Ian C. Stewart SEATTLE PACIFIC UNIVERSITY

THE ETHICS OF DISCLOSURE IN COMPANY FINANCIAL REPORTING IN THE UNITED KINGDOM 1925-1970

Abstract: Ethics is understood as the worthiness of the rights and needs for accounting information of contending groups in society. Company law is viewed as a means by which users of financial statements rights and needs have been redressed, and which users have relatively less important claims for information. The moral idealism of a true and fair view is being converted into impersonal disclosure laws which serve to provide, in the main, for the needs of shareholders.

INTRODUCTION

The theme of this paper is the role of mandatory public disclosure rules in removing the superior information of the issuers of financial statements (accounters). Specifically, com-pany law is viewed as a means by which the users of financial statements (accountees’) rights to know have been redressed.1 A diverse and expanded set of accountees are now pressing their rights to know. Today the list includes shareholders, creditors,

The author acknowledges the contribution made to the research by the Honorary Visiting Scholar Program at Regent College and the facilities provided by the College, in Vancouver, B.C., Canada, where he spent his sabbatical leave in 1989. The author also thanks his former university, the University of Auckland for granting the sabbatical.

1Lev [January, 1988] argues that inequity in capital markets leads to adverse transaction costs, thin markets, low liquidity and in general decreased gains from trade. Lev contends that such adverse consequences can be mitigated by a Public policy mandating the disclosure of financial information in order to reduce information asymmetries. This paper considers the needs of other users as well as capital market participants by engaging in ethical reflection on the growth in disclosure laws.

labor unions, government, consumers, local neighborhoods and the public in general [Accounting Standards Steering Commit-tee, 1975]. The necessity for ordering the needs of these accountees according to perceptions of relative importance needs to be addressed. These interpersonal comparisons are what Devine calls “ethics” [1985, Vol III, p. 50, see also Beaver and Demski, 1974, p. 184; May and Sundem, 1976; American Accounting Association, 1977, p. 24; Ansari and McDonough, 1980, p. 139]. Devine argues that it is accountants’ responsibility to be the “screening agents for weighing and coordinating interpersonal needs and conflicts” [p. 50].

In terms of the accountability relationship, the accountant and auditor come between the accounter and the accountees to “assure a smooth flow of the required information” [Ijiri, Sum-mer 1983, p. 76]. The duty of the accountant and auditor, as embodied in the inherited structures of accountability, is to an ideal; namely, to provide “a true and fair view” [Companies Act of 1981, s. 149]2 of the information flow. The problem, however, is that the accountant’s duty to the ideal of truth and fairness may not be to the accounter’s advantage [Westra, April 1986]. Historically, the personal moral idealism of truth and fairness has been insufficient to check the egoistic impulses of powerful companies. Hence, there has been a significant acceleration in minimum disclosure laws throughout the present century. The objective of this paper is to describe the struggle for the recognition of accountees’ rights to know, and whose rights are relatively more important.

Plan of Study

The plan is to examine company law as a dimension that has contributed to (or repressed) accountees’ rights to know. Successive Companies Acts form part of the discourse of truth and fairness. Indeed, as Carr puts it, “the process by which specific historical content is given to abstract moral conceptions is a historical process” [1962, p. 76].

2J. G. Chastney [1975] sets out the changing configuration of ideals embodied in successive Companies Acts and discusses the meaning of the various terms which have been used.

3Cf. W. R. Kennedy’s “The Auditor’s Song”. “I am the very model of a modern business auditor. I represent the quest for truth no corporation can deter. I poke my nose in every book and pose my questions quizzical” [1983, p. 22].

This historical process can also be seen to be shaped within relations of power [Gordon, 1980]. Powerful industrialists and professional and trade associations made representations to Company Law Amendment Committees which preceded the passage of the Companies Acts during the period covered by this study. Hence, it is pertinent to raise the question of the extent to which disclosure laws may be sustaining and legitimizing powerful economic and political groups, while disenfranchising the rights to know of others [Cooper, 1980, p. 164; Cooper and Sherer, 1984, p. 225; Willmott, 1986, p. 561; Richardson, 1987, p. 351].

