Vahé Baladouni
UNIVERSITY OF NEW

FINANCIAL REPORTING IN THE EARLY YEARS OF THE EAST INDIA COMPANY

Abstract: The first archival period (1600-1663) of the (English) East India Company is marked by an absence of accounting materials. A small number of financial statements have escaped peril, however, and found their way to the India Office Library and Records in London. Of these, two are of singular interest. Along with related Company minutes, these statements are analyzed and interpreted in this paper. They shed some light on the reporting practices and concepts of the early years of the incorporated joint-stock company.

INTRODUCTION

The history of modern English corporate accounting and reporting begins with the incorporated joint-stock company. Although this form of business organization emerged in England in the second half of the 16th century, it was not until the foundation of the East India Company in 1600 that it acquired distinctive characteristics.

For the first two centuries, the incorporated joint-stock company developed rather slowly. In the case of the East India Company, for example, permanent capital, a characteristic of this form of enterprise, did not exist until some sixty years after the formation of the Company [Scott, 1968, Vol. 2, pp. 122-3, 128]. From 1600 to 1657, the Company operated with terminable stocks, issued for a single or a series of voyages. At various points in the life of a particular stock or venture, available proceeds were divided pro rata and distributed to the adventurers (shareholders). The distribution of proceeds was actually liquidation of invested capital as well as distribution of profits. For this reason, it is appropriate to refer to these distributions as “divisions” [Scott, 1968, Vol. 1, pp. 153, 159-60].

This study was made possible by a grant from the American Philosophical Society. Two transcripts of Crown-copyright records in the India Office Records appear in this paper by permission of the Controller of Her Majesty’s Stationery Office.

From very early on, the East India Company attracted a wide circle of investors—dukes, judges, knights, clergymen, and merchants [Cooke, 1951, pp. 57-8; Chaudhuri, 1965, p. 33]. Their number, around two hundred and twenty in 1600, rose swiftly to nearly one thousand by January 1617, when the subscription books for the Second Joint-Stock were closed [Birdwood, 1965, pp. 164-6; Scott, 1968, Vol. 2, p. 104]. With a fast-growing number of shareholders, how responsibly did the Court of Committees (Board of Directors) carry out its financial reporting obligations? On what conceptual basis were the Company’s financial statements prepared?

FINANCIAL

Article 306 of the East India Company’s bylaws, published in 1621, states that “They [Accountants General] shall yearely deliver up unto the Court [of Committees] at the Fine of June, a perfect Ballance of all Accompts in their charge” [Lawes, 1621, p. 68]. To ensure the reliability of the annual report, the Auditors General of the Company were instructed to “have care of the general accompts, to see that all the other accompts and parcels be fairely and truly entered into them by the Bookekeepers” [Lawes, 1621, p. 70]. The Auditors General were also to see to it that the Accountants General “deliver[ed] up a perfect Ballance of all the said accompts unto the Company, by the last day of June yearely” [Lawes, 1621, p. 70].

Despite management efforts to meet the financial reporting re-quirements, delays in preparing the yearly balance of accounts were not uncommon. There is ample evidence in Company minutes to indicate that delays in producing the yearly financial report resulted from four distinct factors. First, there was the problem arising from the long communication lines between the home office and the East Indies. Second, the bookkeepers of warehouses and other operations were more often than not both late and deficient in providing the Accountants General with the requisite data [Sainsbury, 1862-92, 156, July 1, 1625]. Third, there was a certain amount of confusion in the accounts resulting from incomplete voyages, each with its separate “remains” and differing lists of shareholders [Scott, 1968, Vol. 2, p. 111]. Fourth, a most serious problem for accounting arose from the simultaneous running of various voyages which made it difficult for the Accountants General to keep the activities of the various trading ventures distinct and separate from each other [Scott, 1968, Vol. 2, p. 109].

