Evolution of Corporate Financial Reporting (RLE Accounting)

T. Lee, Robert Parker

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781134715213
• Edition: 1
• Topic: Betriebswirtschaft
• Subtopic: Buchhaltung

This book explores certain contemporary problems of accounting through the eyes and pens of historians. Many accounting problems are not new ones and it is therefore important to understand their history and development through the ages. This book places twentieth century studies in context and provides clues to possible solutions. The focus of this book is on companies and their financial reports and will be of use to students of economic and business history who wish to provide themselves with an accounting background in relation to the financial reports of companies they may be studying.

Part 1

Illustrations of Corporate
Financial Reporting Developments

Introduction

This section of the text is very much a fact-finding introduction; a prelude to the more detailed studies of specific developments in particular reporting areas (in Part 2); and the major influences on such developments (in Part 3). Throughout the text the selected items are either British or American in origin and thereby provide a means of contrasting the progress in company financial reporting on both sides of the Atlantic during the last one hundred years or so – particularly in the hitherto neglected period of 1900–1950.

The method of analysis utilized in each of the papers reproduced in this section is a study of the published financial reports of major companies, most of which remain in business to this day – for example, Distillers Co. Ltd, Unilever Ltd, and the Imperial Continental Gas Association in the UK; and the United States Steel Corporation in the USA. Thus, they attempt, in their differing ways, to describe the progress of financial reporting as evidenced in published financial statements. Surprisingly, little or no attention has been paid by accounting historians to date to such original source material, and this explains why so few items of this type can be included in this text. It is therefore to be hoped that they will encourage historians in the future to make more extensive use of available financial reports and provide an empirical base to their analyses and judgements of the past.

As well as providing a useful background to the writings reproduced in Parts 2 and 3, the items in Part 1 introduce the reader to either reporting problems of the day or specific influences on reporting practices – all of which will also be described in detail in later writings. Thus, Part 1 is the basis and introduction for Parts 2 and 3. As such, there is a minimal amount of necessary overlap in material, but only so far as a Part 1 item leads naturally on to a Part 2 or 3 item.

The British Development

The items in this sub-section are all British, and examine the financial reports of very well known and large companies – that is, the Imperial Continental Gas Association, Distillers Co. Ltd, and Unilever Ltd. The first is that of Hill (pp. 6–14), and concerns the accounting system and financial reports of the Imperial Continental Gas Association from 1824 to 1900. It is an interesting study in that it confirms many of the features of nineteenth century company accounting – the lack of provision for depreciation and contingencies; the publication of a balance sheet without a profit statement; the lack of a professional audit; and shareholders not receiving copies of the audited balance sheet (these being offered for inspection only at the Annual General Meeting). It also gives interesting insights to the problems of accounting for foreign exchange transactions at that time; most of Imperial’s business being located overseas in Continental Europe.

The DCL study by Lee (pp. 15–39) is a far more detailed one, covering financial reports for a period from 1881 to 1944 inclusive (1881 being the first available report and 1944 being the last report prior to DCL introducing consolidated financial statements to its shareholders). Using a funds statement format involving several years’ aggregate data at a time, the development of DCL has been outlined through its published accounting statements and, by such a format and aggregation, the distortions of particular accounting policies over time have been minimized. In particular, Lee traces the changes in DCL’s financial statements in relation to the legal and professional developments of the time. He thus reveals the relative poverty of the information provided to DCL shareholders throughout much of the period covered – for example, the early lack of balance sheet classification; the meaningless profit statement intended only to justify dividend proposals; the lack of notes supporting financial statement data; the haphazard accounting for fixed assets and their depreciation; and, particularly, the lack of information concerning investments in other companies at a time when consolidated statements were not provided.

The study of Unilever by Hodgkins (pp. 40–46) is very limited by contrast with those of Hill and Lee. However, it is unique in that it has been written by a member of staff of the company’s firm of auditors. It makes a relatively brief comment and comparison of published accounting information between 1894 and 1915 but, by doing this, the author is able to provide evidence to substantiate that gained in the Hill and Lee studies – that is, the conservative nature of the accounting policies utilized during this period; the lack of profit information of any consequence; and the lack of data concerning subsidiary and associated company investments.