The identification and ordering of accountees has been generated in an inductive manner using primary and secondary source materials. Primary source documents include successive British Companies Acts along with the Company Law Amendment Committees that immediately preceded the passage of the legislation.4 These sources constitute the principal evidential data for weighing the relative importance of the accountees. Secondary sources consulted included relevant articles from the periodical literature in accounting.

Time Period

The minimum disclosure philosophy was first introduced in the Companies Act of 1907, but was not significantly developed until the Companies Act of 1929. A Company Law Amendment Committee was appointed in 1925 to undertake a full review of the working of the Companies Act then in force. The Committee reported in 1926, and its report formed the basis for the reforms of the Companies Acts 1928/29. The accounter’s right to privacy received little opposition prior to this date. It has only been over the last half century that there has been a gradual evolution towards disclosure. Since the Act of 1929, there have been three major enactments in 1947, 1967 and 1981 which have further developed the theme of minimum disclosure. The Act of 1981, however, was not preceded by a Company Law Amendment Committee. It was driven by the harmonizing provisions of the

4Excerpts from these Acts and Reports along with some of the evidence before the Committees has been brought together very helpfully in two volumes by Edwards [1980]. Extensive use was made of this material.

5Especially helpful in this regard was the collection by Lee and Parker

4th EC Directive on company law. Hence, the 1981 Act has been omitted from consideration. Moreover, 1970 saw the advent of the accounting standards setting program developed by the British accounting profession and thus marked the end of an era in which major reliance was placed on companies’ legislation in raising the standards of company financial reporting and disclosure.

The rest of the paper is organized along chronological lines. A section is devoted to each of the major revisions of company law, which took place in 1928/29, 1947/48 and 1967. The concluding section offers an interpretation of the data used in the study and emphasizes the relevance of the findings to contemporary education, policy and research issues.

THE CULT OF PRIVACY The Growing Obscurity of Financial Reports

Edwards [1979, p. 278] reports that in the years up to 1925 accounting information was becoming less informative. Further support for this view comes from Kitchen [1979, p. 98] and Edey [1979, pp. 226-7]. Both Edwards [1979, pp. 278-9], and Kitchen [1979, p. 118] point out that secrecy in financial reporting may well have reflected the difficult conditions facing directors in the 1920s. Kitchen notes that “to many of them, to increase disclosure seemed tantamount to inviting more criticism — at the least more questions, and many had had their fill of inquiries.” Edwards observes that an explanation of the obscure reporting practices of some managers lay in their belief that the decline in demand for their products was of a temporary character and would revive with the imminent up-turn in the trading cycle [p. 279].

In these particular circumstances, the accounters’ moral po-sition may have been act-utilitarian;6 namely, that “it can never be right to act on the rule of telling the truth if we have good independent grounds for thinking that it would be for the great-est general good not to tell the truth” [Frankena, 1963, p. 30].

6″Act-utilitarians hold that in general, or at least where it is practicable, one is to tell what is right or obligatory by appealing directly to the principle of utility or, in other words, by trying to see which of the actions open to him will or is likely to produce the greatest balance of good over evil in the universe” [Frankena, 1963, p. 30].

Stewart: Ethics of Disclosure in Company Financial Reporting 39
Public disclosure of poor performance may precipitate the fail-ure of the company with consequent loss to the investing public and the workforce.

Greene Committee

The Greene Committee on Company Law Amendment, which sat in 1925, circulated among some 44 individuals and institutions, including the Co-operative Congress and the Trades Union Congress, for their views on the existing state of company law. Edwards [1980, p. xvi] reports that 39 submissions were made to the Committee including both written and oral evidence from the Co-operative Congress, but no submission was received from the Trades Union Congress. Accountancy bodies made representations to the Greene Committee for the first time in the long history of company reform (dating back to 1867).

