidence contained within the recent accounting and economic history literatures and obtained from new archival sources. The conventions used in the preparation of financial accounting data in the United Kingdom are the result of a particular pattern of evolution, involving economic, legal and professional factors. The criticisms of accounting practice that have been made in the business history literature have been generally accurate, but have tended to exaggerate the importance of these defects by not placing them within the overall evolution of accounting practice. In particular, the evidence suggests that business historians may find the published financial statements of the latter half of the nineteenth century more reliable than they have supposed, although some caution on their part is still clearly advisable.
NOTES
I would like to thank the following institutions for permission to use their archives: Allied-Lyons Retailing Ltd, British Steel PLC, Cheshire Records Office, Coats Viyelia PLC, Courage Ltd. Courtaulds PLC, Coventry City Record Office, Greater London Record Oftice. Lister and CO PLC, London Borough of Barking and Dagenham, the London Office of Price Waterhouse, Quarry Bank Mill Trust Ltd. Southampton City Records Office. Stanton PLC, Tyne and Wear Archives, University College London, University of Liverpool, University of Warwick, West Yorkshire Archive Service, and Whitbread PLC, two anonymous referees for their helpful comments on an earlier version of this paper and CATER. the Chartered Accountants' Trust for Education and Research, for their generous support.
1. S. Maniner, 'Company Financial Statements as Source Material for Business Historians', Business Hisrory, Vol. XXII (1980), pp.203-35; R. Lister, 'Company Financial Statements as Source Material for Business Historians: Observations on the Underlying Conceptual Framework'. Business Hisrory, Vol. XXIII (1981), pp.233-9; J.R. Edwards and K.M. Webb. 'The Influence of Company Law on Corporate Reporting Procedures, 1865-1929: An Exemplification', Business History, Vol. XXIV (1982). pp.259-79; J. Mason, 'Accounting Records and Business History'. Business Hisrory, Vol. XXIV (1982), pp.293-9; R.H. Parker, 'Misleading Accounts? Pitfalls for Historians'. Business Hisrory. Vol. XXXIII (1991), pp.]-18.
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Marriner, in 'Company Statements', p.203, was 'particularly concerned with the dangers inherent in taking entries in such statements at their face value'. Lister, 'Conceptual Framework'. Parker, 'Pitfalls', p.15. Mason, 'Accounting Records', pp.2934. Marriner, 'Company Statements'. p.225. Ibid., pp.205-7. It is difticult. however, to see why the double-entry system itself should be blamed, since it does at least provide a systematic and relatively comprehensive form of recording which can function in conjunction with almost any valuation system or set of conventions. Double-entry is one of three main techniques that have been used for recording the financial aspects of business events and has now superseded the other two, single-entry and charge and discharge accounting. Although it is 'not necessarily the most helpful one for historians' it is far more comprehensive and systematic than single-entry and avoids a focus solely upon the accountability of principal to agent, under charge and discharge accounting, that 'can prove very annoying to the business historian'; Parker. 'Pitfalls'. p.6. Marriner, 'Company Statements', p.216. Ibid., 11.221.
10. Ibid., b.219. 11. As compared with, say, seaborne merchant trading in eras in which forms of communication
were limited, when a joint-venture approach could be applied to each completed voyage as a separable and concluded economic event. It is also possible to construct cumulative financial statements covering longer periods of time from conventional annual statements as an aid to historical analysis: see R.P. Brief, B. Merino and I. Weiss, 'Cumulative financial Statements'. Accounting Review, Vol. LV (1980). pp.480-90.
