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Written by David Highfill
Kansas State University
December, 2004

British Accounting

Introduction

This paper talks about British Accounting. The first part will talk about how the British were important in the development of accountancy. Within this part, large-scale organizations showed growth. Company legislation was important to the development of accounting laws in England. Limited liability companies were prone to insolvencies during the late nineteenth century. The income tax created demand for accountants during this period. The second part will talk about the differences between British and American accountants. The final part will talk about how British accountants were important to the development of the United States. Without the intuition of past British accountants like: Samuel Price, Edwin Waterhouse, William Welch Deloitte, and George A. Touche, this profession would not be in the same place as it is today.

Development of Accountancy

"Four aspects of the nineteenth century British economy were particularly important for the development of accountancy: the growth of large-scale organizations and, in particular, of the railways, company legislation, the high rate of insolvencies, and the introduction of income taxation" (Parker, 1986 p.5). The demand for auditing, bankruptcy, costing, and tax services rose due to these issues, and they were supplied by the accountancy profession (Parker, 1986 p.5).

Large-scale Organizations

Large organizations began to grow during the industrial revolution and the railway industry was a significant part of this growth. The railway construction between 1830 and 1875 produced more than 70% of England's final route mileage (Parker, 1986 p.5). This industry had great economic benefits for accounting. With these larger organizations growing, accountants were needed even more to keep track of the financial situation of these businesses. Clients had more investments and assets to maintain, which made the accountants have higher quality standards. "The big railway companies were pioneers in corporate management at a time when most manufacturing companies were still family firms" (Parker, 1986 p.6). This move from family business to corporate business was a great way for businesses to increase their investment and growth potential by acquiring more cash into the business. The corporate world has always needed accountants to evaluate and manage the business on its activities. Corporations have continually been a huge employer to the accounting profession. Large organizations and corporations must have accountants to survive in the competitive world of business.

Company Legislation

"Accountancy practice in the United Kingdom, unlike the United States, has been greatly influenced by company legislation. The essence of modern company law is that it grants by registration with a government agency the rights of corporate personality, perpetual succession and limited liability" (Parker, 1986 p.8). The South Sea Company took over England's national debt and issued stock in an attempt to make money. This business concept never worked. After the South Sea Company's bubble popped, the result was the Bubble Act of 1720. "It aimed to correct four evils: (1) excessive stock speculation, (2) formation of fraudulent joint stock companies, (3) the use of corporate prerogatives by unincorporated firms, and (4) the use of corporate charters to conduct inappropriate types of business. This act not only denied limited liability status to all firms not incorporated by Crown or Parliament, but was used as a policy instrument to restrain the formation of new corporations" (Chatfield p.81). South Sea Company is an example of how company decisions affect the accounting profession and laws in England.

Insolvencies

Not only did the nineteenth-century British economy have growth but also had crises and insolvencies (Parker, 1986 p.10). Limited liability companies were very prone to insolvency. Between 1856 and 1883, "about one-quarter were dissolved within three years of registration, about one-half within ten years, and almost three-quarters within twenty years" (Parker, 1986 p.10). These high numbers of insolvency led to higher demand for accountants to act as liquidator during this period.

Income Taxes

The development of the income tax added demand to accountants. The British used income tax to finance wars. "An income tax was first introduced in Britain in 1799 to help finance the war against Napoleon" (Parker, 1986 p.11). Since prior to 1799 no one paid income taxes, the common citizen and business all of a sudden needed someone to calculate how much they owed to the government. Accountants were already used for keeping track of businesses financial situation, but now figuring out income taxes made businesses higher more accountants. The income tax was removed after the war ended but reintroduced when war broke out again in 1803. The income tax was withdrawn in 1815 when war ended again. The final re-installment of the income tax was "in 1842 as a temporary measure at a time of nation crisis" (Parker, 1986 p.11). The continuation of the income tax will always create a demand for someone else, an accountant, to figure out the least a person owes to the government.
The Accounting Profession in the United Kingdom

The United Kingdom differs from the United States in the Accounting Profession. The largest accounting organization is the Institute of Chartered Accountant in England and Wales (ICAEW), which was founded in 1880 and at the end of 2002 had 123,719 members (ICAEW.co.uk). Members of the ICAEW are called Charter Accountants. "Applicants for membership must pass the Institute's examinations covering a wide range of subjects and must complete a designated amount of time under a training contract with an authorized training office" (Arthur Andersen & Co., 1987 p.4). The ICAEW members are required to "obtain a minimum credit within a broad range of professional activities (such as audit, tax, company law, and so forth)" for their continuing professional education (Arthur Andersen & Co., 1987 p.5).