At the time, accepted conventions “left a fairly wide area of accounting discretion to company management and auditors” [Yamey, 1979, p. 237]. In practice, the exercise of accounting discretion …. was conditioned in general by an approved bias towards ‘conservatism’ ” [p. 237]. But, as Yamey observes, the creation of secret reserves “went well beyond the caution of this ordinary conservatism” [p. 237]. Edwards [1979, p. 280] notes that overall secret reserves received approval from those witnesses who gave evidence. Mr. F. Whinney felt that shareholders might be entitled to know of their existence although not the details relating to them [Edwards, 1980, Vol. II, p. 101]. Both the Law Society [Edwards, 1980, Vol. II, p. 102] and the Institute of Chartered Accountants [Edwards, 1980 Vol. II, p. 120] took the view that a balance sheet prepared to give full protection to creditors would give away information to competitors. The giving of an “externality” to competitors is a theme which runs throughout the period reviewed here. Both institutions contended that the remedy for shareholders was to ask questions at the annual meeting. As Garnsey [1922] observed, “shareholders as a rule are quick to appreciate the dangers attending a too full statement of the affairs of their company and rely to an almost unlimited extent upon the advice tendered to them by their Board” [quoted in Kitchen, 1979, p. 94]. This accepts the “necessity” of the shareholders’ welfare being given overriding consideration in determining the greatest balance of good over evil [Edwards, 1979, p. 277].

As far as creditors are concerned, both the Law Society and the Institute took the view [Edwards, 1980, Vol. II, p. 102 and p. 120] that creditors’ means of protection was largely in their own hands — they must pursue their own inquiries. Both submissions asserted that creditors could obtain as much information about the financial position of a company as they could about that of an individual. Both concluded “It is impossible by legislation to protect fools from their own folly” [Edwards, 1980, Vol. II, p. 102, and p. 120].

The Greene Committee appears to have accepted the view that additional disclosures should be kept to an absolute mini-mum. The Committee argued that it would be “most undesir-able, in order to defeat an occasional wrong doer, to impose restrictions which would seriously hamper the activities of hon-est men and would inevitably re-act upon the commerce and prosperity of the country” [Edwards, 1980, Vol. II, p. 79]. The Committee appealed to the concept of utility. The system of limited liability leaves opportunity for abuse, but these costs are outweighed by the benefits to trade and industry. The report did include proposals for minimum disclosure in the balance sheet. The report also recommended that the balance sheet and the profit and loss account be presented to the members at each annual meeting, and the former document be circulated to the members prior to the meeting. It was further recommended that a copy of the last audited balance sheet be filed annually with the Registrar of Companies [Edwards, 1979, p. 281].

Companies Act of 1928

The Companies Act followed the recommendations made by the Greene Committee in connection with accounting matters. It included requirements for companies to distinguish between the amounts of fixed assets and floating assets, to show balances for several named intangible assets and to provide a small amount of information concerning subsidiary companies. Moreover, the Act required, for the first time, that directors were responsible for circulating the accounts to members prior to the annual general meeting. Section 39(4) also called for a directors’ report to be attached to the balance sheet. A “real advance” [Edey, 1979, p. 228] was the requirement to present a profit and loss account (which need not be audited) to those shareholders in attendance at the annual meeting. Sections 6(d) and 39(4) made it clear that only the balance sheet and the directors’ report presented to the company at a general meeting need to be filed with the Registrar. This innovation illustrates a continuing “preoccupation with the shareholder group” [Edwards, 1980, Vol. I, p. xvi]. Presumably, the profit and loss account was not required to be filed with the Registrar because it was thought to give an unfair advantage to a competitor.

In this period, disclosure is viewed as an intramural prob-lem of the directors and the shareholders. To give shareholders greater rights to know would result in benefit to competitors. Moreover, enforced disclosure in the difficult economic condi-tions facing directors in the 1920s may have precipitated the collapse of the company with consequent loss to the general public and the work force. It was not until 1931 that management’s right to privacy was seriously challenged in the Royal Mail case.

THE ROYAL MAIL CASE

Edwards observes that in the months following the intro-duction of the 1929 Act there was a general improvement in reporting practices particularly on the assets side of the balance sheet [1979, p. 284]. Nevertheless, profit manipulation and the maintenance of secret reserves persisted. Edwards states “it is fairly clear that where the Act placed some specific obligation on directors, this was complied with. Where no such obligation was imposed, information did not gratuitously emerge” [p. 285].

