Reviewed by John K. Courtis University of Waterloo
This book originally appeared without substantive change in 1970 as the author’s doctoral dissertation. Its purpose is to document chronologically the changes in selected corporate annual financial reporting practices in Canada from 1900 to 1970, together with their underlying influences.
The work, which is structured into seven chapters, com-mences with the evolution of the mandatory audit and its scope. Attention is then given to how the balance sheet and profit and loss statements evolved, including their content, classification, and general valuation base. The earned surplus statement, footnotes to financial statements, secret reserves and extraordinary items are then examined. A separate chapter is devoted to corporate depreciation practices. The book includes a comprehensive 270 item bibliography and five supporting appendices, but no index.
The study’s perspective is broad-based. It focuses on general changes and influences, and especially on the reporting practices of industrial companies that fall within federal, and not provincial, companies’ act legislation. To document these changes, the annual reports from a random selection of ten companies are examined for each of the periods: 1903 to 1919, 1920 to 1939, and 1940 to 1970. In addition, test readings of corporate reporting practices of 30-40 companies are made approximately every ten years throughout the period. These samples, together with the descriptions and studies of similar evidence by academic and professional commentators of the time, comprise the fabric upon which themes are developed.
The initial influence of English company legislation, fol-lowed by the growing influence of pronouncements from the American Institute of Certified Public Accountants, especially during the formative 1930 to 1950 period are reviewed. These influences are carefully traced to both Canadian company legislation and to pronouncements of the Canadian Institute of Chartered Accountants about the scope of financial statement audit and the form and content of the audit report. The implicit thesis of this longish second chapter is that improvements to annual reporting practices since 1900 have been a reaction to the mandatory audit and its scope rather than to voluntary disclosures. One surprise was to learn that it was not until 1964-65 that Canadian federal legislation required the auditor to give an opinion on the profit and loss statement.
The book then details an intricate chronological mapping of the several influences that underlie the evolution of financial statements’ form and content. This is dealt with in three periods: 1900 to 1920, 1920 to 1940, and 1940 to 1970, and is based on a review of corporate legislation, financial press commentary, the professional and academic literature, and a sample of corporate annual financial statements.
The 1900 to 1920 period appears to reflect a philosophical tug-of-war between maintaining secretiveness in corporate re-porting practices (motivated partly by fear of helping a com-petitor) and an increase in voluntary disclosures, the latter emerging victor. In the second period, there was increased emphasis on operating profit as a commentary on valuation. This, together with advocacy of disclosures which would prevent recurrences of the Royal Mail Steam Packet case, acted as the catalyst for the federal Companies Act of 1934 (and its 1935 Amendment). This legislation introduced several new mandatory profit and loss disclosures, especially about each asset category’s valuation base. An underlying motivaton of this Act was to give additional protection to the public against corporate stock promotion and capitalization abuses.
In the third period, the Ontario Corporations Act of 1953 constituted a significant revision of financial statement disclo-sures, these being based almost entirely upon recommendations of the Canadian Institute of Chartered Accountants. This pro-vincial legislation became the precursor for federal Companies legislation eleven years later, and was also extended to the rights of shareholders, the duties of directors, takeover bids, and insider trading. The author notes that almost all of the legislation relating to financial statement disclosure is a direct copy of recommendations of the Canadian Institute of Chartered Accountants, which in turn has benefitted from the American Institute of Certified Public Accountants’ having supplied the prototype for many of these recommendations.
The book also has a chapter on the evolution of the depre-ciation concept in Canada. Between 1932 and 1954, the depre-ciation methods of Canadian companies tended to follow con-ventions adopted by the tax department. Subsequent to 1954, no correspondence between depreciation for book and tax purposes was required, and the accounting concept of depreciation was replaced by the new concept of “capital cost allowances.” This development was as much a function of general fiscal policy as it was of the need to amortize corporate fixed assets against corporate revenue. This has given rise to the tax allocation problem, and it is unfortunate that the book does not detail the outcome of deferred tax since 1970. An additional chapter on inventory valuation would have rounded out attention to specific financial reporting practices.
While the greater part of this book is enlightening, its impact is diminished because it is incomplete. Being the only published Canadian study of its kind, the author had a responsibility to use his knowledge of source documentation and his analytical skills to update the text to include the changes that have taken place since 1970. The influence of environmentalists and other vested interest groups on social responsibility reporting, the growing demand for disclosures of an expectational nature, the influence of more recent corporate and bank collapses, several stock scams involving disclosure practices and auditor responsibilities, the Institute’s excursion into current cost accounting, and the political influences that underlie the standard setting process have all been influential in explaining how we have arrived at present reporting practices. At least some of this information might have been obtained from personal interviews with relevant individuals. Such inclusions would have significantly updated, enlivened and enriched this scholarly book. Although we are interested in history, our anchor-point is, more realistically, the present, and not 1970.