The American Development

By way of contrast, it is interesting to read the final two contributions to this section, both of which involve a very major American company – the United States Steel Corporation (USSC). The first, by Claire (pp. 47–63), is a relatively non-quantitative analysis of USSC’s financial statements from 1901 to 1943. In doing this, he reveals a company in the forefront of reporting innovation during a period when financial reports were relatively unfashionable. Indeed, there is evidence that, from 1901 onwards, USSC was ahead of generally accepted reporting practice on both sides of the Atlantic well into the 1950s and 1960s – for example, from its inception, the following items were included in annual reports: consolidated financial statements; funds statements; employment reports, and audit reports. Considering that consolidated statements were rarely produced in the UK until the Companies Act 1948; funds statements are still not obligatory for all companies in Britain; and The Corporate Report (ASSC, 1975) has only recently suggested the publication of employment reports, it is clear how slowly progress actually takes place when measured against events elsewhere. In addition, USSC annual reports were addressed to shareholders and employees from 1939 onwards; and, beginning in 1943, there was an explicit attempt to eliminate accounting jargon and misleading terminology from financial statements. Again, these are very much problems of which present-day financial reporters are aware.

Although USSC was patently in the forefront of reporting developments in America, it was not free of the problems and the controversy which surrounds them. This is evident in the Claire study in relation to the definition of gains and surpluses as profit, and in the valuation of subsidiary company investments. It is equally evident in a complementary study by Vangermeersch (pp. 64–79) of the depreciation policy of USSC between 1902 and 1970. In this paper, the problems of accounting measurement are brought clearly to the fore. Between 1902 and 1941, the basis of USSC depreciation was related to the level of production of steel; although prior to 1935 the method was more an appropriation of profit to reserve rather than an expense to be charged against profit. However, due to the pressures of tax legislation and accounting, depreciation was computed from 1941 onwards on a declining balance basis. Additionally, Vangermeersch describes the problems faced by USSC when it based its depreciation policy on replacement costs between 1941 and 1948. It is therefore interesting to examine this in relation to the present world-wide debate on the relevance of historic cost accounting.

Finally, what do the writings in this section tell the reader? First, that there is nothing new in financial reporting (the reader is invited to consider such ‘present-day’ matters as employment reports, funds statements, and replacement cost depreciation); second, reporting problems were relatively similar on both sides of the Atlantic, with or without legislation or regulation; third, the problems which confronted financial reporters in the past were considerable and varied, and the influences on methods of improvement were equally numerous (this applying both in Britain and America); fourth, despite lack of legislation and regulation, there are indications that American practice may well have been ahead of British practice in particular areas (for example, in relation to consolidated statements and funds statements); and fifth, and as previously mentioned, much can be learnt from a study of individual company financial reports, and it is to be hoped that much more will be learnt in the future.

Accountancy Developments in a Public Utility Company in the Nineteenth Century

N. K. HILL

In the year 1824, when gas lighting was being developed on an extensive scale in this country, a company was formed which had, to quote from the original prospectus, ‘the special purpose of extending the benefit of this admirable system to the principal towns of the Continent’. This company was the Imperial Continental Gas Association, which still carries on today through subsidiary and allied companies a very substantial business in the supply of gas to the city and suburbs of Antwerp and gas and electricity to suburbs of Brussels and a considerable area beyond. At one time or another, however, the Association has also supplied Berlin, Vienna, Amsterdam, Rotterdam, Lille, Marseilles, Cologne, Hanover, Frankfurt, Prague and many smaller towns, under contracts negotiated with the local authorities, no mean achievement for a British company considering the nature of the business and the advanced state of development of most of the countries concerned.

From a modest business operating with an initial issued capital of under £100,000, the Association expanded into a highly prosperous and large-scale undertaking, with capital and reserves of nearly £6,000,000, by the end of the century. It is of some interest, therefore, to trace the developments in accountancy methods and ideas through the intervening period.

The early financial framework of the Association was unusual as in the absence of a charter it originally took the form of a partnership of proprietors governed by a deed of settlement (generally referred to as the ‘deed of co-partnership’) with, of course, unlimited liability. While the deed itself placed no restriction on the extent of the Association’s activities, the proprietors as a body demurred at a proposal to increase the capital in 1836 in order to set up further businesses abroad, and it was finally agreed to raise an entirely separate capit...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Orginal Copyright Page
• Table of Contents
• Acknowledgements
• Preface
• Part 1: Illustrations of Corporate Financial Reporting Developments
• Part 2: Specific Developments in Corporate Financial Reporting
• Part 3: Influences on Financial Reporting Developments
• References
• Index