The United Stated version of the ICAEW is the American Institute of Certified Public Accountants (AICPA). The AICPA was formed in 1887 and today has 328,000 members (AICPA.org). The AICPA requires its members to acquire continuing educational credits to stay a member. "United Kingdom chartered accountants often engage in activities that are not customary for a CPA in the United States. For example, the chartered accountant may act as a liquidator, a receiver, or a trustee of a company in bankruptcy" (Arthur Andersen & Co., 1987 p.2). "The Auditing Practices Committee (APC) is a subcommittee of the Consultative Committee of Accountancy Bodies (CCAB), which represents all the major professional public accounting organizations in the United Kingdom" (Arthur Andersen & Co., 1987 p.2). In the United States, "the Financial Accounting Standards Board (FASB) has been the designated organization in the private sector for establishing standards of financial accounting and reporting" (FASB.org). Accounting in the United Kingdom is different from accounting in the United States.

British Accountants in the United States

British accountants first came to the United States to protect the English investments. Many British accountants found work in the United States because the economy was booming the late nineteenth century (Parker, 1986 p.65). Many of the large accounting firms today came from England, which include: Price Waterhouse, Deloitte & Co., Ernst & Young, and KPMG.

Price Waterhouse

"Price Waterhouse was founded in London in 1850 by Samuel Lowell Price" (O'Malley, 1990 p.7). Samuel Price became partners with Edwin Waterhouse and William Hopkins Holyland. Price Waterhouse made many trips to the United States to look after European investments. An office was opened at New York in 1890 to have a continual presence in the States (O'Malley, 1990 p.8).

Deloitte

"William Welch Deloitte established an accounting practice in London at age 25 and quickly proved to be an innovator. He helped develop a system that formed the basis for the English railway accounts, as well as a system of hotel accounting that became standard in the field. Deloitte's reputation was so strong that he was asked to help unravel the infamous frauds at the Great Northern Railway and the Great Eastern Steamship Company. His importance to the accounting profession was recognized in 1889 when he was elected president of the Institute of Chartered Accountants" (Deloitte.com "William Welch Deloitte").

Touche

"George A. Touche, a Scotsman, established a London-based accounting company in 1898 to help meet that (joint stock companies) demand. Two years later, he followed the flow of British capital to the United States, establishing the first U.S. office of Touche, Niven & Company" (Deloitte.com "Our Beginnings").
Conclusion

The United Kingdom has been a major factor in many areas of accountancy. The British were instrumental in the development of accountancy, the accounting profession, and United States accounting. The ICAEW was active in the progress of the accounting profession. Without the British taking an innovative stance to the changing economy, the world of accounting would not be the way it is today.




Sources

Arthur Andersen & Co. The Accounting Profession in the United Kingdom. 1987.

Chatfield, Michael. Development of Basic Accounting Methods.

"FAQ About the AICPA."
      8 May 2004. http://www.aicpa.org/about/faqidx.htm.

"FASB: Facts - Mission."
      8 May 2004. http://www.fasb.org/facts/index.shtml.

"ICAEW End of Year Membership Totals."
      13 March 2004. http://www.icaew.co.uk/index.cfm?AUB=tb2i_2594,MNXI_11403.

O'Malley, Shaun F. Price Waterhouse. 1990.

"Our Beginnings."
      13 March 2004. http://www.deloitte.com/dtt/section_node/0,2332,sid%253D2274,00.html.

Parker, R.H. The Development of the Accountancy Profession in Britain to the Early Twentieth Century. 1986.

"William Welch Deloitte."
      13 March 2004. http://www.deloitte.com/dtt/executive_profile/0%2C2305%2Csid%25253D2275%252526cid%25253D3050%2C00.html.


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