Accounting Principles, Internal Conflict and the State: The Case of the ICAEW, 1948–1966
Abstract
The series of Recommendations on Accounting Principles (RoAPs) issued by the Institute of Chartered Accountants in England and Wales (ICAEW) between 1942 and 1969 demonstrated the willingness of a professional accounting body to take a degree of responsibility for the form and content of British corporate financial reports. RoAPs 12 and 15 focused on the enduring problem of whether and how to take account of changing prices when constructing published financial reports. This article reveals disagreement between practising and industrial members in general, concerning how to address this issue, and examines the way in which the Council of the ICAEW sought to resolve this internal conflict within the constraints imposed by the need to be seen to behave in the ‘public interest’. Major discord between the two main categories of membership emerged within the operation of the Taxation and Financial Relations (T&FR) Committee. What were judged by the ICAEW's leadership to be the extreme views of the industrial members were marginalized and suppressed by bypassing the normal channel for designing RoAPs and, instead, formulating them at the higher level of the Parliamentary and Law (P&L) Committee. The conflict between practising and industrial members continued in the period following the publication of RoAP 15, when further attempts were made to tackle the problem of accounting for inflation.
The use of historical cost as the measurement basis when preparing the profit and loss account and balance sheet came under serious challenge, in the accounting literature, in the 1920s and 1930s. It was the rapidly rising price levels in France and Germany (hyper-inflation caused the collapse of the German mark in 1923) that generated a literature critical of historical cost accounting and advocating, instead, the adjustment of accounts for changes in the general price level (Clarke, 1980, p. 91). German writers, such as Schmidt (1930, pp. 239–40; 1931, pp. 291–2), made the case for the restatement of assets at replacement cost, and this approach found favour also in the Netherlands and the United States.1 In Britain, prices had risen rapidly during World War I but had dropped back to pre-war levels in the 1920s. A similar trend failed to occur following World War II; indeed, the price level continued to rise fairly rapidly in the late 1940s and accountants in Britain at last turned their attention to the problem of accounting for inflation. It has been a major issue ever since, and remains unresolved despite continuous debate; the publication of two Recommendations on Accounting Principles (RoAPs), and the construction of Statements of Standard Accounting Practice (SSAPs)2 that gave recognition to two contrasting models of financial reporting; and the construction of the Statement of Principles for Financial Reporting (ASB, 1999) which is designed to provide the conceptual basis for the Financial Reporting Standards presently in issue.
Two decades ago, Tweedie and Whittington (1984, p. 1) pointed out that
the inflation accounting debate is merely one example of the problems facing accounting. There is a lack of generally accepted accounting principles because a changing environment has made traditional principles obsolete, and the process of evolving new principles is essentially political, involving the reconciliation of the conflicting interests of various groups of preparers and users of accounts.
The depth and complexity of the ‘conflicting interests’ is demonstrated in this article, which reveals the failure to reconcile, in the 1950s and 1960s, the divergent priorities of the membership of a single professional accounting body, the Institute of Chartered Accountants in England and Wales (ICAEW). The views of that organization were of particular significance for reasons which include the following: it was comfortably the largest accounting association3; it had established its credibility with the state by issuing a series of RoAPs that were influential in constructing the accounting regulations introduced by the Companies Act 1948 (Zeff, 1972, p. 16; Bircher, 1991, pp. 231–2); and, compared with most other accounting associations at that time, it possessed chartered status (Willmott, 1985, p. 47).
PURPOSE
The Council of the ICAEW issued two RoAPs on inflation and accounts: RoAP 12, Rising Price Levels in Relation to Accounts, in January 1949; and RoAP 15, Accounting in Relation to Changes in the Purchasing Power of Money, in May 1952. In Edwards’ (1989, p. 251) estimation: ‘No. 12 gave unreserved support for the continued use of HCA [historical cost accounting] but, after criticism, No. 15 signalled a minor tactical retreat by advocating the continued use of HCA “unless and until a practical and generally acceptable alternative is available”’. To the outside world, the stance of the ICAEW in adhering to the historical cost basis was robust and unequivocal. This image was acknowledged by The Accountant.
In Great Britain the Institute's recommendations, which carry the authority of the Council, are issued without details of any dissentient views of any of the members of the Council; it seems reasonable, therefore, to assume that before publication the Council will have reached a degree of consensus amounting for practical purposes to unanimity and that without substantial unanimity no recommendation would emerge. (15 January 1949, p. 33)
Edwards (1989, p. 251), Tweedie and Whittington (1984, pp. 45–6), Mumford (1979, pp. 100–1; 1983, p. 71), Zeff (1972, p. 17) and Gynther (1966, pp. 21–32) acknowledge the existence of inter-organizational disagreement between the ICAEW and other accountancy bodies which favoured the adoption of replacement cost accounting, but they pay little or no attention to the possibility of intra-organizational conflict within the ICAEW. Gynther and Mumford recognize the tension produced by the different priorities of practising and industrial accountants, within the arena of inflation accounting, but do not address this issue in the context of the formulation of RoAPs. Zeff (1972, pp. 12–13) acknowledges the possibility of conflict arising within the operation of the Taxation and Financial Relations (T&FR) Committee and that, in such circumstances, Council might decide to override the wishes of the T&FR Committee:
The votes of the Council on Recommendations were never revealed.4 Dissents and dissenting opinions were not recorded . . . Nothing about any modifications made by the Council was disclosed . . . It was not known, of course, the extent to which any Recommendation embodied the views of the T. & F. R. Committee. It was entirely possible for a Recommendation not even to originate in the committee: It might have been written by the Council itself.
However, the absence of total unanimity within the ICAEW on the specific issue of inflation accounting is referred to by Zeff (1972, pp. 24–5) only when commenting on factors contributing to the creation of the Research Committee in 1964:
Another factor may have been the frustration experienced by several members of the Council in trying to persuade their brethren on the merits of replacement-cost or price-level accounting. At least one serious attempt had been made since 1954 to change the Council's thinking on Recommendation 15, but it lost . . . The first publication to be identified with the [Research] committee appeared in 1968. A 24-page booklet entitled Accounting for Stewardship in a Period of Inflation . . . The possibility of issuing such a document had been referred to the [Research] committee following the failure of the most recent drive, which had consumed almost four years, to dissuade the Council from its position in Recommendation 15.
In the above literature, not only the existence of friction between industrial and practising members within the ICAEW, but also the significance of their conflicting priorities, is left unexplored. It is therefore the purpose of this article to undertake an in-depth analysis of the internal tensions that arose between different categories of membership within a professional body and the governance issues that resulted. The arena for this examination is the developmental process of RoAPs 12 and 15 which, as we shall see, gave rise to disagreement between practising and industrial members in general, concerning how to resolve the theoretical and practical accounting issues that needed to be addressed. We examine the way in which the Council of the ICAEW sought to settle this internal conflict within the constraints imposed by the need to be seen to behave in the ‘public interest’. The article also builds on Zeff's earlier work to show that it was continuing internal conflict between practising and industrial members that subsequently prevented the ICAEW from formulating further RoAPs on inflation in the period up to 1965.
The remainder of this article is structured as follows. First, we draw attention to the existence of different priorities, within the membership of the ICAEW, concerning the nature and purpose of profit measurement procedures. Next, we review the way in which the T&FR Committee operated when preparing technical documents, and focus on the friction between the T&FR Committee and the machinery of Council that was responsible for controlling technical activities within the ICAEW, the Parliamentary and Law (P&L) Committee. The remaining sections explore the nature and significance of the processes followed when developing the RoAPs on inflation and accounts, and then investigate further related unsuccessful initiatives in the period up to 1965 before presenting our concluding remarks. The main primary sources consulted for the purpose of this study are located at the office of the ICAEW in Milton Keynes, England.
CAPITAL MAINTENANCE CONCEPTS; PROPRIETORSHIP VERSUS ENTITY
The ICAEW was created by Royal Charter in 1880 and, as Willmott et al. (1993, p. 71) have pointed out, this imprimatur of the state ‘confers a privileged status on a trade association in the sense that it differentiates those who qualify as members from other providers of (accounting) labour’. Although such recognition may be an important event in the pursuit of a professional project (see Larson, 1977, p. xvii; Macdonald, 1985, p. 542; 1995, p. 188), it is a two-edged sword; recognition is granted ‘in exchange for an undertaking that this function will be performed “in the public interest”’ (Willmott et al., 1993, p. 71). The ability of an association to deliver its own side of the bargain is likely to become more problematic if, and when, the membership becomes dispersed and segmentalized. The association is then faced with the task of reconciling and balancing not only the public interest with the self-interest of its members, but also coping with the fact that the self-interest of different segments might conflict.
The formation of the T&FR Committee in August 1942 (renamed as the Taxation and Research [T&R] Committee in 1949 and the Technical Advisory Committee in 1964) and the publication of technical documents by the ICAEW have been recognized as key landmarks in British accounting history (The Accountant, 30 October 1943, p. 205) by reflecting the willingness of a professional accounting body to take formal responsibility for the development of improved accounting practices. Indeed, the formulation of the series of RoAPs5 has been hailed as the T&FR Committee's greatest achievement.
The T&FR Committee was initially created also to help cope with the problems created by the increasing segmentation of the ICAEW-led accounting occupational group. The ICAEW had been formed to represent the interests of public accountants, but by 1939 the number of qualified members who had ‘left the profession’ to take up full-time posts in industry or commerce had risen to 1,612 compared with 5,210 in practice at that time (ICAEW membership list, 1939). Many of these industrial members believed that the ICAEW failed to represent their interests and was not even concerned to hear their views, as epitomized by the absence of even a single representative on Council (see Zeff, 1972, p. 7; Smallpeice, 1944, p. 45). The T&FR Committee, comprising members drawn from practice and industry, was created as a body designed to help achieve a closer and more effective liaison between the two groups and to provide industrial members with a voice in decision-making processes of the ICAEW.
Despite a common professional education, it does not necessarily follow that industrial members’ views on technical matters will be in accord with those held by practitioners. This is principally because, as the ICAEW admits, the problems that industrial members have to face are ‘of a different character in their practical application to those confronting the practising members’ (Ms.28432/19). A study by Hastings and Hinings (1970, p. 358) confirms that industrial and practising accountants attach different weights to shared professional values: ‘Chartered Accountants employed in industry would [be expected to] exhibit less attachment than do Chartered Accountants in public practice to four professional values (caution, exactitude, anti-theoretical pragmatism, professional exclusiveness) but no lessened attachment to the other two professional values (quantification and rationality)’. It is of course the case that one reason for including people with different backgrounds, on any committee, is to improve the available knowledge base. But, variations between professional groups in the level of attachment to particular professional values can produce a conflict that is hard to reconcile.