12. This is aside from the usual arguments that information is a public good and is not 'costlessly available'; see, for example, P. Taylor and S. Turley, The Regulation of Accounting (Oxford, 1986). pp.6-16. The 1856 Act contained model reporting and auditing provisions but their adoption was voluntary. The Vice-President of the Board of Trade explained that 'having given them a pattern the State leaves them to manage their own affairs and has no desire to force on these little republics any particular constitution'; L.W. Hein, The British Companies Acts and the Practice of Accountancy, 1844-1962 (New York, 1978). p.149. The analogy is revealing, since voting rights in such republics would be in direct proportion to (committed) wealth. P.L. Cottrell, Industrial Finance, 1830-1914: The Finance and Organisation of English Manufacturing Industry (1980). p.41. See R.H. Parker, 'Regulating British Corporate Financial Reporting in the late Nineteenth Century'. Accounting, Business and Financial History, Vol. 1 (1990). pp.5 1-7 1 ; Taylor and Turley, The Regulation of Accounring, p.35; and J.R. Edwards, 'Companies, Corporations and Accounting Change, 1835-1933: A Comparative Study', Accounting and Business Research, Vol. 23 (1992). pp.59-73. The Companies Act 1856. for example, recommended that dividends should not be paid out of capital (see model articles) but did not define 'capital' with any precision. J.M. Reid, 'Judicial Views on Accounting in Britain before 1889'. Accounting and Business Research. Vol. 17 (1987). pp.247-58. See R.H. Parker. 'The Want of Uniformity in Accounts: A Nineteenth Century Debate', in R.H. Parker (4.) . Papers on Accounting History (New York, 1984). pp.67-88; G.A. Lee, 'The Concept of Profit in British Accounting, 1760-1900'. Business Hisrory Review. Vol. XLIX (1975). p. 19. Marriner. 'Company Statements', p.216. W.P. Kennedy, Industrial Structure, Capital Markets and the Origins of British Economic Decline (Cambridge, 1987). p. 126; see also L. Hannah, The Rise of the Corporate Economy (2nd edn. 1983). pp.130-31; and L. Hannah, 'Takeover Bids in Britain before 1950: An Exercise in Business "Pre-history"', Business Hisrory, Vol. XVI (1974). pp.72, 77. 'Extract from Memorandum furnished by the Institute to the Company Law Amendment
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52 BUSINESS HISTORY
Committee', Correspondence File 28443119251~2, Archives of the Institute of Chartered Accountants in England and Wales, Guildhall Library Manuscripts Department.
22. University College London, Gower Street, Royal Mail Steam Packet Company Archives: Boxes 26-31, annual reports and statements of account.
23. Statist, 3 May 1913, p.374; and Fairplay (1914). pp.897-8. 24. This leaves aside sectors such as the railways and utilities, in which companies were subject
to far more specific regulation. The number of companies in the set was determined by the availability of good quality archives. The companies concerned were:
Brewing: Bentley's Yorkshire Breweries Ltd, Bristol Brewery Georges & Co. Ltd. Chesters Brewery Co. Ltd., Tennant Brothers Ltd. Threlfall's Brewery Co. Ltd. Commercial and Industrial; Birmingham Small Arms Co. Ltd., Bradbury Greatorex & Co. Ltd. Brunner Mond & Co. Ltd. Bryant & May Ltd. John Crossley & Sons Ltd. Lawes Chemical Manure Co. Ltd. Lister & Co. Ltd. Walkers Parker & Co. Ltd. Iron Coal and Steel: Sir W.G. Armstrong Whitworth & Co. Ltd. Bolckow Vaughan &Co. Ltd. Consett Iron Co. Ltd. Dorman Long & Co. Ltd. R.W. Hawthome Leslie & Co. Ltd. Staveley Coal & Iron Co. Ltd, Vickers Ltd. Shipping: Cunard Steamship Co. Ltd. General Steam Navigation Co. Ltd. lndia General Navigation & Railway Co. Ltd. Peninsular & Oriental Steam Navigation Co. Ltd. Royal Mail Steam Packet Co. Ltd.
25. Calculations based on a count of items of information, i.e. excluding repeated items, arithmetic balances and totals. West Yorkshire Archive Service, papers held on John Crossley & Sons Ltd; University of Liverpool Archives, Cunard papers D42/A/in.
