Corporate Disclosure and Financial Statements: a Brief History

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Corporate disclosure and financial statements: a brief history

While the history of private enterprise is thousands of years old, a relevant launchpad to understand the modern corporation, and its associated concepts of limited liability and disclosure etc. can be with the corporations of the 17th century. Understanding the evolution of financial statements and disclosure in the private sector is critical to seeing the remarkable similarity between the evolution of “Right to Information” issues in the private sector and the current debates on the same topic in our public institutions: •While the history of private enterprise is thousands of years old, a relevant launchpad to understand the modern corporation, and its associated concepts of limited liability and disclosure etc. can be with the corporations of the 17th century. Of special interest to India is that no institution offers a better case study here than the East India Company: •Between 1600 and 1617 the company sponsored 113 voyages, each supplied with newly subscribed capital and treated as a separate venture. •At the end of each voyage assets as well as earnings were subject to divisions among the shareholders. Profit was easily measured by the individual investor: he gained to the extent that he got back more than he had paid in. •One of the first attempts to deny stockholders access to the records of their company occurred during 1633. After a decline in the fortunes of the East India Company, some stockholders moved for the appointment of a committee of inspectors. The Governor (Chairman) refused to put the motion to the meeting and the governing committee decided that no-one should be permitted to read or copy, or to ‘ravel and dive’ into the accounts without its consent. •During 1841 a Select Committee was requested to inquire into the State of the Laws respecting Joint Stock Companies with a view to the greater security of the public in Great Britain. It published its First Report during 1844, including the following recommendations: •“The periodical holding of meetings, the periodical balancing, audit and publication of accounts, (would make) the Directors and officers more immediately responsible to the shareholders.” •“Periodical accounts, if honestly made and fairly audited, cannot fail to excite attention to the real state of a concern; and by means of improved remedies, parties to mismanagement may be made more amenable for acts of fraud and illegality.” •“It is expedient that the accounts of every such Company be open to the inspection of the shareholders: and that the annual balance-sheet, together with the reports of the auditors thereon, be registered.” •This report heralded the beginning of the never ending attempts to enforce proper disclosure of the affairs of corporations, the birth of the modern accountancy and audit professions and the eventual supervision by entities such as stock exchanges, central banks and securities commissions. •Some of the “Modes of Deception Adopted” by these companies recorded in the Report were: •By the issue of prospectuses and advertisements containing false statements as to the authority under which it exists, as to the amount of capital of the Company, or as to the period of its establishment; •By the concoctors and managers living at great expense, entertaining their neighbours, and thereby endeavouring to fortify themselves against suspicion; •By the making up of fraudulent accounts, so as to deceive the directors and the shareholders, which has been facilitated sometimes by the accounts not being audited, or by the accountant being a near kinsman of the managing director, the only party taking an active part in the concern; •By declaring dividends out of capital, on false representations of profits realized; •The 1844 Report was followed by the first general Companies Act, the Joint Stock Companies Act 1844 which provided for •The institution of the Office of the Registrar of Joint Stock Companies...
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