Reviewed by M. J. Mepham Heriot Watt University, Edinburgh
This well written study of the development of the British side of Ernst and Whinney is an unconventional house history in that it deals with its subject matter within the context of the evolution of the UK accountancy profession. This approach means that the book begins long before Frederick Whinney joined the London firm of Harding and Pullein in 1849 or the opening of Ernst and Ernst’s office in New York in 1918.
Chapter One briefly notes the 14th century origins of the double entry system and its initial emphasis on the prevention of dishonesty and negligence rather than on the measurement of profitability and the provision of economic advice. The slow progress of the system over the ensuing 500 years is mentioned, but the author moves rapidly to the development of the UK accountancy profession. Jones considers that this development is inextricably linked with the history of the Industrial Revolution and he identifies the 1840’s as the critical decade.
The Bankruptcy Act of 1831, the 1844 Companies Act, the sub-sequent growth in the formation of companies, the development of the railways, the gradual recognition of the need for accounting controls when business drew its capital from the general public, all created a demand for the services of accountants. The 1840s saw the establishment of accountancy practices whose names are prominent in a roll call of the large firms; and five of Ernst and Whinney’s predecessor firms were also founded in this period.
Whinney, Smith and Whinney developed from one of these practices (Harding and Pullein), and the book provides some interesting insights into the sources of this firm’s fee income over the last half of the 19th century. Insolvency work provided 73% of the income in 1848, this rose to 94% in 1865 but slumped to 20% by 1900. In contrast, auditing provided a meager 2.4% in 1860, but this had swollen to 53% by 1900. The claim that British accountants prospered in times of adversity because of their insolvency work was not so true by the end of the Victorian period as it had been at the beginning. The author points out that auditing did not feature in the lists of an accountant’s duties contained in the Edinburgh and Glasgow petitions for Royal Charters in the 1850’s but that it was clearly included, some 25 years later, in the English Institute’s charter
The Edwardian period saw the formation of more of the founder firms of the future Ernst and Whinney, and also the beginnings of taxation as a new area of work for the profession. Pitt had switched from customs and excise to income tax as the main source of the national revenue; but in the 1840s, the income tax rate was a very low 2.9% and the collection procedures were simple. By 1900 the state had begun to recognise the need to redress some obvious social injustices, and because more revenue was needed, the income tax rate correspondingly increased. The Boer War caused another jump and the standard rate rose steadily throughout the 1914-18 World War. The inter-war period saw the accountant becoming more heavily involved with tax work, but it was not until World War II that this work began to generate a substantial fee income. Whinney Murray’s tax department is the oldest and largest of the firm’s specialist departments.
A fairly recent addition to the range of specialist services offered by professional firms is that of “management services.” Cost and management accounting were late starters in the UK. Costing had lagged far behind the engineering and financial accounting devel-opments of the Industrial Revolution and it was the 1914-18 war that first brought the subject into prominence when a number of senior accountants were drafted into government work. World War II brought further advances. The author’s concentration on the history and contribution of professional firms leads to some incom-pleteness in his coverage of recent progress. There are, for example, only two brief references to the Institute of Cost and Management Accountants although this organisation must be recognised as an important factor in the development of management accounting in the UK.
The inter-war period saw a wave of business mergers, the growth of the holding company, and the beginning of consolidated ac-counts. The 1960s and 70s was another period of intense merger activity, with a decline (by almost 50%) in the number of UK public companies between 1948 and 1978. There was a corresponding increase in the average number of plants operated by the largest companies and in the extent of diversification and divisionalisation. This trend was accompanied by a significant migration of accountants into business, and also led to a number of major accountancy amalgamations.
In the last decade, a significant percentage of medium sized UK practices has been absorbed by the large firms so that the practising side of the profession is now polarised, with a large number of small practices and a very few very large firms. The largest of these have become as international as their larger clients. Jones describes these and other developments down to 1980 in his concluding chapter.
The book is an interesting and readable socio-economic history of the UK profession and of the UK side of Ernst and Whinney, but its unusual format does mean that some branches of accounting (notably management accounting and public sector accounting) and some important professional bodies are inadequately covered. Apart from this, the book is highly recommended. Economic historians have tended to regard the growth of financial services (in-cluding accounting) as relatively unimportant, in comparison with production, in that such services are not considered to create wealth. Edgar Jones has sought to remove some of these miscon-ceptions and to show the nature and importance of the growth of accountancy to the British economy.