Delays in presenting the yearly balance of accounts to the share-holders gave rise to suspicions concerning the reliability of ac-counting figures in general. Many of the shareholders maintained that management were their delegates and should, therefore, keep them abreast of the Company’s state of affairs. They also demanded that all matters of importance be referred to them for decision. It was not uncommon for shareholders to take the liberty “to come into the Accountants’ and Auditors’ offices to peruse the Com-pany’s letters and accounts” [Sainsbury, 1862-92, 633, December 24, 1634].

Suspicion regarding the reliability of accounting information rose to a high point in 1634 when, at a shareholders’ meeting, it was proposed that a special committee of twelve shareholders be appointed to examine the Company’s accounts. This idea was rejected with contempt by management [Sainsbury, 1862-92, 622, November 21, 1634]. The continual delays in reporting, coupled with the absence of independent “investigation” or audit, were reasons enough to shed serious doubts on the validity of the financial statements. Today, the historian is also aware of a management decision (1635) to conceal the Company’s indebtedness from the shareholders [Scott, 1968, Vol. 2, pp. 111-2]. Whether the management had fraudulent intent or not, such concealment cannot be regarded in the shareholders’ interests.

TWO EXTANT FINANCIAL STATEMENTS

Although the East India Company’s first archival period (1600-1663) is marked by an absence of accounting materials such as journals, ledgers, etc., a small number of statements have escaped destruction and found their way to the India Office Library and Records in London. Of these, two are of singular interest. The first is an account of profit and loss of the Second Joint-Stock (1617-1632) prepared some nine years after the termination of the venture (Exhibit A). The second is a balance of accounts of the Third Joint-Stock (1632-1642) dated April 30, 1641; it was prepared two months ahead of the annual closing date, June 30, unless by this time the earlier closing date was moved two months forward (Exhibit B). These financial statements are unedited copies of the original documents.

Profit and Loss Statement of the Second Joint-Stock

This joint-stock, which began operation in 1617 and lasted for fifteen years, turned out to be a near disaster. The records show that nine hundred and fifty-four persons had subscribed to this stock a total amount of £1,629,040. This capital was to be paid over a period of eight years, that is, in eight equal installments of 12/4% or £203,630 each year [Scott, 1968, Vol. 2, p. 104; Chaudhuri, 1965, p. 209]. Because of Anglo-Dutch hostilities during the early years of this stock, the English East India Company suffered great losses. As a result of these losses, the Company found it necessary to call up two installments in 1619 [Chaudhuri, 1965, p. 219]. Despite efforts to ameliorate the financial situation of this joint-stock, matters became worse with time. The acute problems of maintaining liquidity forced the Company to borrow heavily, since the shareholders became increasingly reluctant to make their regular payments. According to Company investigation, the causes of failure were four [Chaudhuri, 1965, p. 218]:

First, the injurious proceedings of the Dutch; secondly, the extraordinary charge of shipping for defence of the trade; thirdly, the great interest that hath lain upon the Stock from the beginning; and fourthly, the loss of ships at sea.

The account of profit and loss prepared for the Second Joint-Stock several years after its termination highlights some of the causes of this failure. Prepared around 1640 and paradoxically entitled “The Success of the Second Joynt Stocke breifly valued,” this statement appears to have been produced in response to a motion passed at a meeting of the Board of Directors, held on November 9, 1640. In part, the minutes read [IOR: B19, pp. 337-8]:1
… a mocon was made to keepe an accompt of proffitt and losse (as p[ar]ticular men doe) whereby it may appeare to any [that] doubts thereof what the true reason was why the said stock did not prove so profitable as was expected . . .

From these minutes it is quite clear that the main purpose of this financial statement was to help vindicate the Board of Directors from any imputation of bad management. The users of this report were likely to be members of Parliament as well as present and prospective investors.