A vital issue in the inflation accounting debate, and the central focus of this article, is the nature of capital to be maintained intact when measuring reported profit. Tweedie and Whittington (1984, pp. 281–2; see also Tweedie, 1979, p. 18; Whittington, 1981a, pp. 5–6) delineate three possibilities in a manner suitable for our purposes:
- 1
financial capital—the equity stake in an enterprise in money terms;
- 2
real financial capital—the equity stake in an enterprise in real terms (the proprietary concept); and
- 3
operating capacity capital—the ability of the enterprise to maintain its ability to provide goods and services (the entity concept).
Financial capital is, of course, the historical cost-based capital maintenance model which was, and still is, the subject of attack from proponents of price-level adjusted models. We will see evidence of the fact that the interests of practitioners as auditors, and the dominance of practitioners within the ICAEW, caused its leaders to persistently emphasize the criterion of objectivity (Whittington, 1981b, p. 70; Westwick, 1980, p. 356). Their assessment of alternatives to historical cost accounting was, therefore, always cautious and pragmatic.
Where price-level adjusted models for financial reporting were the subject of serious discussion, a common area of dispute concerned the purpose of the profit measurement process; whether it was to maintain intact the ‘real financial capital’ (the proprietorship focus) or the ‘operating capacity capital’ (the entity focus) of the enterprise. In deciding between these alternatives, the assessment made by Gynther (1966, p. x), writing during the time-frame of this article, is insightful. He argues that ‘the attitude adopted depends on whether one tends to look on a firm from without or from within’. Gynther continues (pp. 44–5):
If it is felt that the whole purpose of accounting is to look after the interests of the shareholders or proprietors, then it is almost certain that the use of one general index will be favoured for profit determination purposes; so that the number of purchasing power units contained in the monies subscribed to the business by shareholders will be maintained throughout a period of changing prices. However, if it is believed that the whole or prime purpose of accounting is to assist the entity (the firm) in its daily struggle (and that only in this way will the interests of shareholders be looked after in the long run), then it is almost certain that the use of specific indexes will be favoured, i.e., so that the physical assets of the business will be maintained during the period of changing prices.
Practising accountants, in Gynther's (1966, pp. 44–5) estimation, favour the use of a general index because their duties relate to the protection of the interests of shareholders, whereas industrial accountants prefer to use a specific index (replacement cost accounting) because their priority is to maintain intact the operating capacity of the company for which they work (see also Gynther, 1967, pp. 282–5). Mumford (1991, p. 130) makes the same point and also the following observation: ‘when faced with price inflation, auditors have typically preferred using historical costs to current values, as being more objective and less open to manipulation’. He also supplies a specific example based on an interview with E. H. Davison. When Davison, a member of the ICAEW who had worked in industry for some years, became chief accountant of Courtaulds, he pressed for the adoption of replacement cost accounting, but the finance director ‘had been appointed straight from Price Waterhouse, and opposed innovation along these lines’ (quoted in Mumford, 1991, p. 130). Those differences between the mindsets of accountants in business and in practice will be shown to have significantly undermined ICAEW initiatives designed to resolve the inflation accounting issue.
RULES GOVERNING THE OPERATION OF THE T&FR/T&R COMMITTEE
As noted above, the T&FR Committee was created, in 1942, to help establish an effective liaison between practising and industrial members through collaboration in the study of technical matters (Ms.28432/19; Ms.28423, p. 2). In particular, the terms of reference of the General Advisory Sub-Committee (GASC), the body initially responsible for drafting RoAPs within the T&FR Committee, included the requirement ‘to consider, inter alia, general questions of accounting principles and procedure and any other matters of mutual interest’ to practising and industrial members (Ms.28423, p. 11).
The mechanism for producing technical documents, particularly RoAPs, is explained by Zeff (1972, pp. 11–12), and its main features are summarized in Figure 1.6Zeff (1972, p. 10) also explains why Council retained close control over the content of technical documents, including RoAPs, drafted by the T&FR Committee: ‘An axiom of the English Institute . . . is that only the Council may authorize the issuance of guidance statements to members. While factual surveys, in the form of books, booklets, or short papers, may carry the name of an Institute committee, the Council must authorize their publication.’
GENERAL STRUCTURE OF THE PRODUCTION OF TECHNICAL DOCUMENTS THROUGH THE ACTIVITIES OF THE T&FR COMMITTEE
The ICAEW's leadership was keen to retain close control over technical outputs, partly in order to ensure that their content maintained an appearance of neutrality towards sectional interests such as the owners of business. Such neutrality, the leaders of the ICAEW noted, would foster the image of an institution behaving independently and in the ‘public interest’, and thereby help achieve legitimization of itself with relevant government departments. The following examples are manifestations of this conviction.
The minutes of the Taxation Sub-Committee (TSC) meeting of the T&FR Committee, held on 17 September 1943, state: ‘Mr. Carrington [chairman of the TSC] . . . has explained that the suggested representations [to the Inland Revenue]7 might destroy the impartial position now held by the Institute and its members’ (Ms.28424, p. 20).
A report of the TSC on taxation on overseas profits, dated 18 November 1952, concluded:
The Taxation Sub-Committee is unable to find any logical principle running through any of the methods . . . It may well be that arguments both for and against such methods can be formulated on the basis of political considerations or sectional interests. The Taxation Sub-Committee considers that this is not a field into which the Council of the Institute should be drawn. (Ms.28424, p. 191)8
The minutes of the P&L Committee (25 February 1952) report correspondence from J. Clayton, a member of the ICAEW and director at Broadcast Relay Service Ltd, to W. H. Lawson, chairman of the P&L Committee9 and a partner in Binder, Hamlyn & Co., criticizing evidence drafted for submission to the Royal Commission on the Taxation of Profits and Income:
In the current document . . . the Council stands in grave danger of losing its objectivity by advocating special relief for owners of businesses. It may well be that the F.B.I. or some other body representing the sectional interests involved may properly put up powerful arguments for such relief, but there is no indication at all in the document that all the evidence has been weighed by the Council which would justify this grave departure from objectivity . . . the Council appears to be shifting its objective position merely as a result of the heavy pressure groups which, at least externally, have been exercising undue pressure upon it . . . It would be understandable in these circumstances if the Council of the Institute were to advocate special tax concessions to . . . the holders of fixed interest securities, the value of whose holdings have been at least halved by inflation in the last decade. But for the Council to advocate special tax concessions to those who in general have benefited from inflation at the expense, presumably, of those who have suffered from it, is, to use the mildest of expressions, ‘truly Gilbertian’[reasoning]. (File 14-5-20)10
The original draft memorandum was then amended by the P&L Committee to make it more objective and to ‘avoid any possibility of Council being open to the criticism that it had taken sides as between one class of taxpayer and another’ (File 14-5-20).
The ICAEW was equally determined to avoid any accusation of connection with purely interest-representing organizations. The minutes of a meeting of the P&L Committee held on 21 November 1966, for example, insist that it is ‘inappropriate for the Council to seek to establish a closer official relationship with the C.B.I. [Confederation of British Industries], as such a course might compromise the Council's independence’ (P&L Committee Minutes Book Q, p. 31).
The above episodes help to explain the P&L Committee's determination to maintain strict control over the T&FR Committee when fulfilling its responsibility for drafting technical documents, but intervention sometimes produced serious friction between the two bodies. In the course of preparing RoAP 7, entitled Disclosure of the Financial Position and Results of Subsidiary Companies in the Accounts of Holding Companies, in May 1944, the T&FR Committee submitted a draft to the P&L Committee that was approved only after extensive amendment. The chairman of the T&FR Committee, F. R. M. de Paula, vice-chairman and managing director of Harding, Tilton & Hartley,11 instructed S. W. Rowland, secretary of the T&FR Committee, to write to R. W. Banks, secretary of the ICAEW:
It is fully recognised that the ultimate functions of the [T&FR] Committee are advisory only, but, in view of the fact that very serious consideration is given . . . to the various questions arising and that representatives spend considerable time and trouble in attending meetings of the [T&FR] Committee and of its sub-committees, it is felt to be very desirable that the position in which the [T&FR] Committee stands towards the Council should be defined as clearly as the circumstances allow. There is no question that the authority of the Council is fully acknowledged, but it is to be feared that if the action taken by the Council on matters which have been carefully sifted by the whole organisation should differ materially from the advice tendered there is evident danger that interest and enthusiasm diminish . . . and that if the final result differs greatly from the T&FR's draft disappointment may ensue. (Ms.28432/20)
Drastic amendment to a draft memorandum from the T&R Committee, this time on ‘Simplified Accounting Statements’, occurred again in 1950. The T&R Committee, in accordance with normal procedure (Figure 1) submitted its draft first to the joint representatives of the P&L and T&R Committees and then, in revised form, to the P&L Committee with the clear recommendation that ‘it should be issued as one of the series of the recommendations on accounting principles’ (T&R Committee Minutes Book B, p. 2). At a meeting held on 25 September 1950, the P&L Committee resolved that ‘a recommendation on this subject should not be issued by the Council and that the draft recommendation should be referred back to the joint representatives for redrafting in the form of a memorandum’ (T&R Committee Minutes Book B, p. 13; Ms.28420/4, p. 187, emphasis added) which was, in due course, issued as a Council document to all members. The minutes of a meeting of the T&R Committee, held on 14 December 1950, display the depth of dissatisfaction that these actions created amongst the membership of the T&R Committee:
After further discussion, mainly on the altered and abbreviated nature of the document submitted to the Council as compared with the draft originally submitted by the Taxation and Research Committee, the following resolution was passed on a vote of thirteen in favour and eight against: that the Parliamentary and Law Committee be requested to withhold publication, in their present form, of the NOTES ON STATISTICS RELATING TO INCOME OF AND CAPITAL EMPLOYED BY COMPANIES which the Council has approved for issue to all members of the Institute pending further consideration by the original drafting sub-committee [of the T&R Committee]. (T&R Committee Minutes Book B, p. 19)
The T&R Committee's request to withhold publication of the memorandum and refer it back to the original drafting sub-committee was accepted by the P&L Committee as ‘a special decision in the circumstances of this particular case and not as a precedent’ (Ms.28420/4, p. 226; Council Minutes Book O, p. 215). However, in view of the Council having already decided to proceed, the memorandum was issued to members, as originally scheduled, after only minor amendment (Ms.28420/4, pp. 226, 236).
