Reviewed by
Christopher Noke

The London School of Economics and Political Science

An historical study of the law relating to company accounting casts light on many aspects of current practice, and the factual content of this book may prove of interest for that reason alone. Hein’s specific purpose, however, is to examine the interaction be tween the developing law and the profession of accountancy, and he uses a historical framework to seek answers to three questions: (i) the extent to which increasing legislative control arose from the failure of the profession to control its own practices, (ii) the source of the pressures for increased control, and (iii) the effect of the controls on the development of accounting and the accounting pro fession.

Although the bulk of the text examines the evolution of the ac-counting aspects of company law since 1844, Hein’s objective requires consideration also of the concurrent growth of the ac-counting profession. There is a useful summary of professional development in both the United Kingdom and the United States, deal ing with such matters as attempts to exclude the unqualified from the profession and attempts to control the qualified. Clearly one chapter cannot do justice to this topic but it helps lay the ground-work for some of his conclusions—in particular that, despite the highminded principles of most of the professional societies, their inability to control those participating in the profession and to en force those principles on clients and the business community in general led to other ethically-minded groups (lawyers, chambers of commerce and the like) seeking legislative controls to strengthen the position of accountants. Written before the advent of account ing standards, the book contains warnings of further governmental intervention if the profession (in both countries) fails to put its house in order.

Apart from a chapter of doubtful relevance on the history of the corporation through boroughs and gilds merchant prior to 1844, the legal aspects of accounting are treated by topic rather than by sim ple chronology. The book contains separate chapters on the audi tor, the balance sheet, profit and loss statement and group ac counts. The drawback of this arrangement is that it is often difficult to get an overall impression of the impact of each Act, and as a narrative the end result is not as clear as in, say, Edey and Panit-pakdi’s essay ‘British Company Accounting and the Law 1844-1900’. (Incidentally, despite an extensive bibliography, Hein makes no reference to that important essay, published in Studies in the History of Accounting in 1956. Edey is mentioned on page 240 in connection with his evidence to the Jenkins Committee, but his name is misspelled.)

Nevertheless, Hein deals with much of the material—particularly the abortive attempts at legislation between 1877 and 1899—in greater detail than is usually found elsewhere. The chapters on the Prospectus and Dissolutions touch upon important areas of the ac-countant’s work often overlooked in similar studies. He includes from the report of the Gladstone Committee a nice example of an early prospectus in which one of the named auditors was the porter at the company, and the table he produces from the report of the 1867 Select Committee showing the number of liquidations handled by accounting firms—one firm having an average of 20 per partner —may well be a pointer to the comparative indifference then shown by some accountants to financial reporting.

However, as far as control of financial statements is concerned Hein perhaps places insufficient emphasis on the Cohen Report of 1945, which, among other things, adopted verbatim the definition

of a balance sheet in the submission of the ICAEW (probably the first time that such a committee had considered the function of that statement) and accepted the Institute’s recommendation to delete reference to ‘values’ of fixed assets contained in earlier legislation, effectively rooting financial reporting in the historical cost con vention.
The main primary sources used are Committee Reports, minutes of evidence, draft bills and final enactments, and from the weight of material available the author has chosen some apt illustrations. Those familiar with the part played by Sir George Jessel in early English dividend law will appreciate his remarks to the 1877 Select Committee: “As I have said before I have an utter distrust of these pieces of paper called balance sheets.” (p. 199) and “Profit, of course, is a mere matter of estimate.” (p.. 250) But even good quo tations do not bear repetition and Robert Lowe’s famous remark about the state having “no desire to force on these little republics any particular constitution” does not warrant quoting twice. Need-less repetition is, perhaps, the most irksome feature of the book.

There are problems in concentrating almost exclusively on par-liamentary and similar documents. For example, we are told (p. 77) that “it was not until 1907 that the ordinary business corporation was again required to publish a balance sheet.” (The fact that Hein states (p. 192) “the production of a balance sheet did not again become compulsory for ordinary companies until 1908,” a fact re-asserted (p. 348), is an inconsistency one would not expect to find in a doctoral dissertation.)

But while it is true that the 1900 Act did not spell out the need for a balance sheet, that need appears to be implied by the sections on audit, and Buckley J.’s decision in Newton v. Birmingham Small Arms in 1906 may be interpreted in this way. Hein, however, does not examine how any of the statutes were interpreted in the courts and the resultant impact of case law on the practice of accounting. There is no mention of any of the dividend cases, nor even of the Royal Mail case. Some of his conclusions may also be slightly coloured by his choice of primary sources. While using the min utes of evidence, he rightly highlights the inconsistencies and voltes faces of many of the professional bodies (in relation, for example, to group accounts, secret reserves and qualifications of auditors); his overall conclusion, that “accountants abnegated their potential role as leaders in developing accounting legislation” (p. 354) over looks the potential impact of unofficial pressures. For example, even though the ICAEW made its first formal submission to a com pany law amendment committee in 1925, Aranya has suggested, in his study of pressure groups, that in many respects the 1900 Act reflected the views of the ICAEW as presented in The Accountant, rather than those of the Davey Committee on whose recommenda tions it was nominally based.

The book was written in 1962 while the last major company law amendment committee was sitting. The subsequent entry of the UK into the European Economic Community has brought about fun-damental changes in the way amendments to company law are con-sidered. Hein’s note that throughout this period there was a con tinuing trend of recommendations towards a uniform balance sheet, and the imposition of prescribed formats of accounts in the Com panies Act 1981, as a result of the EEC 4th Directive, both illus trates that change and rounds off a part of his story. Accountants who believe themselves too constrained by such prescription will find little joy in Hein’s observation (p. 242): “Once statutory treat ment of an item is achieved it is rarely challenged in the sense of a reversal towards greater freedom of presentation.”