This aroused accountants and others to criticize the value of the audit function. The auditor had been required since the Act of 1900 to report on the truth and correctness of the accounts. The most well known failure of the auditor to fulfill that duty occurred in the Royal Mail case [Brooks, 1933]. Briefly, Lord Kylsant, chairman of the shipping line, and the company’s auditor, H. J. Morland, were accused of deliberately misleading shareholders as to the true state of the company’s financial position. The line had been doing badly since 1921; and from 1926, Kylsant, with the knowledge of the auditor, had been transferring large sums out of excess tax provisions and non-recurring items of revenue to help pay dividends. Neither the transfers from reserves nor the company’s true trading losses were disclosed in the annual accounts. The only notice given to shareholders that the profit had been derived from the utilization of secret reserves were the words “including adjustment of taxation reserves” inserted in the balance sheet by Morland.

Morland was acquitted on a charge of dishonesty because he had merely adopted a customary practice. It is interesting that the company had published information concerning profitability in the early years of the century despite the absence of any company law requirements, but in common with those of other hard pressed firms, the accounts gradually revealed less and less [Edwards, 1979, p. 288]. It was this case, more than any other single event, that secured the shareholders’ rights to a candid disclosure of profits.

The correlative duty on management not to hide informa-tion is implied in the special relationship which management has with its shareholders. Managers are the agents of the shareholders and promise to represent the interests of the shareholders and to appraise them of their progress in this regard. This is a deontological justification for disclosure.7 Edwards reflects the shift that was taking place: “It is preferable to alarm one’s shareholders by frank disclosure of the financial position than to keep them in a fool’s paradise until it is too late for a remedy to be possible” [Edwards, 1979, p. 290].

It is interesting that the Institute of Chartered Accountants in England and Wales (ICAEW) continued to call for reform to be effected “through the influence of individual members and that there was no need for further legislation” [quoted by Kitchen and Parker, 1980, p. 77]. The Institute felt, on the one hand, that general pronouncements could easily be circumvented or misapplied, while on the other hand, detailed pronouncements were impracticable because of the diversity of business situations. By contrast, the Society of Incorporated Accountants argued that it was “unreasonable to expect the auditor to progress beyond the minimum requirements laid down by the law; these were regarded as constituting an effective limit on his powers” [Edwards, 1979, p. 290].

It took another decade, however, before it was realized that an increase in moral goodwill was not sufficient to offer share-holders protection of their rights. Zeff records that there was still much dissatisfaction in the late 1930s and early 1940s with accounting practices. It was following a series of articles published in The Economist in 1942 concerning the inadequacies of
7Deontologists “assert that there are . . . other considerations which make an action or rule right or obligatory besides the goodness or badness of its conse-quences — certain features of the act itself other than the value it brings into existence …” [Frankena, 1963, p. 14].

published accounts, that the ICAEW changed its attitude to one of issuing recommendations on best practice to members [Zeff, 1972, p. 10].

UTMOST PUBLICITY An Expansion in Number of Accountees

The early recommendations of the ICAEW formed the basis of the sweeping reforms in the accounting requirements which were recommended by the Cohen Committee on Company Law Amendment in a report published in 1945. The terms of reference given to the Committee included an obligation to review the “safeguards afforded for investors and for the public interest” [Edwards, 1980, Vol. II, p. 128]. As Edwards observes, formal recognition of the public interest indicates the extent to which official attitudes had changed during the time since the Greene Committee. This can be seen as a reflection of the changes in social attitudes stimulated by the war [Bircher, Spring 1988, p. 117].

In keeping with the call for social justice and a more equi-table distribution of income and wealth, it was argued by repre-sentatives of The Economist [Edwards, 1980, Vol. II, p. 181] and the Trades Union Congress (TUC) [Edwards, 1980, Vol. II, p. 212], which was making a submission to a Company Law Amendment Committee for the first time, that some standards for accounting information were necessary now that financial reports were serving a wider audience.
The TUC appealed to the public interest or general utility in its submissions. It contended that the public’s and workers’ rights to know should outweigh any competitive disadvantage suffered by the company [Edwards, 1980, Vol. II, p. 207]. In response to the suggestion that publication of information about reserves would lead to a dog fight between management and the unions, the TUC representatives stated that it was not in their interests to raid the reserves if it was going to put the company on the rocks [Edwards, 1980, Vol. II, p. 208]. TUC representatives argued that dissemination of more information would improve confidence and understanding between labor and capital [p. 207].

