Mark Billings

Profitability in English banking in the twentieth century

It is well-known that clearing banks in Britain did not publish their true profits until 1969. This article sets out to establish from sources in the banks’ archives reliable and consistent estimates of the true profits and profitability of the major English clearing banks during the period 1920–68. The methods used and problems encountered are explained, and the results discussed, together with possible sources of data outside the banks. The impact of inflation on rates of return is considered. The question of ‘smoothing’ of published profits by the banks is addressed. The results are discussed in the context of economic theory and the perceived cartel nature of banking and some comparisons made to estimates of profitability in the wider UK economy. Finally, some interesting questions raised by the results, and which require further study, are identified.

Financial crisis, contagion, and the British banking system between the world wars

In a globalised world, when financial crisis strikes, can countries which are well-integrated into the world financial system escape? Recent experience suggests not. In the early 1930s, Britains openness at the centre of the world financial system left it vulnerable, particularly to the central European financial crisis. Yet there was no financial crisis in Britain in 1931, rather an exchange-rate crisis, and sterling left the exchange-rate regime of the gold exchange standard. The most important financial institutions, the joint-stock commercial banks, the central part of the payments system, remained robust and contributed to the stability of the British economy.

Transparency and financial reporting in mid-20th century British banking

Abstract Until 1970, British banks were firm believers in the merits of ‘non-disclosure’, which obscured their ‘true’ profits and capital through profits smoothing and the use of hidden reserves. Many other companies adopted the same view for as long as legislation permitted, but there were special reasons why non-disclosure endured for longer in banking. This paper examines the persistence and demise of non-disclosure in banking, placing it in the context of the wider development of financial reporting in Britain, and highlights similarities and differences in financial reporting between banks and other types of company.

The development of management accounting in UK clearing banks, 1920–70

There is a perception that, in the British banks which dominated the industry for much of the twentieth century, management accounting was limited in scope and contributed to a general inefficiency in these institutions. Various official reports published from the 1960s until very recently have reinforced this view. However, some authors have argued that the banks were more sophisticated in their management than such criticisms would imply. This paper investigates the role, development and limitations of management accounting in the sector, drawing on archival evidence and relating this to the more general development of management accounting. In advancing our understanding, evidence is found to support both views.

Innovation and pragmatism in tax design: Excess Profits Duty in the UK during the First World War

In this article, we examine the design and administration of Excess Profits Duty (EPD), introduced in the UK in 1915. This represented a significant innovation as the countrys first comprehensive attempt to tax ‘excessive’ business profits. EPD was a complex tax which had two objectives: to generate additional revenues to help fund dramatically increased wartime government expenditure and to curb ‘profiteering’. Although criticised on numerous grounds, we argue that the tax was surprisingly successful. For all its defects, it generated very substantial revenues, and its design and administration proved flexible and robust in coping with the uncertainties of war.

New perspectives on not-for-profit financial institutions: Organisational form, performance and governance

This introductory essay discusses the context for the special issue, introduces the contributions, considers a number of key themes which link the articles and suggests areas for future research; in particular it makes a case for the link of organisational diversity and the stability of the financial system.

Discretion in accounting for pensions under IAS 19: using the ‘magic telescope’?

We use a panel data set of UK-listed companies over the period 2005–2009 to analyse the actuarial assumptions used to value pension plan liabilities under IAS 19. The valuation process requires companies to make assumptions about financial and demographic variables, notably discount rate, price inflation, salary inflation and mortality/life expectancy of plan members/beneficiaries. We use regression analysis to analyse the relationships between these key assumptions (except mortality, where disclosures are limited) and company-specific factors such as the pension plan funding position and duration of pension liabilities. We find evidence of selective ‘management’ of the three assumptions investigated, although the nature of this appears to differ from the findings of US authors. We conclude that IAS 19 does not prevent the use of managerial discretion, particularly by companies whose pension plan funding positions are weak, thereby reducing the representational faithfulness of the reported pension figures. We also highlight that the degree of discretion used reflects the extent to which IAS 19 defines how the assumptions are to be determined. We therefore suggest that companies should be encouraged to justify more explicitly their choice of assumptions.

‘To invite disappointment or worse’: governance, audit and due diligence in the Ferranti–ISC merger

Abstract Mergers and acquisitions frequently destroy shareholder value, and UK companies have a particularly poor record in US deals. But outcomes are rarely as calamitous as in the case of the British electronics group Ferranti which in 1987 entered into a significant merger with the US company International Signal and Control Group (ISC). The combined group had collapsed by 1993. Our analysis of the case, seen in the light of more recent corporate failures such as the Royal Bank of Scotland (RBS), leads us to question whether the UK’s ‘idiosyncratic mix’ of corporate governance mechanisms can ever effectively constrain the flawed and dictatorial decision-making of dominant individuals.

Financial centres and international capital flows in the nineteenth and twentieth centuries

theorise the governance processes of entrepreneurial firms), Sarah Jack and Mary Rose’s discussion of network theory (chapter 12) nicely complements Reuf’s work. The reader’s trip then goes downhill again, as the two chapters in section 2.4 barely qualify as ‘integrative works’. Chapter 13 applies a ‘self-regulation perspective’ to the ‘psychology of entrepreneurs’ – history is factored into the equation only through a subsection titled ‘Previous Use of Cognitive Theories’ (p. 296). So we are back to the same rote recitation, history of ideas bog that mires earlier chapters. The authors mention ‘[c]ounterfactual argumentation’ (p. 311), but make no mention of historical counterfactuals. Chapter 14 on ‘Social Entrepreneurship’ just reviews the development of the field, leaving this reviewer wondering: how can it be construed as ‘integrating’ any of Part II’s chapters? To the extent that Part III deals with economic history, it will interest business historians the most. Daniel Wadhwani’s chapter on ‘historical reasoning’ (chapter 15) is superb. It should appear much earlier in the piece because it contextualises the historically myopic focus of the majority of Part II’s chapters ‘on narrow, discrete categories of behaviors and cognitive acts’ (p. 351). Chapter 16 (by Andrew Godley) on twentieth century Britain presents an engaging discussion of ‘culturally specific networks’ and how the entrepreneurial expertise they sustained became quickly outmoded due to events such as depression and war. Hans Landström and Lennart Schön’s ‘structural cycle explanation’ of entrepreneurship’s vicissitudes in Sweden makes for interesting reading, as does David Ahlstrom and Linda Wang’s discussion of East Asian entrepreneurial capitalism (chapter 18). This book is a mixed bag. It tries to be all things to all people who have a scholarly interest in historicising entrepreneurship theory and entrepreneurial activity. A tighter historical focus is needed. No doubt the editors tried valiantly to lend this volume coherence, but they have not been entirely successful. Business historians will find this a sometimes useful but not indispensable resource.

Creative accounting, fraud and international accounting scandals

Creative accounting, fraud and international accounting scandals, edited by Michael John Jones, Chichester, John Wiley & Sons, 2011, xxv + 550 pp., £50.00 (hardback), ISBN 978-0-470-05765-0 The ter...