The 1621 bylaws of the Company contain no requirement to prepare a profit and loss statement. The only reference to profit and loss is in connection with an account by that name kept in the “Accompt proper” ledger. This ledger account was thought of as a

The Adventurers of the Second Joint Stocke subscribed and paid the scne of

EXHIBIT A

THE SUCCESS OF THE SECOND JOYNT STOCKE BREIFLY VALUED
1502756 8 5
There was devided and paid unto the Adventurers In the Second Joint Stocke for theire principall and proffitt
the some of 1690597 3 5
There was loss by shipwrake in 8 shlpps namely the Whale,
Lyon, Sunn, Moone, Hope, Tryall, Unicorne, and Maurie as by
the p’ticulars may appeare 384000 0 0
There was lost in the Argier action 10000 0 0
There was lost by p’tnershipp with the Muscovia Companye 25877 0 0
There was expended In the Treaty with the Dutch in Anno 1632 14370 0 0
The Company paid 22000 1. for assisting the Persians to
take Ormus 22000 0 0
2146844 3 5

More the losses and damages done the Company by the Dutch as by the p’ticulars exhibited to the Lords Comissioners of the Treaty In Anno 1622 the sume of 1116000 1. whereof onely 80000 1. was restored by the Dutch, because of the Treaty of Anno 1619 they were onely bound to pay that which they did
really possess and not that which they had suncke, burned or otherwise damnified whereby the Company did loosse all theIre damages which were 1036000 0 0

More since the said Treaty of Arm 1622 the lossess and Damages which the East India Company have susteyned by the Dutch are £891996. 0. 0 as by the p’ticulars delivered to Mr. Secreatary Windibancke the 15 March 1638 to bee sent to Sr. William Boswell his Ma’tie Embassador with the Lords the States Gennerall of the United provinces 891996 0 0 4074840 3 5 1502756 8 5 2572083 15 0

The whole arm which the Company have devided and paid unto the Adventurers togeather with the losses and damages susteyned doe amount in all Fower millions seaventy fower thousand eight hundred and forty pounds besides our p’tes of the Mace Nuttmeggs and Cloves uppon the Iselands of the Molucoes Banda and Amboina which the Dutch have wrongfully keapt from us many yeares; which may bee vallued at a greate summ of mony; And other losses alsoe by bad deabts and the like both in England and in the Indies, which are not here specified.

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clearing account and accordingly, the accountants were instructed to “cleare no Accompt or Voyage, till the same be fully accompted for, and shall also in this Accompt passe unto every man his profit or losse, as the Stocke generally shall produce” [Lawes, 1621, p. 76]. In light of this evidence, it can be said that the preparation of the statement, “The Success of the Second Joint Stocke breifly valued,” was in all likelihood an exception rather than a regular practice of the Company during this period.

Now, although this statement appears to be in T-account form, in fact it is not. It has no balancing entry and, therefore, no debit and credit totals of equal amounts. In essence, this statement is in report form. The information contained on the right-hand side, except for a missing caption, is complete. The missing caption is “The Adventurers of the Second Joint Stocke subscribed and paid the some of” to appear against the amount of £1,502,756 8s. 5d., second figure from the bottom. This figure is also highlighted on the left side of the statement.

Immediately above this figure is a total amount of £4,074,840 3s. 5d. which according to the footnote represents (1) the amount “devided and paid unto the Adventurers;” and (2) “the losses and damages susteyned” by the Joint-Stock. The amount distributed to the shareholders, £1,690,597 3s 5d., is made up, as it is to be expected, of the original investment, £1,502,756 8s. 5d., and the profit earned, £187,840 15s. 0d. This profit—a return of 121/4% over a period of fifteen years or slightly over eight-tenths of 1% per year—was not actually distributed. The shareholders were promised a division of 12/4% out of the profits of the Third Joint-Stock in return for the transfer of their remaining stock in the Indies to the latter [Chaudhuri, 1965, p. 218]. The rest of the items which add up to £2,384,243 represent losses, damages, and military and diplomatic expenditures incurred by this joint-stock. A figure of £2,146,844 3s. 5d. appearing after the sixth item from the top is a sub-total, perhaps inserted there to facilitate the addition of the subsequent amounts.

What does the last figure on the statement, £2,572,083 15s. 0d., represent? Since it is the difference between the original investment and the amount to which the original investment could have grown, that is, £4,074,840 3s. 5d., it can be designated as revenue. When the total amount of losses, damages, and military and diplomatic expenditures, £2,384,243, is subtracted from the revenue figure of £2,572,083 15s. 0d., the profit figure of £187,840 15s. 0d. is obtained.