26. Although Edwards in 'Companies, Corporations', p.70, described it as 'commonplace' for large nineteenth-century, non-regulated. companies. In evidence by the Society of Incorporated Accountants and Auditors to a Company Law Amendments Committee in 1925, however, the attenuation of balance-sheet information was described as an 'increasing tendency'.
27. Maniner, 'Company Statements', p.221. 28. See, for example. P. Bircher, 'Company Law Reform and the Board of Trade, 192943'.
Accounting and Business Research, Vol. 18 (1988). pp.107-19. 29. J.R. Edwards, 'Companies, Corporations', p.68. See also idem, 'The Process of Accounting
Innovation: The Publication of Consolidated Accounts in Britain in 1910'. Accounting Historians Journal, Vol. 18 (1991). pp.113-32.
30. See also Bircher. 'Company Law Reform'; and idem, 'The Adoption of Consolidated Accounting in Great Britain', Accounting and Business Research, Vol. 19 (1988). pp.3-13.
31. L. Hannah, 'Mergers in British Manaufacturing Industry, 1880-1918'. O q o d Economic Papers, Vol. 26 (1974) p.15.
32. L. Hannah, Corporate Economy; P.L. Payne, 'The Emergence of the Large-scale Company in Great Britain, 1870-1914', Economic History Review, Vol. 20 (1967). pp.519-42. Inter- company investment was affected by legal as well as economic factors; the 1907 Companies Act, for example, established private companies which provided a particularly convenient mechanism for covert transfers of profit between related companies.
33. Birmingham Small Arms 15.9 per cent. Bryant and May 27.1 per cent, John Crossley & Sons 17.5 per cent. Four companies had investments of less than two per cent of their net assets. University of Warwick. Modern Records Centre, MSS119Al2; Hackney Archives, DIBIBRYIIR; West Yorkshire Archive Service, papers held on John Crossley & Sons Ltd.
34. Marriner, 'Company Statements', p.219. 35. And subsequently in the case of banking, insurance and shipping companies. 36. J.R. Edward's History r,f Finuncial Accounting, for example, says very little about their
incidence before 1920 (1989). p.138. 37. Marriner, 'Company Statements', p.220. R.H. Parker, 'Pitfalls', p.12, confirms this
impression by stating that 'the use of secret reserves in the nineteenth and twentieth centuries has been described by Marriner as the "largest single factor"' and so on.
38. G.A. Lee, 'The Concept of Profit', p.33.
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LATE NINETEENTH-CENTURY FINANCIAL STATEMENTS 53
39. R.H. Parker, Macmillan Dictionary of Accounring (2nd edn. 1984). p.253. See also E.E. Spicer, Reserves, Annuities and Sinking Funds (1909). p.10; J.C. Stamp and C.H. Nelson, Business Statistics and Financial Statements (1924). pp.249-51 and, for an extended analysis of the possible mechanisms, E.E. Spicer and E.C. Peglar, Practical Auditing (8th edn. 1947), pp.303-l l .
40. S. Pollard, 'Capital Accounting in the Industrial Revolution', Yorkshire Bulletin of Economic and Social Research (1963), p.90.
41. R.P. Brief, 'The Origin and Evolution of Nineteenth-Century Asset Accounting', Business History Review, Vol. 10 (1966). p.8. See also idem. The Lute Nineteenth-Century Debate over Depreciation, Capital and Income (New York. 1976). Many railway companies and public utilities reported under the double-account system. which did not encompass the making of annual allocations of the cost of fixed assets to profit and loss.
42. R.P. Brief, 'Accounting Error as a Factor in Business History', Accounting, Business and Financial History. Vol. 1 (1 990), p. l l .
