A History of Financial Accounting (RLE Accounting)

J. Edwards, J. R. Edwards

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781134678884
• Edition: 1
• Topic: Business
• Subtopic: Financial Accounting
• Index: Business

This volume deals with the evolution of accounting from earliest times, and gives particular attention to corporate accounting developments since the Industrial Revolution. The author identifies the various sources of accounting practices employed by British companies, to demonstrate the main changes which have taken place, when they occurred and why.

The author emphasises the need to understand the legal, social and economic context in which accountancy changes take place, and also studies the conflicts which arise between suppliers and users of accounting statements. The study concludes with an examination of the duties performed by the professional accountant, the extent to which these have changed in the course of time and how his position in society is reinforced by the activities of professional institutions.

PART I

INTRODUCTION

1

Why Bother with Accounting History?

There has been an upsurge of interest in accounting history since about 1970. There has also been a massive growth in the available literature thanks to the success of the American Accounting Historians Journal (first published in 1977), the willingness of other leading journal editors to publish historical material and the efforts of Richard P. Brief who has edited six major series (published by Arno Press and Garland Publishing) of anthologies and reprints of accounting classics. Five international congresses of accounting historians have been held, beginning with Brussels in 1970, and the subject has increasingly found a prominent place in University degree courses. Why this interest?

For many people the past has a considerable fascination, but is this out of idle curiosity or for more constructive reasons? Perhaps history can tell us. Napoleon viewed history as ‘a set of lies agreed upon’, the philosopher Herbert Spencer dismissed it as ‘worthless gossip’ and Henry Ford believed it to be ‘more or less bunk’. Aristotle, on the other hand, was much more encouraging – ‘if you would understand anything observe its beginnings and its development’. Not only is history attacked but also the historian. According to Samuel Johnson ‘Great abilities are not requisite for an historian … imagination is not required in any high degree’. Our first appeal to history for enlightenment produces conflicting evidence and seems not at all helpful. Looked at a little more closely it contains an important first lesson, that is, history contains no ready-made answers. We need to delve more deeply.

What is accounting history?

One view is that the historian's job is simply to state the facts and set the record straight. The historian is seen as a kind of record keeper, except that he is expected to reconstruct the facts long after they have occurred. This is an enormous task, in itself, made more difficult by the fact that few records survive from earlier periods in which we have an interest. For instance, one problem which worries accounting historians is the exact date that double entry bookkeeping was first used by Italian merchants. Careful investigation of the surviving fragments of the books of Giovanni Farolfi have proved that the system, which had evolved over an unknown period of time, was fully operational in at least one banking house by 1300 (Lee, G.A.). Discoveries in archives may one day produce an earlier example of‘fully fledged’ double entry bookkeeping but it will never be possible to say, with confidence, that we know when double entry was first used.

There are some who criticise ‘fact finding’ on the grounds that it is concerned merely with trivia. The researcher is dismissed as an antiquarian not deserving the more prestigious accolade ‘historian’. The difference is described by the economic historian M.M. Postan as follows:

whereas antiquarians collect facts historians study problems. To a true antiquary all past facts are welcome. To an historian facts are of little value unless they are causes or parts of causes, or the causes of causes, of the phenomena which he studies(p.25).

The point seems to be that the antiquarian collects data of interest to him, irrespective of their relevance, whereas the historian is concerned with an event only if it helps him to discern some pattern of development. The job of the historian is therefore to seek out events that have taken place in the past, to try to understand why they happened when they did, the way in which they did, and the effect that they had.

The discovery of past events is difficult, but finding out the reasons for them is even more demanding. Any conclusions must be tentative as additional information may lead to different interpretations. Moreover, different people will interpret the same information in a variety of ways. Out of the debate will usually come some form of agreement, and this points to flexibility rather than stubborness as an essential ingredient in the historian's make-up. As Keynes is alleged to have said when challenged that his present views differed from those expressed some years ago: ‘I revise my views in the light of new facts. What do you do?’

Much historical research is of course a gap filling exercise but, contrary to Johnson's assertion, this calls for imagination to make the necessary connections. Indeed it has been suggested that history is like literature, but that probably goes too far; history involves innovation and imagination but, unlike literature, generalisations must be consistent with the evidence for them to be an acceptable interpretation of history. The conclusions are, of course, more likely to be accurate if they are based on a full range of information relating to the topic or period under examination.