There were many other occasions when the P&L Committee was dissatisfied with the content of technical drafts emanating from the T&FR/T&R Committee. In most of these cases, the P&L Committee refrained from openly rejecting draft proposals, but nevertheless imposed its authority by returning drafts, for further revision, until satisfied with their content (e.g., RoAP 8, Form of Balance Sheet and Profit and Loss Account, see Ms.28432/20). The P&L Committee also used its overriding power to place restrictions or conditions on research work undertaken by the T&FR/T&R Committee. Even more fundamentally, the P&L Committee sometimes decided to deal with matters directly, as in the case of memoranda on the content of Finance Bills, and thus avoid troublesome friction with the T&FR/T&R Committee. In relation to the series of RoAPs, the largest degree of interference occurred in the formulation of numbers 12 and 15.
DEVELOPMENT OF ROAP 12
According to Mumford (1979, p. 98; see also Tweedie and Whittington, 1984, p. 44), ‘domestic inflation reached a rate of 6.7% in 1947 and 7.8% in 1948, rates unprecedented in Britain in peacetime this century’. Against this background, company directors displayed growing concern with the ‘rapacious “effective rate” of corporate taxation’ (Zeff, 1972, p. 17). Council was aware of these concerns with, for example, T. B. Robson, ICAEW president 1952–53 and a partner of Price Waterhouse & Co., drawing attention of the P&L Committee in 1948 to the fact that the accounting treatment of inflation was ‘very much in the public eyes at the moment’ and ‘receiving much attention in the press’ (File 12-32-1).
The issue of inflation and accounts was raised, within the ICAEW, at a meeting of the London regional T&FR Committee on 15 December 1947. E. H. Davison12 presented a paper in which he argued that the ‘great increase in the cost of capital goods which has taken place during the last eight years and is still continuing tends to throw doubt on the traditional bases of providing for depreciation and necessarily gives rise to consideration of the true object of making such provisions’. He continued:
The current methods of providing for depreciation do not take into account the fact that balance sheets and profit and loss accounts, expressed in money values, need correction for fluctuations in their standards of expression. Such corrections have, in the past, been relatively small and have consequently been ignored; fluctuations are now clearly so great that adherence to the conventional methods of provisions for depreciation may not only be misleading but dangerous . . . The implications of a suitable announcement by the Institute on the whole question would be very great, notably in the direction of converting the Revenue Authorities to the correct view that Profits Tax and Income Tax are being levied to an increasing extent on capital. (File 12-32-1)
In a paper previously presented at a meeting of the London and District Society of Chartered Accountants held on 19 November 1947, Davison (1947, p. 391) also stated that, ‘I believe it is held, in some quarters, that the question of depreciation on a replacement basis is a matter of financial prudence or financial policy. This view is, I believe, quite clearly incorrect. The question is one of the ascertainment of profit.’ Davison therefore favoured reform for three reasons: to provide fully for the replacement cost of fixed assets13; to prevent tax being levied on capital; and to ensure that profit was a fair measure of business performance. To meet these objectives, he put forward the following recommendation for consideration by the T&FR Committee:
It is the responsibility of business management to provide for replacement of fixed assets as they fall out of use. The responsibility should be reflected in the accounts (a) by making provisions for depreciation (by whatever name called) which are adequate to ensure that the physical assets are maintained and (b) in so doing, by taking into account additional costs of replacement arising out of a rise in prices. Unless such provisions are made, profits will be overstated or, conversely, losses understated. (File 12-32-1)
T&FR Ad Hoc Sub-Committee
The president of the ICAEW, G. D. Shepherd, responded by instructing the Research Programme Sub-Committee of the T&FR Committee to consider the question of depreciation in relation to replacement costs. In due course, an ad hoc sub-committee, comprising five industrial members and one practising member, was appointed14 on 15 April 1948 to consider
The accounting treatment of amounts set aside, in addition to provisions for depreciation based on costs, to provide for the cost of replacement of fixed assets at increased prices, bearing in mind paragraph 5 of Recommendation IX15 and the following points in particular: disclosure of the fact that such amounts have been set aside, the method of calculation, whether such amounts are provisions or reserves, how the amount so set aside are to be utilised and the procedure when the asset concerned is replaced. (Various Sub-Committee Minutes Book A, p. 70)
The London regional T&FR Committee which, as we have seen, had been influential in raising the profile of the issue within the ICAEW, prepared a memorandum to serve as a starting point for the work of the ad hoc sub-committee. The memorandum argued that any amount set aside to provide for the increased replacement cost of fixed assets should be separately stated in the profit and loss account, as a charge against earnings, and in the balance sheet as an amount credited to ‘Replacement Reserve’. One of the five industrial members on the ad hoc sub-committee, F. R. M. de Paula,16 immediately made clear his staunch opposition to any proposal to charge extra depreciation ‘above the line’:
An increase in the price level inevitably results in a corresponding increase in the capital requirements of a business. The financing of an undertaking is the responsibility of its directors. This increased finance may be provided in various ways, i.e., by ploughing back profits, by temporary borrowing and/or by increasing fixed capital. The ultimate amount required cannot be estimated in advance. Can it be laid down that provision for this extra capital must be a charge on profits? There is nothing in the Law compelling a company to adopt the most prudent policy.17 (Ms.28432/22)
Other members appear to have been equally adamant in their support for the proposals put forward by the London regional T&FR Committee. F. Sewell Bray argued that
the economist, having foremost in mind the maintenance of productive capacity, argues that it is real assets rather than monetary capital that must be maintained intact and that depreciation provisions should be calculated with this end in view rather than on the basis of original cost. This point of view is frequently expressed by saying that real rather than money capital must be kept intact or that capital must be kept intact in real terms.18 (Ms.28432/22)
P. M. Rees, chief accountant at Lever Brothers & Unilever, also favoured basing the depreciation charge on the replacement cost of fixed assets and cited the Companies Act requirement for accounts to show a true and fair view to justify this stance (Ms.28432/22). The memorandum prepared by the ad hoc sub-committee, however, is testament to de Paula's powers of persuasion underpinned by his authoritative position within the ICAEW:
It is a principle of company accounting that capital must be kept intact. This has always been understood to mean the money capital subscribed by the proprietors . . . In a period of sharply rising prices it is obvious that if a company is to continue its operations it must either refrain from distributing its profits in full so as to conserve resources to finance future replacement, or alternatively, seek new capital when the occasion arises by either temporary borrowing or new subscriptions. These are questions of policy and the decisions made in individual cases are capable of being recorded as such in the accounts; but the accounts are essentially a record and not a programme . . . The profit and loss account should show a true and fair view of the profit or loss for the year and it may be argued that it does not do so unless the charge for usage of fixed assets is shown in the same depreciated currency as the revenue brought into account. The profit or loss, however, is the difference between the amount for which goods or services are sold and their cost. It is not part of the function of accounting to conjecture what might have been the result if, instead of the conditions actually experienced, the circumstances had been different either as regards the time and method of acquiring fixed assets, the time and method of fixing selling prices, the productive efficiency of the company, the value of the currency or otherwise. (Ms.28432/22, emphasis added)
Consistent with the above lines of argument, the memorandum insisted that provisions for depreciation should continue to be based on historical cost and that any amounts set aside to ‘provide additional capital’ for the increased cost of replacement are ‘matters of financial prudence’ and should be reported as ‘an appropriation in the profit and loss account’ and as ‘a capital reserve’ in the balance sheet (Ms.28432/22). The memorandum was circulated for comment to the regional T&FR committees. The London regional T&FR Committee did not ‘pull its punches’:
The Committee are not in favour of the issue of this document; they are not in sympathy with the general approach indicated in the preamble which savours of defence rather than of constructive proposals and they disagree with some of the statements made therein and some of the recommendations. (Ms.28432/22)
Having considered this and other comments, the ad hoc sub-committee revised the draft memorandum and presented its recommendations in the following amended form
- 1
That provisions for depreciation of fixed assets should continue to represent amortisation of the cost of those assets;
- 2
That amounts set aside out of profits to finance a possible increase in the cost of replacement of fixed assets should be stated separately in the profit and loss account and retained as a reserve in the balance sheet. (Ms.28432/22)
The previous clear statement that any amount set aside to finance the increased cost of replacement was a matter of financial prudence was deleted, while the appropriate location in the profit and loss account of any additional deduction for depreciation was rendered ambiguous by deleting the words ‘as an appropriation’. It is reasonable to suspect that these changes were made to help counter further objections from regional T&FR committees, particularly London. However, the overall intention of the memorandum remained unchanged, with the explanatory section stating that ‘[t]he profit or loss . . . is the difference between the amount for which goods or services are sold and their original cost’ (Ms.28432/22, emphasis added). The views of de Paula prevailed.19
Joint Representatives Meeting
On 17 June 1948, the T&FR Committee resolved that the memorandum prepared by its ad hoc sub-committee should be submitted, with minor amendment, to a meeting of joint representatives of the P&L and T&FR committees with the recommendation that it be published as RoAP 12. However, the joint representatives, comprising nine practising and two (Clayton20 and Rees) industrial members (see Appendix B), judged the memorandum to be ‘unsatisfactory’ (Ms.28420/4, pp. 70–1). T. B. Robson, chairman of the P&L Committee,21 was particularly critical, commenting that, ‘[t]he more I look at the draft recommendation the greater doubt I have about it. The document seems to say the same thing as we have already said in Recommendation IX’ (File 12-32-1).
It was noted above that, where the P&L Committee disagreed with proposals from the T&FR Committee, it could return the draft for further consideration. But the decision was instead made to allow the joint representatives to undertake the required revision of the T&FR Committee's document. The minutes of a meeting of the T&FR Committee, held on 14 October 1948, seem to acknowledge defeat.
