Corporate Disclosures

The Origin of Financial and Business Reporting 1553 - 2007 AD

Shankar Jaganathan

• Publisher: Routledge India
• Year: 2020
• ISBN:
  9781000083712
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Spanning over two millennia of time and five continents of space, this book narrates the unfolding of financial and business reporting. The first part of the book traces the origin of the 'company' as a form of organization and the evolution of bookkeeping. The second part: The Accounting Edifice, depicts events that led to the disclosure of the balance sheet, the profit and loss account, cash flow statements and the practice of auditing. In the third part: Reaching out to the Shareholders, the author explores the need for governance, reporting of intangible assets and the emergence of annual reports. Indian Corporate Disclosures, the fourth and the last part, sketches the panorama of post-independent dvelopments in Indian corporate disclosures using heritage IT companies, Wipro and Infosys as examples. The last chapter of the book contrasts disclosures by the Indian Sensex companies in 2007 with the best global practices.

Part I
The Background

The Background

What we see often depends upon what we are looking for. Background is another major influence. While a search can be for an individual's need, the background remains common to all. This holds good for corporate disclosures too. The first part of the book sets the background against which corporate disclosures can be viewed.

Among commercial organizations, corporate entities are of relatively recent origin. Compared to the sole proprietor firms and partnerships that have been in existence for more than the last two millennia, corporate entities emerged only in the last five hundred years. While individual endeavors and group endeavors are common in social, religious and political spheres of life, corporate entities are peculiar to the economic sphere only. Corporate entities have a distinct existence from their shareholders, management and employees. This is both a boon and a bane. While this inference is true of every human invention, corporate entities have added a completely new dimension -an external peg for human beings to hang their responsibilities on; in a way insulating the decision makers from the consequences of their decisions.

A better appreciation of the corporate entity comes from knowing the circumstances that led to the emergence of this new human invention, environment in which it flourished and finally the implications of this economic entity on other aspects of human life. This appreciation will clearly reveal the finer nuances of corporate disclosures.

A better appreciation of the corporate entity is only half the background. Making up the other half is the 'corporate-tongue'. While the corporate-tongue does sound different from the common language we hear, its core is in the business language, but with a distinct accent. An accent can be deciphered with exposure, but conversing in a new language requires conscious effort.

Accountancy is the language of business. This language evolved from the fusion of money and writing. Both money and writing are symbolic representation of the real world. Consequendy accountancy, the derivative, is also a medium of symbolic communication. By knowing the meaning of words, a language is only partially understood. To comprehend its full meaning and to read between the lines, it is important to understand the grammar and the context. The grammar of accounting is in specific accounting concepts. Development of these accounting concepts is traced through anecdotes that highlighted the need for these concepts.

Accountancy, the business language is both spoken and written. Written languages need script for coding and decoding, and a convention for presentation. Accounting too has both a code and a convention. As the commercial complexities evolved, the code and convention also increased in sophistication. Double-entry bookkeeping in this journey is a significant pinnacle. An engaging method to imbibe the mechanics of this convention is to speculate on their origin that provided the base for their emergence.

The first chapter in this part deals with the birth of companies covering half the background and the second chapter dealing with the evolution of accountancy completes the background required to view corporate disclosures.

Chapter 1
Birth of the Company

Not Indebted for Life

The truth is that the company law is primarily concerned with means and not ends

Bhabha Committee Report¹

The Emergence of the Company as a form of business organization is outlined in this chapter. Collaboration among human beings accelerated economic progress in society. Principles of social collaboration were embodied in guilds. These guilds had been in existence for over two thousand years. In the last five hundred years, the concept of limited liability was added to guilds giving birth to the company. Companies have accelerated the pace of economic growth and improved the quality of human life. This benefit is at the cost of concentrating economic power in the hands of a few. Today companies are the main vehicles of economic activity. Unfortunately, the cost of this vehicle may be gauged from the corporate scandals that erupt at regular intervals. Legislation has proved to be inadequate to check human greed. Disclosure seems to be the only viable alternative for minimizing the cost of the company. In extreme cases, the legal protection given to companies is withdrawn by the courts of law. Economic progress in India too is driven by companies. With the passage of time, the importance of companies has increased steadily.

Two Plus Two Equals Five

Man is a social animal by nature. Man was and will continue to be a social animal, also because it is beneficial to him. When two or more members join together, they stand to gain more that way than as individuals. This is called the non-zero sum game. Gain of one individual is not at the cost of another, but arises from their collaboration. There are four sources of gain from collaborations, namely, division of labor, heterogeneity, benefits of scale and risk reduction.

The benefit from division of labor was vividly illustrated by Adam Smith in his classic, the Wealth of Nations. Quoting the example of a pin manufacturing factory, he quantified die output of a ten-member team working together at forty-eight thousand pins, weighing twelve pounds. The daily production of four thousand eight hundred pins per person working as a team is in contrast to the twenty pins they produced when they worked alone. From this he infers the principle, that 'in every other art and manufacture, the effects of the division of labor are similar to what they are in this very trifling one, though, in many of them, the labor can neither be so much subdivided, nor reduced to so great a simplicity of operations.'² In doing so, Adam Smith only quantified the benefits of a practice that was as old as human society.

Unlike Robinson Crusoe (and Robinson Crusoe had no choice), only people living together in a society could specialize and practise division of labor. It is probable that the initial motive to specialize was driven more by the individual differences in their ability and needs, rather than a purely materialistic objective of maximizing gains. The combination of differing ability and needs and higher yield provided the mutually beneficial opportunity to trade. Excess production especially of perishable commodities was not wasted. It could be traded, either for goods or for a promise to be redeemed later.

In addition to specialization arising from division of labor, working together provided opportunities to pool their resources together. A team of individuals combining together could undertake activities on a scale that was not within the reach of individual members. A team for example could hunt bigger, faster and more ferocious animals, giving each one of them a higher return.

'Money lending', often quoted as the world's first profession, contributes to non-zero sum game by reducing the uncertainty. Amount in excess of requirement, especially of perishable commodities is of little value to an individual who will need it in the future. The practice of lending creates value by matching people in need with people with plenty. Lending assures the lenders that their future needs will be met not only by their own efforts but also supplemented by the efforts of the individuals to whom they have lent.

If collaborations are so profitable, why is it not found in all societies and in all spheres? The answer to this question was found by William Easterly and Ross Levine in their study of seventy-two countries. They asked the question, 'What makes some country richer than another?' Their answer was quite surprisingly not material resources but social relationships.³ Building on their study, Eric Beinhocker identified three basic prerequisites for collaboration that determined the economic development of these countries.⁴ First was the potential for a non-zero sum game, the second was a method for sharing the gain from collaboration and the third was a mechanism to ensure that the agreed sharing pattern was practised.

Does this twentieth century finding stand the scrutiny of human history? Is there evidence to prove that economic prosperity rests on these conditions?

In one of the most ...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Dedication Page
• Contents
• List of Hyper-texts
• List of Tables
• List of Exhibits
• List of Appendices
• Foreword
• Preface
• Acknowledgements
• Part I The Background
• Part II The Accounting Edifice
• Part III Reaching out to the Shareholders
• Part IV Indian Corporate Disclosures
• Postscript: Questions Yet to be Answered
• Appendices
• Index