Introduction Accounting in the West has gone through many changes since the medieval period, where It was used as a rudimentary means of assessing stewardship, to today, where it has become a vital and complex part of the economy on both a local and international stage, as will be shown throughout the essay, as well as how these changes have affected the social and political landscape in the West; who has benefited, who has not, and the debate which continues today as to the position counting should have In the world, compared to the position it currently occupies. Sing eleven papers, in chronological order, this essay is separated in to two fields; financial accounting and management accounting in an attempt to reveal an underlying theme throughout the history of accounting which illustrates the benefits and drawbacks of the development of accounting In the West. Financial Accounting Bacilli Christianity plays a significant role in the development of accounting practices throughout the Middle Ages and in to the 1 5th Century. Volume (1994) writes of Luck
Piccolo, a Franciscan monk who embraced the belief of “number mysticism”, wherein all figures were created by God, and therefore were essentially God’s word. Bacilli wrote Sum, a collection of work from the artists and thinkers of the time edited by the author as a “detailed description of the best accounting practices used in the International commercial centre of Venice” (Volume, 1994, p. 7). Sum contains the first-known detailed description of double-entry bookkeeping, and describes the means by which accounting is a part of good business practice. Piccolo’s conceptual ramekin meets the definition of a conceptual framework used by the [FAST] (1 AWAY’ (Volume, p. 7). His framework consisted of three books, still In use today: the memorandum (daybook); the Journal; and the ledger. Modern concepts such as a true and fair view, consistency, reliability, relevance, understandability, materiality, and full disclosure in accounting practices are described in Sum. Bacilli also recognizes that the nature of the business entity is to make profit and recommends that accounts are balanced yearly, Indicating the use of prudence.
Volume (1994) also argues that in another of his works, De Divine Proportions (1509), Bacilli first hints upon the idea of visually displaying trends and proportions in accounting figures, via graphs and charts. This will have been of enormous influence throughout the centuries, as evidenced by the five examples of Sum In existence In Scotland, one of which belongs to the Edinburgh society of Accountants, one of the precursors to CICS. It has helped to codify business practices and shape the principles at the heart of accounting, and by doing so will have helped to develop a consensus on both in the West.
The original was also published In the common language of the time, and therefore made this knowledge accessible to all. This Inclusively Is not mirrored In modern accounting however, as evidenced by Ministry (2013), who observes a nationalistic terms. This will have been contrary to the intentions of one of accountings most venerable icons, as Bacilli had used the common language of the time in his writing “so that educated and non-educated would benefit from it to the same extent” (Volume, 1994, p. 6). 9th and 20th Century Practices The practices established by Bacilli are seen in use in the 19th century, although not n quite the unified and recognizable manner seen today. Edwards & Baber (1979) assess “the accounting policies and procedures” (p. 139) of DICE from the asses onward, a period of sustained growth for the company. They point out that such growth could not have happened without comprehensive record keeping of all the transactions and movements of resources that this would necessarily entail.
Disc’s own financial reporting structure mirrored three of the four accounting concepts of SAP 2, which would not come into being until 1971. Only the accruals concept was not really recognized, as the company believed that the prudence concept should cake precedence. There were two unusual aspects to Disc’s accounts compared to the standards of today. As a family-run business, transactions of a personal nature tended to be carried out through the accounts of the entity, although it should be noted that this was recognized, and such transactions were ” properly accounted for through the various partners current accounts” (Edwards & Baber, p. 40). Perhaps the most unusual difference (compared to accounting practices of today) was that capital expenditure was recorded as a cost in the year incurred and presented in Disc’s profit & loss account. While dramatically reducing the profit fugue of DICE in those years where expansion took place or fixed assets were replaced, this seems to have benefited the company. Dollars recognized all the cost at once, which gave them greater freedom with internal finances in subsequent years, and in those years where capital expense reduced profit, they in turn reduced spending.
This, combined with “direction provided by a succession of firm and dynamic leaders”, has attributed to the unprecedented growth of the company in the 19th century (Edwards & Baber, 1979, p. 148). This is in line with Watts & Zimmerman (1979). They argue that theories and subsequent practices are borne of the self-interest of the party promoting them, and that unregulated markets will still produce relevant accounting information. Disc’s practices occasionally reflect modern standards, but occur naturally out of the company’s own necessity to produce information.
Also, despite using company accounts for personal transactions and recording capital expenditure as a cost in the year occurred, neither the company nor its investors seem to have suffered, and in fact the company went from strength to strength, although much of his must be attributed to the British Industrial Revolution and the unrivalled period of growth for the company. Combs & Edwards (1995) analyses the attitudes of Masc.. Towards accounting between 1835 (the advent of the Municipal Corporations Act) and 1933.