It had been considered that the subject required to be treated on a wider basis than the [T&FR] committee's draft recommendation and a more comprehensive document had been prepared which was still under consideration. The changes made were such that it might be necessary for the Parliamentary and Law Committee, if it decided to submit a document to the Council, to submit it as its own and not as a T.&F.R. document. (Ms.28423, p. 150)
The industrial members of the T&FR Committee disagreed with the decision of the joint representatives to conceptualize the additional cost of replacement as a matter of financial prudence and thus account for it as an appropriation of profits. In a letter to the assistant secretary of the T&FR Committee, F. M. Wilkinson, dated 19 November 1948, Rees suggested that
I have a feeling that it [the proposed document] lacks a definite recommendation as to the action—if any—an auditor should take. That is to say, whether or not he should comment in his Report if no additional amount—or, in his opinion, an inadequate amount—has been set aside out of profits to meet the position described. Can he state that the Profit & Loss Account gives a ‘full and fair’ view of the results if no action is taken by the company? My personal opinion is that he should comment if necessary. (File 12-32-1)
Focusing on the possible erosion of capital and the consequent risk of under-capitalization of the corporate sector, Davison's assessment of the amended draft document was even more derogatory:
The latest recommendation on accounting principles [to be] issued by the Council of the Institute will cause disappointment and dismay over a wider field than the accounting profession alone. Indeed, only the tax-gatherers are likely to welcome the recommendation since it strengthens their prerogative, for a further span, of milking industrial Capital under the guise of an ‘income’ tax . . . Surely the basic principle of accounting is, and always must be the truth. Profit figures, as they are now shown under conventional ‘historical’ accounting methods, do not reveal the whole truth, since they are based on the assumption, by now exploded, that money has a stable value . . . To arrive at a figure of ‘real’ profit, or indeed a figure of profit that has any meaning at all, some correction must be applied to the monetary measure. To recommend that such a correction may be applied as a matter of ‘financial prudence’ is to abrogate the Accountant's responsibility for stating the whole truth. (File 12-32-1)
Some practising members were sympathetic to the industrial view. For example, G. F. Saunders, partner in Harmood-Banner, Lewis & Mounsey of Liverpool, suggested to Wilkinson that
There is a considerable feeling in industry that some allowance should be made for increased replacement cost both in connection with taxation and Government costing, but if we are to bring out a recommendation asserting that the provision is merely a matter of appropriation of profit, it seems to me that we shall have great difficulty in persuading the Government to alter their views on these lines in any shape or form. (File 12-32-1)
In general, however, the practising members dismissed the industrial members’ arguments on the grounds that they were too radical, politically inspired or inconsistent with accounting principles. Wilkinson, for example, described Davison as someone who held ‘extreme views’ and ‘for whom, nothing short of the economist's method will be satisfactory’. He continued:
Personally I feel that if the Institute concedes the economist's view that a true and fair view of the profit can only be given if the usage of fixed assets is charged in depreciated currency instead of on original cost, this would represent an entire break from the principle laid down in Recommendation IX and also that specifically stated in Recommendation X [namely]‘profit or loss on trading is the difference between the amount for which goods are sold and their cost’. (File 12-32-1)
In a similar vein, G. G. G. Goult, partner in Ensor, Son & Goult of Ipswich, argued that:
I do not think that the Institute should associate itself in any of its conclusions with the present ‘agitation’ to charge profits with ‘hypothetical’ depreciation or roam into the field of economic theory . . . I cannot avoid the idea that . . . the memorandum should adhere rigidly to a concluding statement of accounting principles and not be drawn into political argument as to the remedies of the situation.
To clarify the status of any additional depreciation charge, the following amended wording was put forward at a meeting of joint representatives of the P&L and T&FR Committees held on 25 October 1948:
That any amounts set aside (in addition to provisions for depreciation based on cost) to provide for replacement of assets at increased cost should be treated as a transfer to reserve and should not, therefore, be regarded as a necessary charge in ascertaining profit. (File 12-32-1)
Despite objections from Rees, the proposal commanded majority support (File 12-32-1).
Content of RoAP 12
The P&L Committee submitted the revised document to Council with the suggestion that it be published as RoAP 12, Rising Price Levels in Relation to Accounts.22 Council accepted this proposal and on 5 January 1949 published RoAP 12, which stated that ‘[t]he following further recommendations are now made in amplification of Recommendations 9 and 10’:
Any amount set aside to finance replacements (whether of fixed or current assets) at enhanced costs should not be treated as a provision which must be made before profit for the year can be ascertained, but as a transfer to reserve. If such a transfer to reserve is shown in the profit and loss account as a deduction in arriving at the balance for the year, that balance should be described appropriately.
In order to emphasise that as a matter of prudence the amount set aside is, for the time being, regarded by the directors as not available for distribution, it should normally be treated as a specific capital reserve for increased cost of replacement of assets. For balance sheet purposes fixed assets should not, in general, be written-up on the basis of estimated replacement costs, especially in the absence of a measure of stability in the price level. (ICAEW, 1961)
The content of RoAP 12 therefore maintained consistency with the historical cost basis for published accounts previously espoused in RoAPs 9 and 10 on depreciation and stock-in-trade. The only recognition given to growing concern with the impact of rising price levels was contained in the second paragraph which, at the same time, re-asserts the primacy of the historical cost model. One can therefore conclude that the case put forward by the industrial members of the T&FR Committee was defeated by the P&L Committee which imposed its will by: (a) not referring the original document back to the T&FR Committee; and (b) amending the original draft memorandum at meetings of joint representatives of the P&L and T&FR Committees. In the estimation of Tweedie and Whittington (1984, p. 44), ‘[t]he rate of inflation had, by 1949, slackened, and the leaders of the profession no doubt hoped that the problem of inflation would become a purely academic issue, of no material importance to the practitioner’. If this was their expectation, it was shattered by the even steeper rising price levels caused by the rise in demand that accompanied the Korean War, 1950–52 (Morpeth, 1981, p. 43).
DEVELOPMENT OF ROAP 15
Mumford (1979, p. 101) notes that the Council of the ICAEW began its review of RoAP 12 in response to the appointment of two major government investigations into the operation of the taxation system—the Tucker Committee on the Taxation of Trading Profits in 1949, and the Royal Commission on the Taxation of Profits and Income in 1951. The review was launched, however, in response to the adoption, by influential companies such as the Imperial Chemical Industries, of new ways of accounting for fixed assets under conditions of rising price levels. The Accountant (5 May 1951, p. 434) reported that:
The board of directors of Imperial Chemical Industries Ltd, have announced in their preliminary statement of the trading results for 1950, that the manufacturing assets of the company and its wholly-owned manufacturing subsidiaries at home have been revalued on the basis of replacement at construction costs current on January 1st, 1950, reduced by reference to the age of the assets and their remaining useful lives. The effect in figures of this considerable task is that a surplus of £96,120,273 has been evolved and has been transferred to capital reserve . . . The reaction of other companies to this marked innovation will be watched with much interest and, in some quarters, not a little apprehension.
The joint auditors, Price Waterhouse & Co. and Thomson McLintock & Co., gave the accounts a clean report containing no mention of the upward revaluation.
Guest, Keen & Nettlefolds, whose chief accountant was W. W. Fea (a member of five of the sub-committees listed in Appendix B), announced a change to its depreciation policy in the same month. The Accountant (10 May 1952, p. 491) reported that ‘regard had been had to the reduced purchasing power of money and the provision for depreciation had, therefore, been made on the basis of current values instead of book values of fixed assets’.
T. B. Robson informed a meeting of the P&L Committee, held towards the end of May 1951, that he had received from Sir Russell Kettle, ICAEW president 1949–50 and a partner in Deloitte, Plender, Griffiths & Co., a letter indicating that ‘it may not be desirable for the Council to remain silent in view of the comments which were appearing in the press on the subject of accounting principles for dealing with depreciation, particularly since the re-valuation of assets by Imperial Chemical Industries Ltd’ (P&L Committee Minutes Book E, p. 7). The P&L Committee accordingly resolved to appoint its own sub-committee, in contrast with the normal practice of delegating such matters to the T&R Committee, to review RoAP 12 and to consider whether any further statement or recommendation should be made.
P&L Sub-Committee and T&R Ad Hoc Sub-Committee
The P&L sub-committee, consisting of four practising23 and one industrial members (Appendix B), held its first meeting on 13 June 1951 and recommended to the P&L Committee that
the Taxation and Research Committee should be requested to submit a memorandum setting out fully the respects in which any members of the Taxation and Research Committee are not in agreement with the principles enunciated in Recommendation XII, the memorandum to contain the specific suggestions of those members for different principles and the reasons they give in support of their views. (P&L Committee Minutes Book E, p. 24, emphasis added)
The P&L Committee accepted this proposal (P&L Committee Minutes Book E, p. 13) and called for any dissidents to prepare, by mid-August,
a joint memorandum setting out the precise respects in which they disagreed with the recommendation and the reasons they gave in support of their views, in the form of a redraft of the whole recommendation so that the exact changes which they wished to make were made clear. (T&R Committee Minutes Book B, pp. 36–7; P&L Committee Minutes Book E, p. 13)
In spite of the very tight time scale, seven (five industrial and two practising24 members, Appendix B) of the forty-eight members25of the T&R Committee met together (on 27 July and 3 August 1951) and prepared a memorandum on the points of disagreement. They suggested the following to be incorporated in a new recommendation amending RoAP 12:
- 1
Commence by stressing the importance of the profit and loss account, emphasising that it concerns a continuing business and that its object is to show a true and fair view of the profits or losses of an accounting period.
- 2
Point out that this object can be achieved only by having regard to material changes in price levels by expressing debits and credits in similar monetary units. For this purpose, revenue should be charged with the appropriate current value of assets consumed in earning it.
- 3
Distinguish clearly between: (a) the amount charged to revenue to represent the current value of assets consumed during the accounting period; and (b) any further amounts which may be appropriated out of profits to a reserve to meet the probable—but unknown—increase in future replacement cost. (Various Sub-Committee Minutes Book A, p. 187)
They also emphasized the need for the ICAEW to show it was able to address difficult technical problems and willing to provide leadership for its members:
it is inadvisable that the Institute should have issued a recommendation which admits a problem and then implies that from a practising accountant's point of view there is no recommended solution because they cannot find the answer to it. It is therefore thrown back on the directors who, in their turn, will normally refer to their own accountant who, in an increasing number of cases, is a member of the Institute and looks to it for the guidance and support which in this instance is lacking. (Various Sub-Committee Minutes Book A, p. 186)
At the time RoAP 12 was being formulated, the industrial members had placed great stress on the risk of under-capitalization resulting from failure to provide for the increased cost of replacing fixed assets in a period of rising price levels. This time, they placed centre-stage the requirement, introduced in the Companies Act 1948, for the accounts to show a true and fair view of business performance. They interpreted this requirement as giving rise to the need for asset values to be adjusted in accordance with changing price levels and for the amount charged against revenue, above the line, to represent the current values of assets consumed. Many would agree that the passage of time has demonstrated the logic of these arguments, but they appear to have had no influence on the P&L sub-committee reviewing RoAP 12 which, on 27 August 1951, emphasized the validity of RoAP 12 and resolved to prepare an ‘addendum’ to RoAP 12 to that effect. The P&L Committee agreed to this proposal (P&L Committee Minutes Book E, p. 28), with the role of the industrial members marginalized by delegating the work of preparing the addendum to the P&L sub-committee reviewing RoAP 12.
