Beginnings of financial reporting and premises of consolidation of accounts in the French aluminium industry, 1921-1939
by Didier Bensadon (firstname.lastname@example.org)
Associate Professor in Financial Accounting, University Paris-Dauphine, DRM
The expansion of groups of companies during the inter-war years is one of the most profound transformations in the structure of French capitalism. Studies in economic history have shown the importance of the subsidiary creation phenomenon in relation to Compagnie Générale d’Electricité, Energie industrielle or Schneider. By contrast, these studies are less interested in the specific arrangements for auditing subsidiaries and managing Company Groups. This article seeks to show how and why the directors of Alais, Froges et Camargue – The largest French company in the aluminum sector- established specific audit measures from the 1920s onwards. This research is essentially based on the company’s archives (annual reports, general organisation chart and memoranda from the general secretariat). Even if the results published in the annual reports should be treated with the utmost caution, in particular owing to the absence of accounting regulation in France in the inter-war years, they remain essential for assessing the important position of subsidiaries and main shareholdings in assets. The scope of the subsidiary creation phenomenon, which is behind the establishment of specific controls, is highlighted. This trend, far from being linear, is strongly influenced by the economic and political situation. The size of the Group’s growth gave rise to two types of requirements for the directors of Alais, Froges et Camargue, namely to audit the subsidiaries and to measure the group’s net cash flow. The response to the need for auditing the subsidiaries was provided by the introduction of financial reporting from 1921. Faced with the increasing number of subsidiaries and main shareholdings held by Alais, Froges et Camargue, this control mechanism was to be strengthened in 1931. Furthermore, the necessity of measuring the Group’s net cash flow led the directors in 1927 to draw up a financial statement whose conceptual foundations were based on those of the consolidation of accounts.
Review by Masayoshi Noguchi
This is an interesting piece of work distributed by NEP-HIS on 2011-11-03. Its analytical method is the traditional archival research and the object of the analysis is ‘the company’s archives (annual reports, general organisation chart and memoranda from the general secretariat)’ of Alais, Froges et Camargue. Citing Bouvier (2005) on Compagnie Générale d’Electricité, Vuillermont (2001) on Energie industrielle and d’Angio (2000) on Schneider, the author assesses the prior research as being less interested in specific arrangement for controlling subsidiaries and managing a group of business enterprises. To rectify the deficiency, Bensadon exemplifies the case of Alais, Froges et Camargue, born out of the merger in 1921 of the Produits Chimiques Alais et Camargue Company (PCAC) and Société électrométallurgique française (SEMF) engaging in energy and electrochemistry related activities along with activities in the production of aluminium. Recognizing the importance of the subsidiary creation phenomenon during the inter-war years for transforming the structure of French capitalism, the research proposes to explore how and why the directors of Alais, Froges et Camargue established a new management structure from the 1920s onwards.
To answer the question of ‘why’, Didier Bensadon argues that ‘[t]he size of the Group’s growth gave rise to two types of requirements for the directors…namely to audit the subsidiaries and to measure the group’s net cash flow’, preceding the legal framework under which ‘corporate confidentiality’ to protect the business interest of private enterprises was still stressed, the same pattern more or less recognized in the experience of Great Britain during the period from the late nineteenth to the early twentieth centuries (see for example Dick Edward’s A History of Financial Accounting).
For the ‘how’ question, the Bensandon forwards the idea that ‘the necessity of measuring the Group’s net cash flow led the directors in 1927 to draw up a financial statement whose conceptual foundations were based on those of the consolidation of accounts’. Specifically, the author’s indication is intriguing that a prototype of consolidated statement of cash flows came out spontaneously as a management tool to control the group’s financial strategies, rather than the means for external reporting. In fact, it has been pointed out, from the viewpoint of group formation of businesses, that greater importance may be attached to the consolidated statement of cash flows rather than to the balance sheet or income statement (for example see Heath, 1978; Heath and Rosenfield, 1979). Bensadon’s research on the Alais, Froges et Camargue helps to support the case, though unclear to what extent the findings would be generalized in French industrial society during the interwar period. Probably, his future research agenda will include the issue of how the argument for preceding origination of consolidated cash flow statement could be applied to other companies.
Bensadon’s analysis on the attributes of subsidiaries and the relationships with the required frequency of reporting will provide a useful guide for future research. However, he arrives at important conclusions in some places but without showing sufficient evidence. Sorting out of associated companies classified in ‘shareholdings’ category which became the subject of ‘close monitoring’ in relation to his Table 4 is a typical case. The reference system is also coarse.
In contrast, there is persuasive power in the author’s analysis on the shareholdings of Alais, Froges et Camargue for its subsidiary network created in accordance with the business strategy of the parent company making heavy investments on several strategic sectors, i.e. energy supply and chemical production. The archives utilized also vastly extends covering the company’s articles of incorporation, the notice of meetings and the minutes of ordinary and extraordinary general meetings, balance sheets and profit and loss accounts, minutes of board meetings, copies of large contracts, the complete set of annual reports and various other reports (especially those affecting financial programmes) for the subsidiaries. Effectively utilizing these materials, this piece of work has attained its objective.
Edwards J R (1989) A History of Financial Accounting, London: Routledge.
Heath L C (1978) Financial Reporting and the Evaluation of Solvency, Accounting Research Monograph No.3, AICPA.
Heath L C and Rosenfield P (1979) Solvency: Forgotten Half of Financial Reporting, Journal of Accountancy, January, pp.48-54.