Creative accounting in the British Industrial Revolution: Cotton manufacturers and the ‘Ten Hours’ Movement
By Steve Toms and Alice Shepherd (both at the University of Leeds Business School)
The paper examines an early case of creative accounting, and how, during British industrialization, accounting was enlisted by the manufacturers’ interest to resist demands, led by the ‘Ten hours’ movement, for limiting the working day. In contrast to much of the prior literature, which argues that entrepreneurs made poor use of accounting techniques in the British industrial revolution, the paper shows that there was considerable sophistication in their application to specific purposes, including political lobbying and accounting for the accumulation of capital. To illustrate lobbying behaviour, the paper examines entrepreneurs’ use of accounting to resist the threat of regulation of working time in textile mills. It explains why accounting information became so important in the debate over factory legislation. In doing so, it shows that a significant element was the accounting evidence of one manufacturer in particular, Robert Hyde Greg, which had a strong impact on the outcome of the parliamentary process. The paper uses archival evidence to illustrate how accounting was used in Greg’s enterprise and the reality of its economic performance. The archival evidence of actual performance is then contrasted with the figures presented by Greg to the Factories Inquiry Commission, convened by the House of Commons in 1833-1834 to hear witnesses from the manufacturing interest. These sets of figures are compared and contrasted and discrepancies noted. Conclusions show that the discrepancies were substantial, motivated by Greg’s incentives to present a particular view of low profits, high fixed costs, and the threat of cheaper overseas competition. The figures appeared to lend some credibility to the apparent plight of manufacturers and to Nassau Senior’s flawed argument about all profit being earned in the ‘last hour’ of the working day. The consequence was a setback for the Ten Hours movement, leading to a further intensification of political struggles over working conditions in the 1840s.
Review by Masayoshi Noguchi
The paper by Toms and Shepherd was distributed by NEP-HIS on 2013-11-22. It makes a welcomed contribution to researching the role of accounting information within the British Industrial Revolution, as great debate still continues over the extent to which accounting technology was used for management decision making during that period.
The aim of Toms and Shepherd is to examine “the use of accounting by entrepreneurs to resist the threat of regulation of working time in textile mills in the early 1830s” (p. 2). This by analyzing the extent of “anti-regulation lobbying on working hours and child labour was influenced by accounting manipulation” (p. 2).
Archival evidence was sourced in the business records of the partnerships of Samuel H. Greg and Sons. As is well known, one distinctive feature of accounting system of partnerships until present day is profit-sharing amongst principals. Toms and Shepherd also examines in detail the level of “sophistication in recording capital appropriations and accumulations” (p. 4) among partners. This as the partnerships’ accounting system recognised implied interest charges of capital and used them to arrive at the balance carried forward. However, this criteria sharply contrasted with the absence of any other criteria for accounting for fixed assets (including depreciation). Fixed assets were treated as part of “[Greg’s] private estate and not assigned to the partnership” (p. 14). The practice at Greg and Sons thus provides a further case to support Pollard’s critical assessment of the limited use of accounting information for decision purposes (p.14).
Business records recording the actual performance of the business are then contrasted with evidence submitted by Robert Hyde Greg to the Factories Inquiry Commission of 1833. Toms and Shepherd then argue that the latter accounting evidence was distorted by the manufacturer’s interest to oppose the introduction of regulation stipulating the working day in textile factories. In particular, Greg manipulated accounting evidence submitted to the Factories Inquiry Commission by exaggerating “the importance of wages as an expense” (p. 22). This by assuming that most of the production costs in general, and wages in particular, were fixed costs and thus “reducing the working day would increase the burden of fixed charges” (p. 21) on profit.
Using the information recorded in Greg’s accounts of the partnership, Toms and Shepherd offer some factual and contra-factual exercises, including the calculation of “implied” rate of return on capital (pp.32-33). They then compare these results with the evidence provided by Greg to the Commission thus providing clear evidence of the manufacturer’s accounting manipulation. However, as the authors themselves admit, the concept of “return on capital is not referred to specifically in Greg’s evidence (only ratios of profit to output)” (p. 31), even though “the committee (sic) could easily draw conclusions from his tabulated appendices” (p. 31). Personally I would like to know more about the effect of writing-off the asset values exercised in 1832 (pp. 27, 30) on Greg’s submission of the accounting evidence to the commission in 1933.
With the skilled manipulation, the evidence submitted by Greg was successful to achieve a political effect with the final report of the Commission incorporated the entrepreneurs’ argument against the regulation on working hours. The authors conclude that accounting information could be used “not so much as an aid to [rational] management decisions, but as a [opportunistic] means of influencing others” (p. 36).