Politics and Principles
In preparing the addendum, the P&L sub-committee aimed for consistency, not only with the principles enunciated in RoAPs previously issued, but also with its recent and ongoing submissions to official investigations into taxation matters.
In February 1950, the ICAEW submitted a memorandum to the Tucker Committee on the Taxation of Trading Profits. The memorandum outlined ways of giving additional tax relief, for possible adoption, subject to the following condition:
whatever form of relief may be introduced to deal with the question of retained profits26 or the higher cost of replacement of fixed assets, the relief should not interfere with the ascertainment of profits on accepted accounting principles; it should be an additional relief computed after the ascertainment of profits. (File 14-5-15)
When, two years later, the ICAEW sought to draft a memorandum for presentation to the Royal Commission on the Taxation of Profits and Income,27 it was decided that such evidence ‘should proceed on similar lines to that submitted by the Council to the Tucker Committee on Taxation of Trading Profits’ (P&L Committee Minutes Book E, p. 46). Accordingly, the memorandum again insisted that ‘the principle of historical cost must, unless and until some satisfactory alternative is available, continue of necessity to be the basis on which annual accounts are prepared for shareholders’ (File 14-5-20).
The P&L sub-committee charged with responsibility for drafting an addendum to RoAP 12 held discussions with representatives of the P&L Committee responsible for preparing the submission to the Royal Commission and, following these exchanges, decided that a more extensive measure was required to deal adequately with the subject of accounting for rising price levels (P&L Committee Minutes Book E, p. 97). A new draft recommendation was prepared and submitted to the P&L Committee on 25 February 1952, but it added nothing of substance to RoAP 12. Alternatives to the historical cost basis—that is, replacement cost, current value or price index-based valuation methods—were judged to be dangerously subjective, and the conclusion reached was almost identical to that contained in the evidence presented in March 1952 to the Royal Commission: ‘Unless and until some satisfactory alternative is available, the principle of historical cost . . . should continue to be the basis on which annual accounts are prepared for shareholders’ (P&L Committee Minutes Book E, p. 98).
When the P&L Committee invited the T&R Committee to express its view on the draft recommendation, nineteen members voted in favour and nine against (T&R Committee Minutes Book C, p. 55). The split of votes between practising and industrial members of the T&R Committee is unknown, but we might imagine that the dissidents were mostly industrial members. Given that there were forty-eight members present, we can conclude that twenty members abstained from voting and that only a minority of the total membership voted for the draft recommendation. Hardly a ringing endorsement!
Unease with the draft new RoAP extended to members of the P&L Committee, partly it seems because of criticism of its contents from a number of organizations —the Society of Incorporated Accountants and Auditors, the Association of Certified and Corporate Accountants, the Scottish Institute, the Stock Exchange and the Federation of British Industries—that had previously requested informal discussions with the ICAEW to consider a revision of RoAP 12 (P&L Committee Minutes Book E, pp. 53–4, 62, 71). These organizations were invited to consider the new proposals at a meeting held on 21 March 1952.28 A report of the P&L Committee, dated 24 March 1952, records the outcome:
With the exception of one member of the Scottish Institute, it was clear that all the representatives of other bodies disagreed with the preliminary draft document and hoped that it would not be issued. It was suggested that instead recommendation XII should be withdrawn, no further statement should be issued by the Council and that the Institute should enter into discussions with other bodies. It was evident that the main objective of the representatives of some of the other bodies was to reach the position where amounts which are treated as reserves for higher cost of replacement of assets would be treated as charges in arriving at profits certified by the auditors and that short of this no change would be regarded as satisfactory. (P&L Committee Minutes Book E, p. 83, emphasis added)
Certain members of the P&L Committee favoured a continuation of these discussions (P&L Committee Minutes Book E, p. 84) but a proposal to press forward and publish the draft recommendation was approved by ‘a bare majority’. Those in favour of the issue of the document argued that
- (a)
There is an urgent need for guidance to members, especially in view of the amount of literature which is continually being produced on the subject, some of which tends to be special pleading and is in the nature of criticism of recommendation XII;
- (b)
The Institute's witness who will appear before the Royal Commission on the Taxation of Profits and Income will be called upon to deal with the subject, in view of the evidence which has been submitted by other bodies or persons;
- (c)
At the Sixth International Congress in June, 1952, one of the main papers will deal with the subject, and it is to be presented by the President [C. P. Barrowcliff] of the Society of Incorporated Accountants and Auditors whose views are known to be contrary to recommendation XII;
- (d)
There is little likelihood of reaching agreement with other accountancy bodies in the near future, in view of the public statements of their Presidents and the attitude taken by them at the recent informal discussion. (P&L Committee Minutes Book E, p. 84)
But even the ICAEW's premier committee, comprising fourteen practitioners and just one industrial member, T. A. L. Thompson, director at Scott & Turner, Ltd, failed to achieve closure on this issue. The minutes of a meeting held on 6 May 1952 (the same month that the new RoAP was issued) record that the P&L Committee was ‘unable to reach agreement on any definite recommendation to submit to the Council on 7 May. Accordingly, it was agreed that the chairman [Sir Harold Howitt, ICAEW president 1945–46 and a partner in Peat, Marwick, Mitchell & Co.29] should report to the Council to the effect that’:
- (a)
the committee is divided on the question of whether the Council should issue the proposed recommendation XV;
- (b)
if the Council should decide to issue the recommendation (after various amendments of the wording) then it would be appropriate for the President to make a statement at the annual meeting on the lines of the draft approved by the Parliamentary and Law Committee [proposing to invite other accountancy bodies to join in further study of the subject];
- (c)
if the Council should decide not to issue the recommendation, the Council might consider [giving] the President authority to make a statement to the annual meeting on the lines of the draft approved by the Parliamentary and Law Committee. (P&L Committee Minutes Book E, pp. 86–7)
Council nevertheless resolved at a meeting held on 7 May 1952:
- (a)
with three dissentients that the draft recommendation number XV on ACCOUNTING IN RELATION TO CHANGES IN THE PURCHASING POWER OF MONEY be approved . . .
- (b)
with ten dissentients that the recommendation XV be issued to all members of the Institute. (Council Minutes Book P, pp. 42–3)
Content of RoAP 15
A sub-committee of the Council, consisting of Howitt, T. B. Robson, R. Kettle and Sir Harold Barton, ICAEW president 1944–45 and a partner in Barton, Mayhew & Co., settled the final form of RoAP 15 (P&L Committee Minutes Book E, p. 108) which was issued on 30 May 1952:
-
Unless and until a practicable and generally acceptable alternative is available, the Council recommends that the accounting principles set out below should continue to be applied:
- (a)
historical cost should continue to be the basis on which annual accounts should be prepared and, in consequence, the basis on which profits shown by such accounts are computed.
- (b)
any amount set aside out of profits in recognition of the effects which changes in the purchasing power of money have had on the affairs of the business (including any amount to finance the increase in the cost of replacements, whether of fixed or current assets) should be treated as a transfer to reserve and not as a charge in arriving at profits. If such a transfer is shown in the profit and loss account as a deduction in arriving at the balance for the year, that balance should be described appropriately, since it is not the whole of the profits.
- (c)
in order to emphasise that as a matter of prudence the amount so set aside is, for the time being, regarded by directors as not available for distribution, it should normally be treated as a capital reserve.
- (d)
for balance sheet purposes fixed assets should not (except in special circumstances, such as those referred to paragraph 12 [such as where a subsidiary is acquired and the assets are written-up to reflect the cost to the acquiring company]) be written-up, especially in the absence of monetary stability. (ICAEW, 1961)
The main thrust of RoAP 15 remained uncompromising. It is made clear that any additional deduction for depreciation should be made below the line in the profit and loss account, that the motivation for the deduction should be financial prudence, and that assets should not be written up in the balance sheet. The ICAEW nevertheless recognized the need to acknowledge the possibility of further reform, at some future date (the opening sentence in the above extract), and to leave scope for audit firms to accept the inflation accounting practices adopted by some leading companies (the last sentence of paragraph (b) and the parenthetical content of paragraph (d)).
Finally, RoAP 15 encouraged members ‘who are directors or officers of companies or who are asked by clients for advice’ to draw attention to the desirability of making appropriations from profit in recognition of the effects of inflation on the amount that could prudently be distributed. It also pointed to the desirability of ‘[e]xperimenting with methods of measuring the effects of changes in the purchasing power of money on profits and on financial statements’ and referred to the possibility of publishing the results as part of the documents accompanying the annual accounts.
The image portrayed to the outside world by the ICAEW on the issue of inflation and accounts remained robust and consistent with previous pronouncements and, although acknowledging certain limitations of historical cost accounting, continued to support it ahead of all other alternatives. This apparent solidarity was achieved by silencing the dissident views expressed by industrial members and in spite of the fact that the P&L Committee, and even Council itself, contained members who were unconvinced of the validity of the party line. Zeff (1972, p. 11) informs us that endorsement of a proposed RoAP by an ‘overwhelming majority of the Council’ was a necessary condition for publication. Zeff (1972, p. 12) also states that, although the concept of overwhelming majority ‘was never formally reduced to a specific numeral count, it was generally understood to mean a two-thirds majority’ of forty-five members of the Council. The number of members present at the Council meeting of 7 May 1952 was forty-two, with three absent. Therefore, RoAP 15, with ten dissentients, only just met the criterion laid down by the Council.