The Association of Certified and Corporate Accountants drew the Committee’s attention to the changed position of shareholders since the Greene Committee met. Instead of being a responsible proprietorship, shareholders were mere dividend recipients, or investors seeking capital accretion. They argued that the controlling and functioning of companies now resided, in a vast majority of cases, with the directors and that there was a need to ensure that the directors (and shareholders) “shall not be able to conduct the business of a company as to secure for their interests a priority position as against the interests of oth-ers” [Edwards, 1980, Vol. II, p. 192, see also Pollard, 1969, p. 163 and Hannah, 1983, p. 27].8

Several submissions pointed out that the phrase a “true and correct view” was becoming “distorted by secret reserves” [Edwards, 1980, Vol. II, p. 181 (The Economist), p. 197, (de Paula)]. The Association of Certified Accountants, in their sub-mission, set out in some detail a number of specified items which should be disclosed in order for accounts to exhibit a true and correct view [Edwards, 1980, Vol. II, p. 193]. The Association also drew attention to the auditors’ lack of independence. They noted that it is not infrequent for auditors, conceiving it their duty to draw attention to some particular feature in the accounts, to find themselves at variance with the directors and lose their appointment [Edwards, 1980, Vol. II, p. 193].

Cohen Committee

Whereas “confidentiality” had been the watchword of the Greene Committee, “fullest practicable disclosure” was the ob-jective identified by the Cohen Committee [Edwards, 1980, Vol. I. p. xvi]. This illustrates the change which had taken place in attitudes to disclosure. The Committee considered that utmost publicity would reduce the opportunities for abuse and accord with a wakening social consciousness [Edwards, 1980, Vol. II, p. 130]. The report argued that the hands of the auditor would be strengthened if the law were to prescribe a minimum amount of information to be disclosed in all balance sheets and profit and loss accounts [Edwards, 1980, Vol. II, p. 131 and p. 137]. The Committee recommended that audits be conducted by fully qualified accountants. It suggested that auditors’ independence be strengthened by disqualifying an employee of a company or an employee or partner of a director from being its auditor. As

This argument parallels those put forth by Berle and Means [1932] across the Atlantic, in which the authors suggest that the new concentrations of corporate power must now “serve not alone the owners or the control, but all society.” [1967, p. 312].

Willmott [1986, p. 560] points out “to maintain their position within the prevailing structure of power relations, the officers of professional bodies are obliged to gain the recognition and confidence not only of clients but also, and crucially, of the state.” Other recommendations included giving the auditors the right to attend all general meetings (not just those general meetings where accounts are discussed), and the right, if other auditors have been nominated, or if there is a proposal that they should not be reappointed, to put their views before the shareholders orally at the meeting and in writing prior to the meeting. [Edwards, 1980, Vol. II, pp. 148-150].

One final matter worth noting about the Cohen Report is that the Committee considered the profit and loss account “as important as, if not more important than, the balance sheet, since the trend of profits is the best indication of the prosperity of the company and the value of the assets depends largely on the maintenance of the business as a going concern” [Edwards, 1980, Vol. II. p. 137]. In keeping with this, the Committee sought to bring the profit and loss account within the purview of the auditors’ report. This no doubt accorded with the growing number of absentee owners wishing to evaluate the performance of the company and to assess how much of the profit was available for distribution as dividends.

Companies Act of 1947

The Companies Act of 1947 was based largely on the extensive recommendations of the Cohen Committee. It required auditors to report whether the accounts were true and fair rather than true and correct. The replacement of the word correct by fair was at the suggestion of the English Institute [Edwards, 1980, Vol. II, p. 167]. The Act prescribed specific disclosures which it regarded as the minimum necessary for the purpose of attaining a true and fair view. However, the Act made it clear that true and fair was an overriding requirement. This considerably expanded the concept of minimum disclosure.