The Act, created to combat mismanagement and corruption, required boroughs to produce precise accounts; that these accounts were available to council as and when they were requested; that they were also available to the local public; and that they were audited by someone elected by the public. In the beginning, it the decades, these corporations embraced new practices (such as distinguishing twine capital and revenue, the double account system, and the aggregate balance sheet) at largely their own pace, until 1933, when the accruals-based system of accounting was fully embraced as the standard.
The reason for this drawn-out change stems from the popularity of cash accounting, particularly among district auditors. This method was touted for its simplicity to create and understand, while the accruals-based method was considered undesirable due to its seeming complexity, occasional need for estimates rather than concrete figures, and the lengthy delays in publication due to both.
However, there was encouragement from the accounting profession for Masc.. To embrace accruals-based accounting, extolling its virtues, such as its ability to create profit and loss statements, its adeptness at combating fraud and carelessness, and recording values rather than simply inflows and outflows. The 1907 Departmental Committee on the Accounts of Local Authorities believed that standardization of accounts between the boroughs was “desirable and achievable” (Combs & Edwards, p. 99) and its report reflected the sentiments of Stall’s recommendations in 1889 that boroughs adopt the changes necessary to meet his demand in the profession..
In 1913, The Institute of Municipal Treasurers and Accountants (IMITATE) produced 1 1 standard forms for its members to use in presenting non-trading accounts, after failed attempts to convince the Board of Trade to do so. In 1930, the Statutory Rules & Orders contained an order requiring municipalities to apply the principles of accruals-based accounting to those areas subject to district audit. This order was devised by the IMITATE and although limited in scope, many boroughs will have embraced the order even if they did not have to.
The beneficiaries f this will undoubtedly have been accountants as they themselves pushed for the change. Combs & Edwards (1995) note that “accounting innovation was supply driven rather than demand led”. In 1887, The Accountant, a publication aimed at chartered accountants, published an issue criticizing the lack of accounting qualifications among officials entrusted with auditing municipal accounts, and doubting “if there could be found in most of these corporations officials capable of [preparing a balance sheet] in a correct manner” (8 October 1884, p. ). But ratepayers themselves do not seem to have cared how record keeping was done, and t is likely that the published accounts completed on an accruals basis became more difficult for the layman to understand. In 1903, the Local Government Board argued that the appeal of the cash-based system was that “it shows what the ratepayers do actually pay during the particular year” (BP 1903, vii, q. 78). This regulation of accounting further removes the information from its use to the general public.
Ministry (1999) analyses the prevailing attitude and subsequent accounting approach of Albino Motors, “Scotland most successful vehicle manufacturers” in an attempt to establish the various factors that affect accounting development. He observes that “organizational culture often stems from those who start up businesses” (Ministry, 1999, p. 206). With a strong engineering background, T. B. Murray and N. O. Fulton, the founders of Albino Motors, created a culture heavily biased toward engineering.
This is further evidenced by a system in place of taking well-performing apprentices and placing them on paid BBS courses in an attempt to position. Indeed, Fulton own brother, who took on a financial role in the company, et with opposition to his appointment as director due to his lack of engineering knowledge. From what could be found of Albino’s financial accounting records, a “well-developed double-entry financial accounting system” was discovered at the company’s inception (Ministry, 1999, p. 210). This included all the standard ledgers still in use today. Fixed assets were recorded separately, and depreciation was calculated.
This level of sophistication was advanced for its time, and actually surplus to the requirements in the company’s Articles of Association 1902, submitting profit and loss statement as well as a detailed balance sheet to shareholders where only a balance sheet was required. It is suggested by the author that these measures were put in place by Albino staff, rather than a qualified accountant. Indeed, these high standards would not have been pursued by the board, who labeled employees with a wide range of financial duties as ‘cashiers’, and considered the financial function of the company to simply be a part of general adman.
This function seems to only have been of importance to Leland Motors, who appointed a financial accountant after their takeover of Albino. Although they placed no real emphasis on the value of accounting, Albino Motors does not seem to have suffered much as a result until the takeover by Leland Motors, where it could be argued that a better understanding of their financial situation and the means by which other sources of finance could be obtained may have altered their decision to approve the merger.
It can therefore be said that Leland, who seemed to value good financial systems, benefited from this lack of emphasis as well. Ministry (1999) also argues that the reason scientific management was developed was as an attempt by the engineering profession to maintain a dominance in the boardroom that was being lost to the financial profession. He points out that the reason scientific management was not embraced at Albino (and by my own extension the engineering industry during the early 20th century) was quite simply that in this case, the engineering profession maintained an almost complete dominance at the top level.