There is archival evidence to show that the Board of Inland Revenue drew upon the contents of RoAPs 12 and 15 to justify the rejection of proposals, put forward by some parties in evidence submitted to the Royal Commission on the Taxation of Profits and Income, that price level adjustments should be made when computing taxable profits (File 15-5-20). Reviewing the content of RoAPs 12 and 15, the Board of Inland Revenue concluded that
This conception of the computation of profits is not accepted by the accountancy profession generally . . . Given that the new view . . . does not represent current accounting practice the general question upon which the Royal Commission may wish the Board's opinion is whether it would be proper to adopt the new view for taxation purposes alone. The Board could not support such a proposal. (File 14-5-20)
The importance of an equitable distribution of the tax burden between different categories of taxpayers was also cited by the Board of Inland Revenue to justify its preferred stance:
In considering the definition of profits which ought to be adopted for taxation purposes, the primary consideration which the Board suggest ought to be borne in mind is that of fairness as between one taxpayer and another . . . the computation of profits for tax purposes on what have hitherto been regarded as orthodox accounting principles (historical cost) is more likely to lead to fair distribution of the tax burden. (File 14-5-20)
INITIATIVES INVITED AND QUASHED, 1952–1957
RoAP 15 referred to the desirability of directors or officers of companies ‘[e]xperimenting with methods of measuring the effects of changes in the purchasing power of money on profits and on financial statements’. On 2 July 1952, Council instructed the T&R Committee ‘to undertake research into the [above] question’ (P&L Committee Minutes Book E, p. 115) subject to the restriction that ‘the request does not include the question of a new conception of profit’ (T&R Committee Minutes Book B, p. 60; P&L Committee Minutes Book E, p. 123; Council Minutes Book P, p. 70).
It is difficult to see how the T&R Committee could possibly address the issue without constructing a new conception of profit. Further, the P&L Committee issued the invitation ‘on the understanding that the results of the Taxation and Research Committee's research may not be regarded as suitable for publication’ (P&L Committee Minutes Book E, p. 123). A possible interpretation of these arrangements is that, from the outset, the P&L Committee was determined to sabotage the work of the T&R Committee. Why the T&R Committee accepted the terms of reference is unknown. Possibly, they realized that it was the only way that they could make an input to the debate and remained optimistic that they could convince the P&L Committee of the need for reform. The work was delegated to the GASC.
T&R GASC Sub-Committee
At a meeting held on 22 July 1952, the GASC appointed a drafting sub-committee consisting of three (later increased to five) industrial and three practising members (Appendix B). The sub-committee reached the tentative conclusion that an achievable objective might be to aim for an inflation-adjusted figure for profit that could be compared with the historical cost-based profit figure reported in the main accounts (GASC Minutes Book A, p. 241). The sub-committee considered various ways of adjusting expenses debited to the profit and loss account, including the possibility of applying general or specific price indices (GASC Minutes Book A, pp. 230, 234). Consistent with Gynther's (1966, p. 45) analysis, this debate was marked by conflict between industrial and practising members (GASC Minutes Book A, p. 237). Ultimately, the drafting sub-committee was forced to acknowledge the fact that it was hamstrung by the terms of its appointment (P&L Committee Minutes Book F, p. 63):
In general the sub-committee has obtained some measure of agreement on broad principles . . . but attempts to apply those principles in the form of practical methods seem to infringe on matters specifically excluded [the question of a new conception of profit] from the sub-committee's terms of reference. (GASC Minutes Book A, p. 285)
The P&L Committee (25 January 1954) therefore resolved to recommend to Council that ‘the terms of reference . . . be withdrawn’ and, instead, to set the T&R Committee a second challenging task. RoAP 15 had contained the following observations concerning the limitations of historical cost accounting:
The Council cannot emphasise too strongly that the significance of accounts prepared on the basis of historical cost is subject to limitations, not the least of which is that the monetary unit in which the accounts are prepared is not a stable unit of measurement. In consequence the results shown by accounts prepared on the basis of historical cost are not a measure of increase or decrease in wealth in terms of purchasing power; nor do the results necessarily represent the amount which can prudently be regarded as available for distribution, having regard to the financial requirements of the business. Similarly the results shown by such accounts are not necessarily suitable for purposes such as price fixing, wage negotiations and taxation, unless in using them for these purposes due regard is paid to the amount of profit which has been retained in the business for its maintenance.
The P&L Committee resolved to request the T&R Committee to make suggestions designed to deal with the above limitations (P&L Committee Minutes Book F, pp. 71–2) but, again, without any apparent expectation that the task would yield productive results:
The new terms of reference be given to the Taxation and Research Committee on the understanding that it may not be considered desirable to make any publication as a result of the committee's work and that there is on this occasion serious doubt in the minds of some members of the Council as to whether the Taxation and Research Committee will be able to prepare a document which could hope to have the approval of the overwhelming majority of members of the Council which is necessary if a document is to be approved for publication. (P&L Committee Minutes Book F, p. 73)
T&R Ad Hoc Sub-Committee
The T&R Committee agreed, at a meeting held on 25 February 1954, to again accept a poisoned chalice and appointed an ad hoc sub-committee (GASC Minutes Book B, p. 3) consisting of five industrial and five practising members (Appendix B).30 The approach taken by the sub-committee was to attempt to develop ‘supplementary’ statements that could be prepared for specific purposes (P&L Committee Minutes Book F, p. 147). The deliberations concentrated upon:
- 1
methods of computing profits on the basis of the replacement cost or current value of assets consumed;
- 2
the revaluation of fixed and current assets; and
- 3
the applicability of general or specific price indices when making adjustments to reflect the effects of inflation.
As before, serious disagreement arose concerning the choice of index with industrial members such as Davison and A. Rayner, director and secretary at R. W. Crabtree & Sons, Ltd, rejecting the general index in favour of one specific to a company's business (Various Sub-Committee Minutes Book B, pp. 181–2). A member of this and the previous sub-committee, J. H. Mann, a partner in Mann, Judd & Co., later summarized the depth of the problem in the following terms:
As far as I can recall some of our difficulties at that time stemmed from the tendency of industrial members like Davison to emphasise the management point of view; this raised the almost insuperable problem of finding effective generalisations to cover replacement cost, current cost and the rest. (File 12-5-16)
Joint Representatives Meeting of P&L and T&R
An interim report prepared by the T&R ad hoc sub-committee31 was considered at a meeting of joint representatives, held on 24 October 1956, consisting of four practising and two industrial members (Appendix B). The endeavours of the T&R ad hoc sub-committee were summarily dismissed on the grounds that its terms of reference did not include (a) the question of a new conception of ‘profit for the year’, (b) the determination of profit for the purposes of company law, or (c) the manner of compiling accounts for presentation to shareholders (P&L Committee Minutes Book G, p. 63).
The practitioner-dominated P&L Committee again suppressed the work of the only committee on which industrial members had significant representation. Without consultation with the T&R Committee, the P&L Committee (30 April 1957) instructed the T&R ad hoc sub-committee to suspend its operation (P&L Committee Minutes Book G, p. 82; Council Minutes Book R, p. 98) and appointed instead its own sub-committee.
MOVING TOWARDS STEWARDSHIP-ORIENTATED ACCOUNTS
P&L Sub-Committee, 30 April 1957
The minutes of the P&L Committee reveal that some of its prominent members (Sir Harold Howitt, W. H. Lawson and Sir Thomas Robson, H. A. Benson, ICAEW president 1966–67 and a partner in Cooper Brothers & Co., W. S. Carrington, ICAEW president 1955–56 and a partner in Whinney, Smith & Whinney, A. S. H. Dicker, ICAEW president 1956–57 and a partner in Lovewell, Blake & Co. of Great Yarmouth, and G. F. Saunders32) held informal meetings that led to the appointment of a new sub-committee consisting of nine practising33 and one industrial member. The sub-committee (Appendix B) was created to address, again, the failure of directors to respond to RoAP 15's suggestion that companies should experiment with methods of measuring the effects of changes in the purchasing power of money on profits and on financial requirements. In Howitt's words: ‘there is a need for the Council to give some guidance to members on methods of measuring the effects of the decline in the value of money on distributable profits’ (File 12-5-16). Consistency with previously published RoAPs remained a priority, with Howitt stating that ‘there was no intention to depart from the historical cost method of computing profits but rather that an amount should be set aside “below the line” for the foregoing purpose’.
This practitioner-dominated sub-committee made crystal clear its determination to address the issue from the shareholders’ rather than management's point of view. The sub-committee's declared objective was to ‘suggest methods of measuring the amount required in a period of inflation, in order to maintain intact the capital contributed [defined as direct contributions plus retained profit] by the shareholders’ (File 12-5-16). For the purpose of deciding the amount to be set aside to maintain ‘real capital’ intact, the committee adopted a ‘balance sheet approach’. That is, the additional amount to be appropriated out of profit would be calculated by applying a general index to the historical costs of fixed and current assets, net of liabilities, shown in balance sheet. It was also proposed that the detailed calculation should be reported in the directors’ report. The sub-committee stated that it favoured applying a general index ‘to ensure that an amount set aside from profits is computed on an objective basis and so not unduly influenced by the opinion of those responsible for the conduct of the business’ (File 12-5-16). The sub-committee devoted considerable time and effort to the identification of an appropriate general index, entering into discussions with various experts and government bodies (P&L Committee Minutes Book G, p. 207; Book I, p. 103), but there seems to have been a lack of urgency in taking matters forward. At a meeting held on 1 March 1960, the sub-committee nevertheless confirmed its determination to fulfil its terms of reference (P&L Committee Minutes Book I, p. 88) with Mann summarizing their conclusions and aspirations as follows:
If we leave aside all the complicated tools which management can usefully employ, we might produce something of help from the shareholders’ point of view . . . If we limit our objective to indicating the amount which must be set aside in order to maintain the purchasing power of the capital employed, we might do this by comparison of balance sheets restated in terms of the closing purchasing power. (File 12-5-16)
Nothing concrete materialized and, at a meeting of the P&L Committee held on 24 April 1961, the high-profile sub-committee was disbanded.
P&L Sub-Committee, 29 May 1961
The driving force behind the reconstitution of the activities of the P&L sub-committee seems to have been Henry Benson, who had been a member of the old sub-committee and was now the chairman of the P&L Committee. He argued that ‘the existing terms of reference were not likely to produce a useful result’ and recommended that ‘a fresh sub-committee with fresh terms of reference dealing broadly with the question of the distribution and retention of divisible profits in periods of inflation be appointed’ (P&L Committee Minutes Book J, p. 132–3). The revised terms of reference of a sub-committee comprising three industrial and two practising accountants were as follows:
To prepare a memorandum for the Parliamentary and Law Committee with a view to the publication by the Council of a statement giving guidance to members on the considerations which arise in determining what appropriations should be made from profits and/or reserves, particularly having regard to the effects of inflation, to provide for replacement of fixed assets, additional working capital and other purposes before arriving at the amount which can prudently be distributed in dividends, the memorandum to include suggestions for suitable bases for computing such appropriation. (P&L Committee Minutes Book J, p. 157; Council Minutes Book T, p. 102)
It is not entirely clear, however, that there was any substantive difference between these and the earlier terms of reference. The emphasis remains on computing ‘the amount which can prudently be distributed as dividends’ and, as we shall see, discussion centred mainly on the use of a general price index to identify an amount to be reported ‘below the line’.
