Reviewed by Jackie G. Williams (Mrs.) Virginia Commonwealth University
The title of this reproduced doctoral dissertation is descriptive of the content; however, the primary thrust is the analysis of alternative ways of enhancing the understanding of current and prospective stockholders regarding the retention and distribution of corporate earnings. As the author examined improved methods of the accounting and the subsequent reporting for retained earnings, he compared the relative importance of reinvesting earnings to the dividend policy that is deemed necessary to satisfy the stockholders.
The role that federal income tax regulations played in the accounting for retained earnings is considered throughout the text. There are statistical data that give credence to the argument that, due to the impact of the income tax laws, the majority of recipients of dividend payments would have preferred having earnings reinvested rather than having dividends distributed.
The recapitulation of the entity concept and the development of the accounting method of determining “net income” will be of par-ticular interest to accounting historians, but in retrospect, it seems that the background material contributed very little to the development of a case for the proposed “new requirement,” i.e., the improvement of accounting for corporate retained earnings.
During the discussion about the homogeneity of liabilities and the proprietorship and the acknowledged heterogeneity of long-term in-vestments, there is a table listing twenty-one manufacturing corpo-rations with revenues in excess of one billion dollars in 1954. Ten of the eleven headings in the table relate to revenues, long-term and short-term equities, profits, and dividends. (The eleventh shows the number of employees). Green states that these statistics do not characterize heterogeneity.
Later in the paper, he uses quotations from the statements of several of these same companies to illustrate why literal adherence to auditing standards would often require the public accountant to express the seldom-seen qualified opinion. He cites specific items on the reports of American Tobacco Company (now American Brands) and The Goodyear Tire & Rubber Co. that appeared to him to be sufficient evidence to warrant a qualified opinion when an un-qualified opinion was expressed. There was also information from a report of the Chrysler Corporation during the early fifties that gave evidence of that company’s attempts to inflate earnings for the year.
Many reasons for the retention of earnings, other than growth and expansion, are examined. Of particular interest is quoted material from a 1941 study that investigated the reason often given that earnings were kept for the purpose of paying dividends when current earnings were insufficient. The conclusions of that study of the pre-depression years of the twenties and post-depression years of the thirties refute that claim.
The discussion of accounting for stockholders’ equity includes extensive coverage of recapitalization to increase capital and to de-crease legal capital. The author concludes that the adjusted book value method of accounting for earnings should be adopted; that there is no real accounting difference between a stock split and a stock dividend; and that there should be a differentiation between contributed capital and earned capital.
An illustration of a proposed multi-columned cumulative report of retained earnings that would reveal pertinent information to stock-holders is shown. The clarity of the information is doubtful, particularly if the primary objective of this report was to explain to the relatively uninformed public the disposition of earnings and the related activity that affected dividend declaration.
Since internal accountants serve management’s needs, the public accountant was designated as the one who should prepare the pro-posed supplementary report to account for earnings retention and distribution. Accountants would have to be motivated to compile such a report that would be easily understood and that would communicate clearly exactly what was done with the earnings of the corporation. They would have to become even more perceptive, look beyond the explicit transaction, and use their analytic skills in making judgements and formulating and expressing opinions.
Edwin Green and Michael Moss, A Business of National Importance: The Royal Mail Shipping Group, 1902-1937 (New York: Methuen & Co., 1982, p. xii, 291, $32.00).
Reviewed by
Robert M. Jennings, Sr.
Indiana University Southeast
The pervasive importance of the Royal Mail Shipping Group over almost four decades at the start of this century is thoroughly examined in this business history. The impact of the ultimate dis-solution of the group was far reaching and greatly influenced British accounting, legislation and national economic policy.
The accountant who faces a complex consolidation engagement could only view this entity as a nightmare. Holdings and cross-holdings intertwine to an extraordinary degree, and the preparation of accurate operating results and balance sheet data may have been virtually impossible. The appendix listing the ordinary (common) shares of the eleven principal companies in the group reports thirty cross-held listings. Green and Moss summarize the entire Group in a single sentence, “the Group controlled ninety-two wholly-owned subsidiaries, held majority shareholdings in forty-nine other companies, and was a minority shareholder of a further forty-five companies.” (p 80) By 1930, the total liabilities of the conglomeration were, at least, 120 million pounds. (p. 3)
The national “conspiracy of silence” that kept much of the disastrous news from the general public was apparently quite successful. The international depression and British national policies aimed at maintaining employment levels in the maritime field were very influential in subduing the news releases and encouraging the cooperation of diverse interests.
The liquidity roots of the dissolution are strongly evident. Eventually, however, some shares of the principal companies of the Group were traded at par, or, upon dissolution, returned more than par. For example, the authors cite (p. 177, p. 185, p. 190) the realization of 113% on common shares; a debenture stock return to 97% of par; and a third realization at 133% of par on common shares.
The authors sympathetically portray the behavior and character of the principal defendant who presumably was responsible for the tangle and ultimate dissolution of the Group. Perhaps this is due to Lord Kylsant’s advanced age when he was convicted of fraud (he was nearly seventy years old). Nevertheless, the evidence presented at trial and revealed in the book leads to the conclusion that the conviction may have been a just one.
The authors have conducted exhaustive research on the Royal Mail case. In several places, proof reading errors have occurred that the trained accountant will identify almost immediately because of their jarring nature. One example is a settlement of 75% in cash and 35% (sic) in income bonds (p. 167) which is theoretically possible but seems very unlikely in light of related settlements. A second example (p. 181) has obviously excluded three zeros from the 1,326 shares mentioned. Considering the volume of exchanges and transactions described, it was inevitable that several such errors would creep into the final text. Use of the old British currency makes much of the financial information difficult for nonBritish readers. However, on numerous occasions, the authors have parenthetically inserted pound and decimal pence notations which definitely helps. The complex debt and equity structures frequently found in the Group, together with the unfamiliar pence/shilling/ pound notations require a reader’s careful attention.
The accounting historian should note the profession’s disinterest in those times in any normative attitude towards disclosure. “The Case of the Royal Mail” was reproduced some twenty years ago in Baxter and Davidson’s Studies in Accounting Theory. It was written by the defense counsel for the accountant charged with fraud along with Lord Kylsant, who was the Chairman of the Royal Mall and many of the constituent companies.
This volume is particularly valuable in that it presents an ex-cellent historical perspective of a vital current problem. There exists today the need to recognize that fundamental changes in industrial structure have occurred in the last decade or two. This was exactly the situation the Royal Mail Group faced some six decades ago. But few people, if any, recognized that cash transfers and short term borrowing could not solve the more deeply rooted problems. Then, as now, investors should recognize that short term solutions may no longer be appropriate.