Uses of accounting history

Recreational. Pure enjoyment is a quite sufficient reason for studying accounting history. Many accountants dabble in accounting history with no serious intention of learning anything useful or making any written contribution. Nor do you have to be a trained accountant to tackle the subject successfully; a few gifted academics have been sufficiently fascinated by the subject to make major contributions despite the fact it is not their mainstream discipline. These have been attracted to accounting history because, in Yamey's words, he ‘enjoyed doing it’ (1983, p.8).

One does not have to delve very deeply in the archives to find amusing snippets such as Raymond Chandler's description of an (American) accountant in The Lady in the Lake:

Grayson was a long stooped yellow-faced man with high shoulders, bristly eyebrows and almost no chin. The upper part of his face meant business. The lower part was just saying goodbye. He wore bifocals and he had been gnawing fretfully at the evening paper. I had looked him up in the city directory. He was a CPA [Certified Public Accountant] and looked it every inch. He even had ink on his fingers and there were four pencils in the pocket of his open vest (quoted in Newgarden, p.49).

Ina similar vein we may be fascinated by the phrase ‘king's eyes and ears’, used to describe government auditors in the Persian empire of 500 BC, and find perplexing the quaint nineteenth-century audit custom of confirming obscure and uninformative accounting statements as ‘certified and found correct’. More recently, in the 1920s, we encounter the common practice of including all fixed assets under an omnibus heading, and the occasional eccentricity where a single caption and value was given for the entire range of assets belonging to the company.

Intellectual. The study of accounting history helps us to understand our past and gives us an appreciation of how our current practices and problems came into being. For example, the source of the accountant's conservative approach to asset valuation is popularly identified with the late nineteenth-century business environment. Investment in a business, at that time, was an even more speculative activity than it is today; liquidations and bankruptcies were everyday features of business life, creditors were the main users of accounting reports and prices were falling. In these circumstances the development of the concept of conservatism was perfectly natural.

Explanations are, however, rarely straightforward. A series of events may appear unconnected and, only when they are examined in minute detail, does a pattern sometimes emerge. Even then, it may be possible to find only some hint of the reasons for particular changes. For example, we know that consolidated accounts were devised to provide an adequate method for reporting the results of a ‘group’ of companies. We do not know why the system took so much longer to obtain a foothold in Britain than in, say, the US, although possible influences were the lack of technical expertise, management opposition to their adoption, the ‘laid back’ attitude of the British accountant, the existence of percieved, if not real, legal barriers to change, the fact that consolidated accounts are of little use to creditors, and the undemanding nature of the investing public (see Chapter 18).

Even where there is a mass of information available, there is likely to be disagreement about how the facts are to be interpreted. Taking an example from economic history, the exact causes of as well known and well documented an event as the British Industrial Revolution are, today, as keenly debated as they have ever been. An example from accounting history is the continued disagreement concerning the exact origin of double entry, despite the fact that this topic has received more attention than any other.

Problem solving. Some argue that the study of accounting history provides insights for the solution of present-day accounting problems and helps predict future likely developments.

These are ambitious claims which must be treated with some caution, but we can probably agree that the subject has some contemporary relevance. For example, accounting history throws light on the origin of particular procedures and practices and, therefore, helps us understand possible limitations on their present and future application, e.g. the weakness of the balance sheet as a measure of value becomes much more easy to understand when we realise that the system of double entry record keeping, on which it is based, was initially devised, not to facilitate the preparation of final accounts, but to enable business transactions to be recorded in an orderly and accurate manner, and to keep track of personal accounts and simple physical objects such as cash. As Baxter has put it:

He [the accounting historian] will not be surprised if accounting seems to falter when called on to perform new and different tasks – such as predicting future income, and aiding investors to make decisions. If we have such ambitions for accounting, may we not be like a farmer who demands that his faithful old cart-horse learn the violin? (p.5)

Historical enquiry also tells us that certain problems are enduring and may not be capable of a permanent solution, e.g. accounting for intangibles, uncertainty and changing price levels. The lesson would seem to be for us not to become over-anxious if the search for a definitive answer proves unfruitful; in many cases all we can do is devise procedures which work reasonably well in the present circumstances, i.e. we need to learn how to live with our problems, while not giving up the attempt to devise improved methods. Those who look for speedy solutions to what appear to be ‘new’ problems would find it illuminating to discover the quality and sophistication of the literature on such topics in much earlier times.

A further potential application for accounting history is that it may tell us that an apparently useful idea has been tried in some earlier generation and found wanting. According to the philosopher Santayana, ‘those who do not remember their past are condemned to re-live it’ (quoted in Baladouni, p.54). But circumstances change, and these need to be examined very carefully before parallels are drawn.