Finally, the latter part of the footnote indicates that other items relevant to the Second Joint-Stock such as “mace, nuttmeggs and cloves . . . which the Dutch have wrongfully keapt” and losses from bad debts, both in England and in the Indies, have been left out of consideration in the preparation of this financial statement. It is not known why the management of the East India Company chose to exclude the bad debts from the body of the statement.

Balance of the Estate of the Third Joint-Stock

After the heavy losses suffered by the Second Joint-Stock, there was clearly a lack of confidence on the part of the small investors in conducting trade under this form of business organization, the in-corporated joint-stock company. Many adventurers wanted to adopt the practice of the regulated companies. In a regulated company, each adventurer retained his personal independence by trading on his own account, that is, making his own investment decisions [Cawston and Keane, 1968, pp. 10-2; Davis, 1961, Vol. 2, pp. 66-113]. But the principal merchants were unwilling to abandon the joint-stock arrangement. As a compromise, the Company reverted to the system of ad hoc expeditions. Under this system, stock was issued for single voyages as opposed to a series of voyages which are referred to as “joint-stock.” There were three ad hoc voyages before the Company convinced the adventurers of the wisdom of operating on a joint-stock.
In 1632, the Third Joint-Stock was established. In order to avoid confusion in accounting for the various stocks running simultaneously (three single and one joint-stock), a matter which had been a source of embarrassment to the Company in earlier years, it was decided to combine the undistributed assets of the three voyages, known as the Persian Voyages, with the Third Joint-Stock in 1634 [Scott, 1968, Vol. 2, p. 126; Chaudhuri, 1965, p. 221]. This Joint-Stock (1632-1642) operated on a capital of £420,700. When the account books of the Third Joint-Stock were finally closed, the total division came up to 135%, that is, a profit of 35% over a period of ten years or 3.5% per year [Scott, 1968, Vol. 2, p. 127; Chaudhuri, 1965, p. 209].

During its meeting of November 9, 1640 when the Board of Directors passed a motion “to keepe an accompt of proffitt and losse” for the Second Joint-Stock, it was also decided that [IOR: B19, pp. 337-8]2 a colleccon [be] made of all the losses that have been advised out of the Indies to have befalled the third stock

[that] reason may be given why [this] stock also hath not hither to be produced such proffitt as otherwise it might have done ….

The purpose of this motion was similar to that made for the Second Joint-Stock and, therefore, one would expect to find a similar statement of profit and loss prepared for the Third Joint-Stock. Investigation of the archives of the East India Company has not turned up such a statement. Instead, there is a statement known as “balance of accounts,” the predecessor of the present day balance sheet. This balance of accounts is entitled, “Ballance of the Estate of the 3d Joint Stock taken to the fine of April 1641 continewed and encludinge the Crispiana.

As indicated in Article 306 of the Company’s bylaws, the Accountants General were expected to prepare a balance of accounts as of June 30 of each year. This particular statement, prepared in July 1641, represents the financial status of the Third Joint-Stock as of April 30, two months ahead of the specified closing date. The early closing may have been the result of a special request made by the shareholders or a revision in the closing date.

As one would expect, the statement is in T-account form. However, it may be surprising to see the left side of the statement representing the Company’s liabilities and the right side, the assets. This reversal of positions may be explained by the meaning of two critical terms: “debitor” and “creditor.” “Debitor” is derived from the Latin debitor and Middle French debiteur; its modern equivalent in English is “debtor.” Accordingly, the heading of the left side reads: “The Estate of the third Joint Stock is debit[or],” meaning “debtor” or “one who owes a debt.” Under such a heading, one would expect to find a listing of the entity’s debts. “Creditor” is derived from the Latin creditor and Middle French crediteur. “Creditor” is also in use today with its meaning unchanged, that is, one who gives credit in business matters and, therefore, one to whom money is due. It is opposed to “debtor.” Accordingly, the right side reads: “The Estate of the third Joint Stocke is Creditor,” meaning “one to whom money or other asset is due.” Under this heading, one would expect to find a listing of the entity’s assets. The linguistic explanation offered here must necessarily be taken as tentative.3 Aside from this major division, the statement reflects no other classification.