The influence of the Royal Mail case on the legislation was obvious: among other things, the Act called for full disclosure of all reserves and movements therein, the reporting on the profit and loss account by the auditor, the adequate classification of accounts, the introduction of special requirements for holding companies, and the disclosure of further details in prospectuses. Other important extensions of the law were that both the balance sheet and the profit and loss account had to be filed with the Register, and private companies no longer enjoyed immu-nity from the obligation to file accounts. In addition, the auditor now had to be a member of a professional body. However, as Willmott [1986, p. 565] points out, the price exacted by the State for the sanctioning of market shelters for professional groups was the “reliable production and delivery of relevant and consistent knowledge and skill”.

It was now clear that no longer could the auditor rely on his own experience and strength of character in any contest with the directors. Statutory support was necessary to restore a measure of trust in the moral capacities of the accounters and to encourage an expansion rather than contraction of these capacities [cf. Niebuhr, 1932, p. 272]. The consequent impact on the quality of financial reporting “was little short of tremendous” [quoted in Zeff, 1972, p. 13]. “The justice which results from such a process may not belong in the category of morally created social values, if morality be defined purely from the perspective of the individual. From the viewpoint of society itself it does represent a moral achievement” [Niebuhr, 1932, p. 31-32].

In sum, it took the Royal Mail case (1933) to bring about a greater recognition of shareholders’ rights to know. With the divorce of ownership from control, managers had a moral duty (reflecting a deontological approach) to appraise shareholders of their progress. Also, it took the war and the awakening social consciousness that it brought to bring about a recognition of the public’s rights to know.

GREATER PUBLIC ACCOUNTABILITY Responsibilities to Investors and the Work Force

The Report of the Company Law Committee under the Chairmanship of Lord Jenkins was presented to Parliament in June 1962. The range of interested parties giving oral evidence before the Committee had extended to include among others, The Society of Investment Analysts Limited, The Institute of Directors, The Institute of Actuaries, The Association of Unit Trust Managers, The British Overseas Banks Association, The Association of International Accountants Limited, The Faculty of Advocates, and accounting academics.

The question of the competitive disadvantage of disclosure was once again discussed. Professor Baxter argued that the public interest (general utility) should override the interests of

Stewart: Ethics of Disclosure in Company Financial Reporting 47
shareholders in this regard [Edwards, 1980, Vol. II, p. 294]. Baxter argued that “the more economic information there is the more prosperous we shall be.” In his view, the only objection-able thing “would be if for some reason Competitor A could limit the knowledge available to Competitors B and C; we are saying the thing should be published to the whole world” [Edwards, 1980, Vol. II, p. 297].9 In his memorandum to the Committee, Baxter developed the case for full disclosure.

In a free economy, resources are guided to their most fruitful uses (in the main) by the decisions of individu-als. If the economy is to work efficiently, these deci-sions must be based on adequate information. Investors should have available the fullest and clearest data on the working of the various sectors. Guided by such data, they will put new resources into sectors where likely returns are highest — thus helping to give the consumer what he wants, and to reduce abnormally high profit rates to the competitive level. The society that fails to provide itself with the best available information is wasting resources, and keeping its income needlessly low … [Edwards, 1980, Vol. II, p. 298].

Similar sentiments were expressed by the Society of Investment Analysts [Edwards, 1980, Vol. II, p. 316 and p. 320]. This, of course, raises the “public good/free rider” problem. While investment analysts get information “free”, others such as owners, employees, or consumers must bear the costs of producing the information through smaller dividends, lower wages, or the payment of higher prices, respectively.

The Trades Union Congress once more drew attention to the priority of the public’s right to know over the shareholders. [Edwards, 1980, Vol. II, p. 346]. The TUC posed the question for the committee: “What are the respective rights of the public and the companies?” It focused its remarks on the need for product line reporting arguing that they were disadvantaged in negotiations by not knowing the profitability of particular products.