43. J.R. Edwards and T. Boyns. 'Accounting Practice and Business Finance: Some Case Studies from the Iron and Coal Industry 1865-1914, Journal of Business Finance and Accounting, Vol. 21 (1994). p.1176. See also T. Baldwin. 'Management Aspiration and Audit Opinion: Rxed Asset Accounting at the Staveley Coal and Iron Company 1863-1883'. Accounting and Business Research Vol. 25 (1994). vv.3-12; J.R. Edwards, 'British Capital Accounting Practices and Business Finance 1852-l9i9: An Exemplification', ~ c c o u n t i n ~ and ~ u s i n e i Research (1980), pp.242-3; J.R. Edwards and C. Baber. 'Dowlais Iron Company: Accounting Policies and Procedures for Profit Measurement and Reporting Purposes'. Accounring and Business Research (1979). p.148; J. Wale, 'The Reliability of Reported Profits and Asset Values. 1890-1914: Case Studies from the British Coal Industry'. Accounting and Business Research, Vol. 20 (1990). pp.253-67; and, in the shipping industry, C.J. Napier. 'Fixed Asset Accounting in the Shipping Industry: P & 0 , 1840-1914'. Accounting, Business and Financial History, Vol. 1 (1990). pp.37-47. Edwards. History of Financial Accounting, p. 137. Accountant ( l 895). pp.75-6. The other companies were later identified as being Guest Keen Nettlefold, Amalgamated Wagon, W. & T. Avery, Kynochs, Docker Bros. and Bellis & Morcorn; Accountunt (1906). p.27 1. L.R. Dicksee, Depreciation, Reserves and Reserve Funds (1903). pp.49-50. G. Lisle (ed.). Encyclopaedia ofAccounting (1904). pp.487-8. Napier, 'Fixed Asset Accounting', pp.2148. The secret reserve grew very rapidly in 1892-1912 and was not shown on the face of the Balance Sheet, instead being included, in a manner that subsequently became more common, within the caption 'Sundry balances and accounts not closed'. J.R. Edwards. Company Legislation and Changing Patterns of Disclosure in British Compuny Accounts, 1900-1 940 ( l98 l), pp.38-40, and J.R. Edwards and K.M. Webb. 'The Influence of Company Law on Corporate Reporting Procedures, 1865-1929: An Exemplification', Business History. Vol. XXIV (1982). p.27 1. R.K. Ashton, 'The Royal Mail Case: A Legal Analysis', Abacus, Vol. 22 (1986). pp.3-19; A.J. Arnold, 'Secret Reserves or Special Credits? A Reappraisal of the Reserve and Provision Accounting Policies of the Royal Mail Steam Packet Company'. Accounting and Business Research, Vol. 21 (1991). pp.203-14. The basic argument put forward was that the accounts of the company during the 1920s were deceptive, but largely through the treatment of special incomes or credits, rather than through the use of secret reserves. L.R. Dicksee, 'Published Balance Sheets and Accountants', Accountant, 20 Nov. 1920, p.563 A simple one in the case of Crossley's and a highly intricate one in the case of P & 0 ; see Napier. 'Fixed Asset Accounting'. University of Warwick, Modem Records Centre, MSS119A/2; West Yorkshire Archive Service, papers held on John Crossley & Sons Ltd; Tyne and Wear Archives. 1301273-83; National Maritime Museum, P & 01419-27. Lister, 'Company Financial Statements'. p.233.
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54 BUSINESS HISTORY
55. R.P. Brief, 'Nineteenth Century Accounting Error', Joumul of Accounting Research (1965). p. 14. See also note 41 above.
56. Marriner. 'financial Statements', p.225. 57. W~th the possible exception of Marriner's allegation ('Financial Statements', p.219) that
excessive depreciation, as opposed to the misclassification of shareholders funds as liabilities, functioned as the primary means of creating hidden reserves. There is ample evidence that such accounting conservatisms as excess depreciation and the deliberate undervaluation of assets were widespread, particularly in years of high profitability, but very little that reversals took place on any systematic basis.
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