The assets of the Third Joint-Stock are composed of bills, bonds, and other receivables, £260,624; cash and merchandise inventory,

EXHIBIT B

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Ballance of the Estate of the 3d Joint Stock continewed and encl udinge The Estate of the third Joint Stocke is Debit[or]
267152 0 0
9345 0 0
56565 0 0
20998 0 0
4606 0 0
1000 0 0
2000 0 0
10000 0 0
200 0 0
600 0 0
1500 0 0
350 0 0
12200 0 0
72185 13 4

Ffor the principal debt oweinge att Interest the fine of Aprill 1641
Ffor Interest of 267000 for 6 mos att 7 per cent
Ffor Somuch remaneth to make good 75 per cent to the Adventurers
Ffor subsidue Impost fraight and provisions
Ffor somuch is oweinge to the Adventurers in the Second Joint Stock
and vyadges

Ffor the discomnpts in May and June estimated Ffor the wages of the Crispi1na Ffor the subsidue and Impost Ffor Charges in unladeIng Ffor somnuch paid William Hurt In May Ffor gratuetyes Ffor sallaryes Ffor 14 mos discompt of 120000 1. att 8 per cent
Rest att present towards a fourth devision
458701 13 4

Some amounts

Source: IOR: Home Miscellaneous Series, vol. 39, pp. 161-162.

taken to the fine of Aprill 1641 the Crispiana
The Estate of the third Joint Stocke iIs Creditor
By somuch is oweing by bills bonds etc.
Per remaine iIn Cash 3718 0 0
Per renaime of Callicoes 84940 peeces 40196 0 0
Per remaine in John Blount as Cloves 10745 0 0
in the Exchange Cellar 2830 0 0
in Saltpeeter etc. 4040 0 0
in Blackwball 9041 0 0
Per the Carga of the Crispina as foll[oweth]
SiIke 68378 lb. att 16 s. 54702 08 0
Indicoe Lahor 110000 lb. att 6 s. 8 d. 36666 13 4
Cirques 8400 lb. att 5 s. 2100 0 0
Callicoes 50000 peeces 25000 0 0
Pepp[er] 120000 lb. att 16 d. 8000 0 0
Alloes Cicatrina 1100 lb. att 4 s. 220 0 0
Olibanum 640 lb. att 18 d. 48 0 0
Mirh 1216 lb. att 2 s. 121 12 0
Quiltes 41 att 40 s. 84 0 0
Cotton yarne 2400 lb. att 2 s. 240 0 0
Gumlack 65 Co. att 5 1. 325 0 0
Some amounts to
Some per Contra
In Venice etc more than is allowed above

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£70,570; the cargo of the Crispiana, £127,507 13s. 4d., total assets, £458,701 13s. 4d. The liabilities include: money borrowed at interest, £267,152; six months’ interest on £267,0004 at 7%, £9,345; “division” payable to shareholders, £56,565; subsidy, impost, freight, and provisions payable, £20,998; due to the adventurers in the Second Joint-Stock and voyages, £4,606;5 other liabilities (item 6 “for the discompts in May and June estimated” through item 13 “for 14 mos discompt of 120000 I. att 8 per cent”), £27,850. Total liabilities, not shown on the statement, amount to £386,516. The last item represents the net assets, or what is available for distribution to the shareholders “towards a fourth devision,” namely, £72,185 13s. 4d. A footnote on the right side discloses the existence of additional assets in Venice amounting to £9,000, which added to the balance of this statement brings the net assets to £81,185 13s. 4d. There is no reason given why assets worth £9,000 are excluded from the body of the statement.

EVALUATION

From the study of the financial statements and related Company minutes, conclusions can be drawn in two areas of interest: (1) reliability of the Company’s statements; and (2) conceptual framework underlying the financial statements.