9Professor Bell has argued recently that “if disclosure costs are negligible. . .but disclosure improves the long run efficiency in the economy overall, then a case can be made for mandating disclosure even where the entity making the disclosure seems to be hurt, competitively, in the process. The disclosing entity benefits from externalities when other entities disclose. And it will have benefited from ‘first use’ of its cost cutting measure or measures.” [1989, p. 61].

The TUC lamented that the information useful to employees was really only a by-product of information published for shareholders. It then argued for reports specifically pitched at employees to enable workers to form a view of the company. However, these reports did not eventuate until later in the nineteen seventies [see Burchell, Clubb, and Hopwood, 1985, p. 398], Presumably, knowing that a company has a substantial profit on a particular product should also lead to new investment, perhaps by competitors in that product.

Jenkins Committee

The Jenkins Report repeated the views expressed by the Greene and Cohen Committees as to the undesirability of im-posing restrictions which would seriously hamper the activities of honest men in order to defeat an occasional wrongdoer [Edwards, 1980, Vol. II, p. 219]. In considering the trend toward additional disclosures, however, the Committee posed the question of the value of the information to the persons receiving it, and whether its ascertainment would involve an amount of work disproportionate to its value or whether publication might be detrimental to the company’s business, and thus indirectly detrimental to its shareholders and creditors [Edwards, 1980, Vol. II, p. 219].

The Committee argued for greater disclosure of information about subsidiaries, directors’ compensation, and in the directors’ report, information on the activities of the company including the difference between the current market value of the fixed assets and their book values. In the balance sheet, the Committee recommended the following disclosures: the aggregate amount of fixed assets acquired or disposed of or destroyed during the year, the basis of valuation of inventories, and the aggregate amount of the company’s quoted and unquoted investments. Land was to be subdivided among freehold, long leasehold or short leasehold. Where fixed assets were shown at valuation — the name of the valuers, their qualifications and the basis of valuation. In the profit and loss account, turnover was to be disclosed and the method of calculation for the year stated. Income from quoted and unquoted investments was to be shown separately.

The Committee also recommended the abolition of the ex-empt private company in order to protect those who trade and extend credit to such companies [Edwards, 1980, Vol. II, p.

223]. The exempt private company had been introduced by the 1947 Act to make available to the one owner or family-owned company the advantages of trading as an incorporated company without requiring from it the disclosure of information.

Companies Act of 1967

The Companies Act of 1967 made it mandatory for all companies incorporated with the privilege of limited liability to file accounts with the Registrar, including an auditors’ report and the directors’ report. Thus, the new Act meant that businessmen formerly using the exempt private company had to decide between the value of maintaining the right of privacy as to their financial affairs, compared with the privilege of trading with limited liability.

The Act accelerated the trend, evident in the earlier legisla-tion examined, of greater public accountability. Nearly all the proposals of the Jenkins Committee relating to disclosure were implemented. Some provisions of the Act may be attributable to the case presented to the Jenkins Committee by the TUC for disclosure of information of interest to Unions and employees and also as a basis for public policy.

CONCLUSIONS

In the 1920s, disclosure was viewed as a matter of internal management to be determined by the articles and the decisions of the directors and members. This laissez faire attitude was underpinned by the belief that the greatest possible freedom should be allowed to those responsible for the management of companies. Professional bodies, making representations before the Greene Committee, felt that compulsory disclosure was not desirable, rather they appealed to the mechanism of sharehold-ers’ democracy at the annual meeting of the company. The En-glish Institute took the view that it was “impossible by legisla-tion to protect fools from their own folly”. Two other factors appear to have been influential. First, secrecy would prevent any advantage accruing to competitors, and second, privacy may also enable the company to weather any temporary setback in the demand for its products. The cult of privacy could be justified on utilitarian grounds, which, as Garnsey notes, shareholders were quick to appreciate, assuming the “givens” of their viewpoint.

The Royal Mail case showed how management could use its, control over information in annual accounts in a manner which can misrepresent company performance. The case established shareholders’ right to candid disclosure of company performance. The correlative duty on management not to conceal information is implied in the fiduciary relationship which management has with its shareholders. The emphasis on rights-based, deontological theories was given further impetus by the war. In particular, it was argued that a directorship should be a species of moral trusteeship, towards the British nation [quoted by Bircher, 1988, p. 117].