The sub-committee held its first meeting on 14 July 1961 and, despite the reference to ‘replacement of fixed assets’, the management-oriented approach that requires the maintenance of productive capacity was unambiguously rejected:
the hypothesis that there is no disposable profit until provision has been made for ‘maintenance of the business’ is untenable not only because of the practical difficulties of calculating replacement costs of the fixed assets, but also because such replacement costs cannot be taken into account without also considering the effects of replacement on all the other components of total cost and possibly also on sales revenue.34 (File 12-5-16)
The unequivocal rejection of replacement costs is surprising given that Davison—a staunch advocate of the management-oriented approach while a member of previous committees (Appendix B)—was on this sub-committee.35 The sub-committee's focus, instead, on changes in the general price level was justified in the following terms:
to achieve full comparability in terms of the currency units used in accounts of the income and costs included in the profit and loss account of the year, what was required was merely a means of converting the expenditures brought forward from past years (or a due proportion of them) into their current equivalents in terms of purchasing power . . . The conversion of the expenditure brought forward from past years into its current equivalent in terms of purchasing power by the application of an appropriate price index was all that was required. (5 April 1962, P&L Committee Minutes Book K, p. 145, emphasis added)
The above extract reveals the fact that the present sub-committee differed from its predecessor in that it advocated purchasing power adjustments based on figures in the profit and loss account rather than in the balance sheet. Moreover, they appear to have been of the view, initially at least, that only certain profit and loss account items required adjustment:
In the profit and loss account the only items which are not expressed at current values are those which express the usage of physical assets including depreciation of fixed assets (which is basically an amortisation of historical cost), the charges for the use of materials, and other cash outgo of previous years; and therefore those are the only items of expenditure for which adjustment is required. (13 July 1962, P&L Committee Minutes Book K, pp. 190–1, emphasis added)
The sub-committee, in common with its predecessor, turned its attention to the identification of a suitable general price index, and the minutes of a meeting held on 5 April 1962 recorded that ‘[i]n principle, the application of a general price index to past expenditure on fixed assets, stock and work in progress and any other asset was accepted by the sub-committee as reasonable and practical’ (File 12-5-16).
The logic behind the move from the balance sheet approach to the profit and loss account approach is unclear. In both cases, adjustments are based on movements in the general index and are therefore concerned with making the figures comparable in terms of purchasing power. The balance sheet approach, which involves adjusting all items (whether the adjustment is based on net assets or on shareholders’ equity—the approach advocated by the previous P&L sub-committee —the outcome is the same) for changes in purchasing power, results in real capital being maintained intact. The profit and loss account approach favoured by the present committee would have resulted in only partial adjustment of shareholders’ equity; it ignores expenses other than depreciation and cost of sales, it also takes no account of backlog depreciation, and it fails to consider the impact of general inflation on monetary assets and liabilities.36 In short, it seems to confuse the two capital maintenance concepts—physical capital maintenance and real capital maintenance. It adjusts only the profit and loss account items that are the subject of remeasurement under certain versions of current cost/value accounting (namely cost of sales and depreciation) but uses a general price index rather than a specific price index for that purpose.37
The sub-committee's interim report was considered by the P&L Committee on 25 March 1963, and the archives record that the P&L Committee tentatively ‘found the line of reasoning put forward in the report acceptable in principle’ (P&L Committee Minutes Book M, pp. 29–30). The chairman of the P&L Committee was, by this time, W. E. Parker of Price Waterhouse & Co.38 and he began to take a close interest in the subject,39 arguing that ‘a full appreciation of the effect of change in the purchasing power of money can only be achieved by a revaluation of the whole share capital and reserves, assets and liabilities of the business’ (File 12-5-16). Parker therefore favoured the balance sheet approach propounded by the practitioner-dominated P&L sub-committee of 30 April 1957. Correspondence and meetings between the sub-committee and Parker produced the conclusion that the balance sheet method and the profit and loss account method could be reconciled by extending the latter to deal with expenses other than depreciation and cost of sales, such as inflationary gains and losses on monetary assets and liabilities (File 12-5-16), but disagreement continued over the question of how much detail should be given. The memorandum of a meeting between the two, held on 11 March 1965, recorded that
the sub-committee accepted that Mr. Parker's method was a simple and direct method of arriving at a global figure for this purpose, and gave a ‘control’ figure . . . But the members of the sub-committee stressed that in their view it was not enough only to arrive at the net overall figure. The breakdown of that figure into the underlying adjustments in respect of fixed assets, stock, and monetary assets and liabilities was essential information for a board of directors. (File 12-5-16)
Technical Committee Sub-Committee
The P&L sub-committee was reconstituted as the Technical Committee sub-committee on 24 June 1965, following the transfer of responsibility for technical matters from the T&R Committee to the newly established Technical Committee. In the following year, the sub-committee came under the jurisdiction of the newly established Research Committee on the grounds that ‘any document finally prepared would be more appropriate for publication as a research document rather than as an Institute recommendation or statement of guidance’ (File 12-5-16). The sub-committee was finally disbanded, in October 1966, because the resulting document was regarded as ‘too complicated and too dogmatic’ (File 12-5-16).
DISCUSSION AND CONCLUSION
The purpose of this article has been to examine, within the arena of inflation and accounts, issues of governance arising within a professional accounting body as the result of: the conflicting priorities of different categories of membership; the need to be seen by the state as acting in the ‘public interest’; and the desire to create a public image of experts capable of successfully resolving technical issues.
Willmott et al. (1993, p. 69) make the important point that ‘the achievement of chartered status serves to raise the material and symbolic value of their members’ labour by differentiating it from that of other sellers of accounting labour, [but] the self-interested role of the trade association is, in principle, compromised and constrained’. The ICAEW's governing Council delegated responsibility for controlling the preparation of technical documents to the P&L Committee, and the need for these documents to exhibit an independent appearance, neutral to any sectional interests, was made explicit when drafting evidence for submission to the Royal Commission on Taxation of Profits and Income. By projecting the image of independent arbiter, the ICAEW sought to protect and enhance its reputation for behaving in the ‘public interest’. The same priority is apparent from an examination of the work of the P&L Committee when developing RoAPs on inflation and accounts, as reflected in, for example, the argument that the ICAEW should not associate itself with ‘“agitation” to charge profits with “hypothetical” depreciation’. In consequence, the Board of Inland Revenue, concerned to maintain equity between different categories of taxpayer and also, perhaps, keen to maximize tax revenue, was able to draw on the content of RoAPs 12 and 15 as justification for rejecting proposals for measuring business income on any basis other than historical cost. The determination to be seen to act in the ‘public interest’, however, brought the ICAEW into conflict with its membership, particularly those in business.
As Mumford (1991, p. 130) indicates, and this article demonstrates, members of the ICAEW were by no means unanimous in their support for the traditional, historical cost basis for published financial reports. Although there were exceptions, such as de Paula and Clayton, industrial members in general, and even some practising members of the T&FR Committee, such as Bray and Saunders, were concerned with the implications of the under-depreciation of fixed assets in a period of rising prices. They objected to the ‘rapacious “effective rate” of corporate taxation’, they argued that inflation-adjusted accounts provided a more meaningful profit figure and were better placed to fulfilling the Companies Act requirement for the accounts to show a true and fair view, and they rejected the idea that setting amounts aside to meet the increased cost of replacement should be considered a matter of financial prudence. Instead, they favoured charging additional, usually replacement cost-based, depreciation ‘above the line’.
The arguments raised by the industrial members were labelled ‘extreme’ and marginalized by exclusion from the authoritative channel for the formulation of the RoAPs on inflation and accounts by the overriding power of the practitioner-dominated P&L Committee. Zeff (1972, p. 13) refers to the possibility of a technical document prepared by the T&FR Committee being completely rewritten by the Council, and we are able to confirm that the two RoAPs studied were certainly the work of the P&L Committee and Council. It needs to be remembered, however, that even the P&L Committee felt unable to approve the proposed content of RoAP 15, and the draft document failed to receive unanimous support from Council. Zeff's (1972, p. 11) assertion that RoAPs would be only published if they attracted ‘an overwhelming majority’—The Accountant (15 January 1949, p. 33) refers to a ‘substantial unanimity’—is inconsistent with our findings relating to the issue of RoAP15. The explanation for the Council's decision to press ahead and conceal internal discord may simply be that, to do otherwise, in Benson's later words, would have been ‘a confession of weakness’ and have risked damaging the ICAEW's competitive position in the organized market for accountants’ services (File 12-43-2).
We see a paradoxical situation emerging during the period covered by this article concerning the role of the T&FR, which was initially established to help bring about improved links between members in industry and those in practice. In 1942, the ICAEW was unwilling to grant industrial accountants a place on Council, but the creation of a committee on which they had approximately equal membership went some way towards satisfying their claims for a voice in the ICAEW's decision-making processes. There is little doubt that these industrial members were in a position to make a substantial contribution to the formulation of well thought out RoAPs. As Hastings and Hinings (1970) have pointed out, however, despite common backgrounds, industrial and practising members exhibit quite different levels of attachment to shared professional values, and these differences came to the fore in the preparation of RoAPs 12 and 15. Even if the governors of the ICAEW were convinced of the case made by industrial accountants for replacement cost accounting, which they probably were not, implementation would have proved highly problematic for two reasons. First, the leadership of the ICAEW would have had difficulty selling the case to practitioners. Second, such action might have been judged to be in breach of the ICAEW's contract with the state through its implied support for sectional interests. However, the persistent rejection of proposals put forward by industrial members did not, we suspect, help bring about the desired improvement in links between the two main sections of the ICAEW's membership.
The promotion of price level-adjusted accounting by the ICAEW would also have proved problematic in terms of the content and reputation of the, by then, well-established series of RoAPs. The previously published RoAPs, especially those dealing with tangible assets (fixed assets and stocks) had been based firmly on the concept of historical cost. To move over so soon to an entirely different measurement basis (whether based on general or specific price movements) would have risked a serious loss of credibility.40 Therefore, adherence to traditional measurement procedures, which would naturally also have the virtue of appealing to an auditor-dominated constituency, was justified on grounds of objectivity and technical accuracy. Radical change might well have been judged also to undermine its relationship with the state for reasons other than preferment of sectional interests. The 1940s, through the series of RoAPs, had seen the ICAEW significantly extend its self-regulatory activities. Willmott et al. (1993, p. 71) explain the attraction of such arrangements to government:
From the standpoint of politicians and their advisors, the economic appeal of self-regulation lies in the non-insignificant administrative savings derived from private sector regulation of accounting labour; and its political appeal lies in cushioning politicians and civil servants from responsibility for any perceived failures of regulation since these can then be conveniently laid at the door of the self-regulating trade association.
