Reviewed by Michael J. Mepham Heriot-Watt University

This interesting study by John Edwards, of the University of Wales, is based on an examination of the accounts of 12 quoted companies in iron and steel making during the first forty years of this century. The author acknowledges that this approach and the small sample size inhibits attempts to generalize but, within these limitations, he sets himself the task of analyzing:

“1. the disclosure practices employed by companies during the period 1900-40.

2. differences in disclosure practices both between companies and over time.

3. relationships between disclosure practices and legal requirements.”

As early as 1844, a British Companies Act had required an audited “full and fair” balance sheet to be presented at each ordinary meeting of shareholders but this requirement was jettisoned 12 years later and it was not until 1900 that there began a gradual re-turn towards this sort of regulation. In the period under review, three major revisions of company law had accounting implications. First, the Companies Act 1900 made an audit obligatory and (by im-plication) required a company to issue a balance sheet to share-holders present at the annual general meeting. Second, the Com-panies Act 1907 required each public company to file, with the Registrar of Companies, a balance sheet giving “a summary of its capital, its liabilities, and its assets, giving such details as will dis-close the general nature of such liabilities and assets and how the values of the fixed assets have been arrived at. . . .” (S.21). Third, the 1928 Companies Act provided that a profit and loss account be prepared for shareholders and extended the balance sheet reporting requirements considerably by setting down minimal disclosure rules.

Each of the above had an effect on the preparation and content of company accounts and there were also several important contemporary legal cases (including the Royal Mail Steam Packet case) that had accounting repercussions. During the period the accountancy profession itself had not commenced work on the development of accounting standards but had restricted its activities to obtaining legal opinion on the interpretation of the legal requirements and making representations to various official company law reform committees. The English Institute’s series of “Recommendations on Accounting Principles” did not commence until 1942 and the Stock Exchange only began its attempt to improve disclosure practices in 1939.

Edwards’ study emphasises the changing legal framework. He shows that all twelve companies met their legal obligations and, in fact, that they were often in advance of the law by, for example, circulating audited accounts and a directors’ report to all members before the law made this compulsory. In some cases they did, however, make use of loopholes; for example, one company filed the same balance sheet for more than 10 consecutive years because the 1907 Act did not stipulate that an up to date statement was required.

The author recognises that other factors, besides company law, affect reporting practices. An investigation of the influence of auditors, shareholders, and internal management would require a study of the correspondence files and this is not attempted. More sur-prisingly there is no analysis of the relevant provisions of the com-panies’ Articles of Association. Edwards discounts their importance by saying “they do not specify which figures should appear in the, accounts and how these figures should be calculated.” It would, however, have been useful to have some detail of the articles and to have known, in particular, the extent to which Table A was adopted.

The study is well organised under four headings: the range of reports, presentation methods, valuation bases and disclosure and many interesting facts emerge. There is, for example, a useful discussion of secret reserves with a quotation from the correspondence of one director admitting that “We have used our subsidiaries to hide profits but the public think otherwise hence our shares are much lower than they ought to be.” Only two companies produced any consolidated statements during the period.

The discussion of depreciation is particularly enlightening. Edwards maintains that, in his sample, the regular inclusion of a systematically calculated depreciation charge is a post1 940 phe-nomenon. There is also a discussion of the development of the British distinction between Reserves (which are appropriations of profit) and Provisions (charges against profit).

The forty-year period covered by this study was one in which many changes took place and in which the legislature adopted the approach of specifying minimum standards of disclosure. This min-imum disclosure philosophy continued and developed in the following forty years but the 1981 UK Companies Act has produced a major change by moving to an EEC system based on standardised accounting reports. With such changes occurring this monograph deserves to receive particular attention.