The Rise of Regulation and The Accountancy Body If regulation is unnecessary as Watts & Zimmerman (1979) argue, why then does it exist in modern financial accounting? The answer lies with the formation of accountancy bodies, most notably CICS. According to the Ministry (2013), The rise to power of the Institute of Chartered Accountants of Scotland (CICS) has been the result of what may be perceived as self-interest over public interest, but that, through Fasciculation analysis, this may have proved beneficial for everyone.
CICS’ origins can be found in the Institute of Accountants in Edinburgh (EIA), who formed in 1853 to combat the threat of losing bankruptcy and insolvency work to English courts. Right at the beginning, a discourse of superiority is set, as the new organization argues that “all unqualified and incompetent parties should be excluded from the office of trustee”, essentially arguing for a level of exclusivity in accounting (Ministry, 2013, p. 13).
This exclusivity was furthered by a royal charter granted in 1854 which led to the right to use the term Chartered Accountant, or “CA” (Walker, 1995, cited in Ministry, 2013, p. 14). During WI The Accountant argued in favor of high standard of accountancy qualifications should be required after the war from all in the profession in order that the public should be assured of expert service” (Walker and Skeleton, 1995, p. 79, cited in Ministry, 2013, p. 23).
This discourse contains elements of “political economy theory’ (PET) which argues that economic events cannot be analyses separately from the political and social landscape in which they occur (Gray et al, 1996, cited in Degas & Merman, 2011, p. 322). Societal and political events played a significant part in the rise to prominence of accountancy. However, this call for unification was opposed by the EIA, who saw accounting as being Scottish in nature, and therefore their birthright. This continued in 1965, when CICS, the ‘Sea’s successor, opposed a proposal by the Institute of
Chartered Accountants in England and Wales (CHEW) to merge into a single body. In 2000, the EX. Made the preparation of accounts to International Accounting Standards (AS) mandatory. CICS, among many other institutes worldwide, was involved in the creation of ‘AS. With the discourse that only the expertise of an institute, such as CICS, can be entrusted with financial duties, these institutes created an exclusivity factor around finance. This will have been of enormous benefit to them, as it essentially created a profession that is now seen as vital.
CICS, who has traded on he idea of being the first such institute and therefore the best, has taken this discourse to a higher level, which has led to a disproportionately high number of its members achieving prominent positions in the financial world, and a relatively small organization having a great deal of say in global finance practices. This seems to fill the criteria for capture theory (Degas & Merman, 2011, p. 42-3), which argues that regulated markets will be ‘captured’ by entities in order to dictate regulations to their own self-interests.
Under Fasciculation analysis, Ministry (2013) argues that this courses, which may be self-serving, has also benefited the general public, as under CICS’ leadership, accounting globally has begun to conform to ‘AS, which has led to a better understanding of finances in other countries and helped to increase foreign investment. However, this exclusivity has also meant that the general public are kept out of the decision making processes that create ‘AS, and are also kept at arm’s length with technical and legal Jargon created by a profession that, it could be argued, has made its own existence necessary.
As previously mentioned, this is not n keeping with Piccolo’s belief that knowledge should be shared equally. Even within the profession, many institutes who could argue to be in a better position to lead find that they have less say than a comparatively smaller organization. Competing Theories Watts & Zimmerman (1979) argue that regulations are harmful to the free market. They present accounting theories as products for sale, rather than bodies of work occurring out of necessity.
They argue that most theories are prescriptive, having been produced out of self-interest, which explains why there is no unifying theory. They seem to be believers in Adam Smith’s ‘Invisible Hand’ metaphor, which suggests that unregulated markets will, out of necessity, produce all necessary accounting information for the benefit of stakeholders, or risk losing favor with those stakeholders. They perceive this as preferable to the approach of government that may be misleading and unrepresentative. These regulations also mean agency costs.
In a regulated economy, audits are required in order to ensure that the agent of a business (the manager) has not misrepresented the financial state of the entity or his own economic benefit, where an agent’s reward is related directly to his performance e. G. , through shares. The costs of these audits are placed on the shareholder. Watts & Zimmerman (1979) argue that in an unregulated economy, shareholders would anticipate the dual motives of the agent and demand a proportional reduction in the his/her reward gained by discounting his/her shareholding.
This acts as a disincentive towards altering statements in the agent’s own interest, with no cost being borne by the shareholder. The Limitations of Accounting Ministry (2006) uses Christie Malory Own Double Entry (COMMODE) by B. S. Johnson to illustrate the limitations of accounting in the areas of human nature and day to day life. The book, a black comedy, centers on a bank clerk (the titular Malay) who, in an attempt to cope with the loss of his mother to cancer, begins to noontime and record personal grievances and setbacks in a double-entry system.