There are unmistakable signs that government was impressed by the RoAP initiative. The Cohen Committee on Company Law Amendment, appointed by the Board of Trade, reported in 1945. It announced that ‘[t]he recent tendency has been to give more information [in published accounts] and this tendency has been fortified by the valuable recommendations published from time to time by the responsible accounting bodies’ (Cohen, 1945, p. 54). For many reasons, therefore, the dominant conceptual feature of the high-profile series of RoAPs required protection.
Following the publication of RoAP15, the rates of inflation experienced in Britain up to the end of the period covered by this article were within what has been described as the ‘discussion range’ (Burton, 1975, p. 68), that is, ‘they were sufficient to stimulate discussion of the problem by academics and thoughtful practitioners, but were not sufficiently high to create urgent demands for reform from companies or users of financial statements’ (Tweedie and Whittington, 1984, p. 46).41 During this period, industrial and practising members sat on a series of committees, with the industry-dominated committees appearing to be given logically impossible terms of reference. The operations of these committees were again marked by conflict between industrial and practising members that proved difficult to reconcile. Emphasis was gradually placed more and more on the stewardship role of inflation-adjusted accounts and, therefore, on the need to ensure that the real value of the shareholders’ capital was protected. However, the broad acceptance elicited for general index-based accounts was accompanied by disagreement concerning the degree of detail to be provided, with industrial accountants favouring more rather than less. The internal conflict between practising and industrial members, that continued through to 1966 when the relevant sub-committee was finally disbanded, prevented the ICAEW from formulating a further RoAP on inflation and accounts.
Postscript
In 1968, Accounting for Stewardship in a Period of Inflation was published by the Research Committee, with the determined advocate of the ‘balance sheet approach’, W. E. Parker (then president of the ICAEW), described by Whittington as its ‘principal author’ (Whittington 1994, p. 264). The booklet advocated and illustrated ‘a simple general index adjustment of historical cost accounts’ (Whittington, 1994, p. 264) called current purchasing power accounting. This method formed the basis for Provisional Statement of Standard Accounting Practice 7 published in 1974 and rejected by the government-appointed Inflation Accounting Committee (the Sandilands Committee) that reported in the following year (1975, para. 28; Tweedie and Whittington, 1984, p. 99; Napier, 1995, p. 277). The withdrawal of PSSAP 7 was followed by experimentation with a series of replacement cost accounting models that failed to achieve acceptance for a number of reasons, including a damaging revolt by the ICAEW's own membership against the implementation of ED18 entitled Current Cost Accounting (1976) (Tweedie and Whittington, 1984, pp. 125–48; see also Thompson, 1987, pp. 524–8; GP&F Committee Minutes Book J, p. 61). The image of the ICAEW undoubtedly suffered as the result of its abject failure to address, effectively, the burning accounting issue of the day.42 It is also the case that the ICAEW's continued attempts to reconcile the different and sometimes conflicting interests of various groups of the large and growing membership proved unproductive, and the Council looked to Professor Tricker for advice on how to improve its governance arrangement (Tricker, 1983, Foreword). The Tricker Report, entitled Governing the Institute, was published in 1983 and commenced with the following assertion:
For many years the leadership of the Institute was unassailed. Members contentedly practised their chosen profession; tolerated their relatively autocratic leaders who, in truth, did little that affected them. Externally, too, there was little interest in, or pressure on, the Institute.
This article reveals the above to be an oversimplification of the ICAEW's history.
Footnotes
Appendices
APPENDIX A
| Chairmen of the P&L Committee | ||||
|---|---|---|---|---|
| Year | Name | Firms | Location | President elected |
| 1942–44 | G. R. Freeman | Gane, Jackson, Jefferys & Freeman | London | 1925–26 |
| 1944–45 | Sir Harold Howitt | Peat, Marwick, Mitchell & Co. | London | 1945–46 |
| 1945–48 | Russell Kettle | Deloitte, Plender, Griffiths & Co. | London | 1949–50 |
| 1948–51 | T. B. Robson | Price Waterhouse & Co. | London | 1952–53 |
| 1951–52 | Sir Harold Howitt | Peat, Marwick, Mitchell & Co. | London | 1945–46 |
| 1952–55 | W. H. Lawson | Binder, Hamlyn & Co. | London | 1957–58 |
| 1955–58 | G. F. Saunders | Harmood-Banner, Lewis & Mounsey | Liverpool | |
| 1958–59 | S. J. Pears | Cooper Brothers & Co. | London | 1960–61 |
| 1959–62 | H. A. Benson | Cooper Brothers & Co. | London | 1966–67 |
| 1962–65 | W. E. Parker | Price Waterhouse & Co. | London | 1967–68 |
| Chairmen of the T&FR (T&R) Committee | ||||
|---|---|---|---|---|
| Year | Name | Position of industrial members | Firms | Location |
| 1942–43 | H. M. Barton | Barton, Mayhew & Co. | London | |
| 1943–45 | F. R. M. de Paula | Vice-chairman and general manager | Harding, Tilton & Hartley, Ltd | London |
| 1945–46 | H. J. Page | Kemp, Chatteris & Co. | London | |
| 1946–48 | P. M. Rees | Chief accountant | Lever Brothers & Unilever, Ltd | London |
| 1948–49 | G. F. Saunders | Harmood-Banner, Lewis & Mounsey | Liverpool | |
| 1949–50 | J. Clayton | Director | Broadcast Relay Service Ltd | London |
| 1950–51 | W. G. Campbell | Josolyne, Miles, Page & Co. | London | |
| 1951–52 | W. W. Fea | Chief accountant | Guest, Keen & Nettlefolds, Ltd | Birmingham |
| 1952–53 | G. G. G. Goult | Ensor, Son & Goult | Ipswich | |
| 1953–54 | G. S. Hamilton | General manager | Bass, Ratcliff & Gretton, Ltd | London |
| 1954–55 | T. Fleming Birch | A. C. Palmer & Co. | Leicester | |
| 1955–56 | J. Latham | Director general of finance | National Coal Board | London |
| 1956–57 | G. P. Morgan-Jones | Edmonds & Co. | Eastbourne | |
| 1957–58 | Stanley Dixon | Director | The Midland Tar Distillers, Ltd | Birmingham |
| 1958–59 | E. N. Macdonald | Chalmers, Wade & Co. | Liverpool | |
| 1959–60 | A. H. Proud | Director | Bourne & Hollingworth, Ltd | London |
| 1960–61 | G. N. Hunter | Theodore B. Jones & Co. | Leeds | |
| 1961–62 | J. Cartner | Director | The Metal Box Co., Ltd | London |
| 1962–63 | S. M. Duncan | Price Waterhouse & Co. | London | |
| 1963–64 | H. C. Shaw | Director | Reckitt & Coleman Holdings, Ltd | Hull |
| 1964–65 | Stanley Kitchen | Foster & Stephens | Birmingham | |
| 1965–66 | D. W. Robertson | Tarquand, Youngs & Co. | London | |
- Source: Ms.28420/4; P&L Committee Minutes Books E–P.
- Source: Ms.28423; T&R Committee Minutes Books B–D.
APPENDIX B
| 15 April 1948 | 28 June 1948 | 13 June 1951 | 27 July 1951 | 22 July 1952 | 25 February 1954 | 24 October 1956 | 30 April 1957 | 29 May 1961 | 24 June 1965 |
|---|---|---|---|---|---|---|---|---|---|
| T&FR ad hoc sub-com. | Joint reps. meeting of P&L/T&FR | P&L sub-com. | T&R ad hoc sub-com. | T&R GASC sub-com. | T&R ad hoc sub-com. | Joint reps. meeting of P&L/T&R | P&L sub-com. | P&L sub-com. | Technical Committee sub-com. |
| Industrial | |||||||||
| F. R. M. de Paula | |||||||||
| W. W. Fea | W. W. Fea | W. W. Fea | W. W. Fea | W. W. Fea | |||||
| P. V. Roberts | P. V. Roberts | ||||||||
| P. M. Rees | P. M. Rees | P. M. Rees (in practice) | |||||||
| J. Clayton | J. Clayton | J. Clayton | |||||||
| K. A. E. Moore | |||||||||
| A. P. Ravenhill | A. P. Ravenhill | ||||||||
| J. Cartner | J. Cartner | J. Cartner | J. Cartner | ||||||
| E. H. Davison | E. H. Davison | E. H. Davison | E. H. Davison | E. H. Davison | |||||
| H. Norris | |||||||||
| J. R. Cuthbertson | J. R. Cuthbertson | ||||||||
| D. de Rosario | D. de Rosario | ||||||||
| G. S. Hamilton | |||||||||
| C. W. Aston | C. W. Aston | ||||||||
| A. Rayner | |||||||||
| D. C. Urry | |||||||||
| Practising | |||||||||
| F. Sewell Bray | |||||||||
| T. B. Robson | T. B. Robson | ||||||||
| Sir Harold Barton | Sir Harold Barton | ||||||||
| W. S. Carrington | W. S. Carrington | ||||||||
| Sir Harold Howitt | Sir Harold Howitt | ||||||||
| R. Kettle | |||||||||
| T. F. Birch | T. F. Birch | ||||||||
| W. G. Campbell | |||||||||
| G. G. G. Goult | |||||||||
| G. F. Saunders | G. F. Saunders | ||||||||
| H. A. Benson | H. A. Benson | ||||||||
| S. J. Pears | |||||||||
| W. L. Barrows | |||||||||
| W. H. Lawson | W. H. Lawson | ||||||||
| G. L. C. Touche | G. L. C. Touche | ||||||||
| R. B. Dixon | |||||||||
| J. H. Mann | J. H. Mann | J. H. Mann | J. H. Mann | ||||||
| W. G. Densem | W. G. Densem | W. G. Densem | W. G. Densem | ||||||
| D. A. Clarke | D. A. Clarke | ||||||||
| G. N. Hunter | |||||||||
| L. W. Underwood | |||||||||
| R. G. Leach | |||||||||
| J. D. Russell | J. D. Russell | ||||||||