With regard to the reliability of the Company’s statements, one cannot but conclude that there existed sufficient evidence to question the validity of information presented in the financial state-ments. The continual delays in reporting; management’s refusal of an independent audit; and management’s decision to conceal the Company’s indebtedness from the shareholders are surely reasons enough to shed serious doubts as to the reliability of the financial statements produced during this period.

Analysis of “The Success of the Second Joint Stocke” clearly demonstrates the absence of a framework such as that of a profit and loss statement. To produce a profit and loss statement, figures for total revenues, total expenses/losses, and the resulting profit or loss must be presented in a recognizable manner. These pieces of information are absent from this document, and the statement must be reworked in order to determine them. In this context, the term “profit and loss” is a misnomer. Other than providing discrete information on a variety of items such as invested capital, losses, damages, military and diplomatic expenditures, the statement as a whole seems to be the product of an uncertain conceptual framework.

The balance of accounts was the forerunner of the modern balance sheet or statement of financial position, or condition. Then as now, the heading of the statement consisted of three principal parts: name of the enterprise (Third Joint Stock); title of the statement (Balance of the Estate); and the date of the information shown (End of April 1641). As might be expected, the statement appears to assume the T-account form, but a close look at the headings of each side helps us realize that this statement does not follow the T-account rule, debits on the left and credits on the right. Instead, the left side is used to show to whom “the Estate of the third Joint Stocke is Debit [or],” and the right side, the things over which the entity had claims or rights, “the Estate of the third Joint Stocke is Creditor.” This form is still used in Britain on those occasions when a balance sheet is presented in account form. It may be noted that the shareholders’ equity does not constitute a separate category on the balance of accounts. However, it can be distinguished from other liabilities because it is not preceded by the preposition “for” and is also referred to as “balance,” namely, the difference between what is owned by the Company over what it owes to outside creditors.

Joint-stock companies found it necessary to produce financial statements. Known as “balance of accounts,” these statements were prepared periodically for the benefit of shareholders who had no direct access to the companies’ books. The two financial statements analyzed in this paper attest to the early efforts of the East India Company to meet this demand. If the conceptual basis of the first of these statements is unclear, the second can be viewed as a prototype of the present day statement of financial position.

FOOTNOTES

1Sally Hofmann to author, June 16, 1982.
2lbid.
3For another view on this issue, see Yamey.
4The actual figure of £267,152 is rounded here to the nearest thousand pounds sterling.
5Some nine years after the termination of the Second Joint-Stock, this amount
5Some was still unpaid.

REFERENCES

Birdwood, Sir George, ed. The Register of Letters Etc. of the Governour and Com-pany of Merchants of London Trading into the East Indies, 1600-1619. London: Bernard Quaritch, 1893. Reprinted in 1965.
Cawston, George and Keane, A. H. The Early Chartered Companies: A. D. 1296-1858, New York: Burt Franklin, 1968.
Chaudhuri, K. N., The English East India Company: The Study of an Early Joint-Stock Company, 1600-1640. London: Frank Cass & Co., Ltd., 1965.
Cooke, C. A. Corporation Trust and Company: An Essay in Legal History. Cambridge: Mass.: Harvard University Press, 1951.
Davis, John P. Corporations: A Study of the Origin and Development of Great Business Combinations and of Their Relation to the Authority of the State. 2 vols. New York: Capricorn Books, 1961.

[I]ndia [O]ffice [R]ecords. Court Minutes, B19.
[I]ndia [O]ffice [R]ecords. Home Miscellaneous Series, H39.
Lawes or Standing Orders of the East India Company. [London: ?], 1621. Facsimile Reprint, 1968.
Sainsbury, W. Noel, ed. Calendar of State Papers, East Indies. London: Her Majesty’s Stationery Office, 1862-1892.
Scott, William R. The Constitution and Finance of English, Scottish and Irish Joint-Stock Companies to 1720. 3 vols. Cambridge: Cambridge University Press, 1912. Reprinted in 1968.

Yamey, B. S. “Closing the Ledger.” Accounting and Business Research, Winter, 1970, pp. 71-7.