One obstacle in the way of progress is the difficulty of discarding outdated archaic shackles of the past. Historical inquiry can help us to question some of our time-honoured concepts and ideas which, although perhaps quite effective for another age, or another type of economic society, are ill-suited to today's social and economic conditions. For example, the historical cost concept was entirely appropriate when accounting statements were mainly used to keep track of rights and obligations, but the concept's continued application has naturally been called into question now that accounting statements are used as the basis for performance assessment and resource allocation decisions. Demands for fundamental change have of course been made, but these have been successfully resisted by individuals and institutions with a vested interest in maintaining a system with which they are well acquainted (see Chapter 19).

Accounting history as a basis for making predictions is even more problematic. Some very general forecasts, e.g. that the level of corporate disclosure and the number of practising accountants will continue to increase, can be made with a fair degree of confidence, but it is risky to be more specific. The historian E.H. Carr sounds the following cautionary note:

The historian … is bound to generalize; and, in doing so, he provides general guides for future action which though not specific prediction, are both valid and useful. But he cannot predict specific events, because the specific is unique and because the element of accident enters into it (Carr, p.63).

At the same time accountants have used their knowledge of history to forecast accurately future events, see for example Mumford's study of ‘A Familiar Inflation Accounting Cycle’, which drew close parallels between events in 1948–54 and 1973–78, and led him to the correct conclusion that interest in reform would dwindle with the rate of inflation.

Review

The contribution that accounting history can make to problem solving is a matter for debate. The examination of past events, however, enables us to appreciate the complexity and persistence ofmany of the problems presently facing accountants. It should therefore help to guard against hasty judgements and the premature adoption of apparently simple solutions. The intellectual value of the subject cannot be seriously challenged. Its recreational value is a matter of personal taste, and for every enthusiast there is at least one who finds it deadly boring. I imagine I am dealing with the converted.

2

Economic Progress and Accounting Change

Need for accountability

In every organised society some goods are held by an individual or a group of individuals on behalf of someone else. Such goods may be held merely for safekeeping, e.g. jewellry deposited with a bank, or it may be the intention that the goods should be used to earn a return for the owner. In Britain today the separation of the ownership and custody of goods occurs in numerous circumstances. Boards of directors have cash entrusted to them by shareholders, while trustees have possession of money placed under their care by, perhaps, a parent for the benefit of an infant child. In the case of thousands of clubs and societies, a committee is appointed to use subscriptions and other funds collected for the benefit of the members. Local and central governments have control over resources collected from members of the community, though the citizens have only a limited say about how much is transferred. Local government's main source of fiscal revenue is rates (to be replaced in England and Wales by the community charge in 1990), while central government benefits from a wide range of taxes among which income tax, national insurance contributions and VAT are, financially, the most significant.

For simplicity we will call the person who owns the resources the ‘principal’, and the person who is given possession of these goods the ‘agent’. The agent is normally expected to account to the principal for the resources in his possession, although the accounting function may be carried out by a third party. Accountability may also include an examination, called an audit, to check the accuracy of the information provided by the agent for the principal. A reason for the growing importance of the accounting function is that the proportion of the gross national product entrusted to agents is continuously increasing.

In earlier, less literate, times, when ‘records’ were substantially in a non-written form, accountability involved no more than the agent providing an oral account of the disposition of resources entrusted to him. This account was listened to (hence the term auditor from the latin audire) by individuals sufficiently familiar with the transactions to assess the accuracy of statements made. In the case of tax collected from a local community, members of the public sometimes assembled to hear the list read out by the collecting agent. Today the process is more sophisticated but the essential aim is the same; to ensure an accurate report is made.

Legal regulation of the accounting and audit process is designed to protect the weak principal (e.g. the ratepayer) against the stronger agent (e.g. the city council). The need for protection is a fairly modern development; in earlier times the appointment of a particular individual as agent was often motivated by the degree of control enjoyed by the principal. For example, the use of slaves as record keepers was favoured, in ancient Greece, because their statements, extracted under torture, were judged to be more reliable than those of a free man obtained under oath (Stone, p.287). In medieval times the lord of the manor was no doubt reassured by the knowledge that the reporting agent (called the ‘reeve’), who was fraudulent or failed to pre...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• Preface
• Glossary of Abbreviations
• Part I. Introduction
• Part II. From Ancient Times to the Industrial Revolution
• Part III. Corporate Financial Reporting Practices
• Part IV. Rules and Regulations
• Part V. Development of a Profession
• Appendix A. Table of Cases
• Appendix B. Table of Statutes
• Appendix C. Government Committees
• Notes
• References and Bibliography
• Index