No longer was disclosure an intramural affair of the directors and the members of the company. It was recognized that the law must protect the rights of outsiders and that some standards in the presentation of this information were necessary. As the TUC representatives contended before the Cohen Committee in 1944, workers are entitled to know the facts underlying the calculation of wages. Secrecy and secret reserves were contributing to suspicion and a lack of confidence. With the control of companies increasingly in the hands of professional managers, it was argued that the law should protect the investor, the outside creditor, and the general public. The English Institute, which had earlier opposed compulsory disclosure legislation, now strongly advocated it. This may be understood to have enabled them to extract from the government a license for the control of the supply of professional workers to the market. The Institute’s recommendations became the basis of sweeping reforms put forward by the Cohen Committee and subsequently enacted in companies legislation in 1947. The legislation greatly strengthened the auditor’s position by prescribing a minimum of information to be disclosed n all balance sheets and profit and loss accounts. This increased the credibility of financial reports.

A further increase in the number of organizations and per-sons concerned with accounting results is apparent from the list of those giving evidence before the Jenkins Committee in 1960-1961. A leading academic, Professor W. T. Baxter, argued the case for disclosure on the grounds of its role in the efficient allocation of capital for investment. The TUC pressed its call for more equitable returns for labor based on a break down of profit figures for product lines. The TUC requested reports specifically tailored to enable workers to form a view of the company. These extensions of disclosure were justified in utilitarian terms as information which would be in the interests of the public at large [Edwards, 1980, Vol. II, p. 336] accepting the necessities of the employee viewpoint. Some provisions of the Companies Act of 1967 can be attributed to these submissions, for example, s. 17 of the Act required the Directors’ report to disclose the turnover and profitability of classes of business where these differ substantially from each other.

These reforms have been the only sure means of inducing a true and fair view. However, shareholders have been the dominant group whose interests were being served. It was not until 1980 that the Companies Act laid an obligation on directors to consider the interests of employees “as well as the interests of its members.”

The relevance of this study to two contemporary problems will be considered briefly. The first is education. Successive Companies Acts have spelled out with increasing specificity the information necessary for attaining a true and fair view. The difficulty with this approach is that the disclosure laws came to be seen as autonomous from the morality of truth and fairness. Although Benson (later Lord) said in evidence before the Jenkins Committee in 1961 that true and fair has become “ingrained in the profession” [Edwards, 1980, Vol. II, p. 366], values such as these must be actively protected from erosion [Demant, 1952, p. 115]. Today truth and fairness are regarded as problematic [Rutherford, 1985, Puxty et al., 1987, p. 285; Willmott, 1986, pp. 575-6]. As Frankena warned “principles without traits are impotent” [1963, p. 53], and “having a moral ideal is wanting to be a person of a certain sort, having certain traits of character rather than others” [p. 54]. Educators therefore need to rediscover the ethics of character or virtue, a type of ethics that places primacy on the formation of the moral self [Hauerwas, 1974].

The second issue is policy making. Both shareholders and employees have appealed to deontological and utilitarian theo-ries. Each assumes that moral conflict can be resolved by a single fundamental principle. The assumption underlying the capitalist-utilitarian ideal, for instance, is that the common good equals the greatest sum of individual satisfaction. The policy formed on this basis must therefore be the result of a coalescence of self interest. Puxty et al. [1987, p. 275], highlight the hardiness of laissez faire ideology and the significance of the City of London as a world financial center in explaining the regulation which emerged. The authors suggest that the market principle of dispersed competition through economic entrepre-neurship and calculative rationality is predominant.

The problem is that justice in utilitarian terms is conceived only as a procedural requirement. The demand of the common good is to seek, form and maintain a rational community (not just a harmonizing of interests) [Hauerwas, 1974, p. 237]. To formulate and envision such a good and make it efficacious for all accountees remains the challenge which faces policy makers and researchers alike [Willmott, 1986, p. 574].

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