For instance, in the beginning Malay credits an office block up for being in his way, and then debits up for scoring a line into the buildings fade, thus balancing the account with an inanimate object. This double-entry method of addressing his personal issues ensures him, with ever-increasing debts owed to him for things such as “Socialism not given a chance”, to which he attributes a debt of IEEE,398 (Ministry, 2006, p. 981). His means of recompense grow more hostile as a result, culminating in the murder of 20,479 people by cyanide poisoning, which he calculates at “El . 0 per head, equivalent to the commercial value of the chemicals in each body’ (Ministry, 2006, p. 981). Christie himself dies of cancer in the end, with a final IEEE,392 written off as a bad debt, thus balancing his account. The book demonstrates through satire owe the accounting profession, growing in strength during the asses (where the novel is set), is limited by its need to noontime everything. In doing so, accounting can often omit or misrepresent aspects of human value, and can never fully represent the societal and political impacts of this narrow view.
Management Accounting The Origins of Management Accounting Although, according to Debbie (2008), the Middle Ages were regarded as an uneventful period in accounting history, he points out that there was in fact a great deal of change in financial management during this period. According to Debbie (2008), as the and ownership of abbeys increased, they became more complex, and it was necessary to record and keepsake documentation of proof of ownership.
Thus, greater care was taken with regards to surveys and rentals, in order to define the rights and responsibilities of each house, and prove entitlement to the income generated. Detailed inventories and records of assets were kept, with some houses even recording opening and closing balances at the start and end of the year. Valuable assets were kept under lock and key, often with systems in place wherein more than one obediently (essentially a senior manager) would be required to mongo the chapter for important decisions.
Although auditing was introduced prior to the 13th century, it became commonplace in this period, and veterinaries were required to provide accounts to a group of their brethren known as the seniors ad craniums, a kind of board of directors. According to Debbie (2008), as larger and more complex monasteries arose in the 13th century, it became necessary to compartmentalize them, and each obediently was in charge of their own department, with their own individual sources of income.
Eventually, “central treasuries” were created, wherein an overseer would keep track of each department, strutted assets and income more effectively and for the overall benefit of the house (Debbie, 2008, p. 148). The information of past performance would be used to project future performance, and these estimates were then measured against actual outcomes, an early form of variance analysis. This new system of financial management will have had far reaching benefits. The monks themselves will have benefited from having greater control and say in the house’s finances.
In many cases this will have reduced the potential for misuse of appropriations, and in turn helped stabilize the finances of monasteries. This in turn will have benefited the local communities with whom the monks would trade, and better record keeping will have meant a better understanding of this trading, in terms of substance and form. The author also points out that in the 14th century, a papal bull required “one- twentieth of the monks of a house to attend university’ in order to develop their knowledge of business and finance (Debbie, 2008, p. 154).
This is an early form of regulation (from the very highest authority) which may have led to better accounting in subsequent generations. There were those who did not benefit. Abbots who, forehand, had been able to distribute finances as they saw fit, and therefore could, and sometimes did, apportion finances for their own personal benefit above the benefit of the order or house, now found their powers greatly reduced. The changes also saw many monasteries move away from renting land out, instead taking them under direct management to farm for themselves.
This will have been to the detriment of those farmers who had relied on being able to rent this land. The negative effects suffered by the laborers seems to be a running theme throughout the history of management accounting. Scientific Management Hooking & Mace (2000) use Fasciculation analysis to describe modern management accounting as owing its existence to the use of what they call an “expert disciplinary knowledge” learned and utilized in the 19th century by Daniel Tyler (of Springfield Armory), George Whistler (of Western Railroad) and Herman Happy (of Pennsylvania Railroad) at West Point Military Academy in the US.
The education they undertook required a “new discipline of constantly being made to write, and to be examined and graded on the results of their writing” while also demanding that they achieve “a new and superior expert disciplinary knowledge… F modern mathematics and science” (Hooking & Mace, p. 3). They argue that these new disciplines fed in to the business practices of these three prominent figures, who used this level of detailed analysis and grading to begin measuring and studying the human element of decision making, thus exemplifying the adage Faculty took apart and analyses; that knowledge is power.
Hooking & Mace (2000) also point out that this system of recording and examining events was not new, having existed even before the Roman Empire, but that doing so for the human element (labor) seemed to complete the concept. They contend that the term ‘accountability changes at this point, from one describing stewardship, to one of measurement of the entity. They make the case, therefore, that this new ability to accurately measure from within the cost and efficiency, as well as the ability to better predict outcomes, changed the way in which markets operated.
Organizations could grow exponentially in size using a system of which would managers could analyses the efficiency of other managers. Thus, through the Fasciculation approach, Hooking & Mace argue that this new form of “administrative coordination” (p. 5) was not brought about for a marketplace that squired it, but rather came about as an attempt to change the marketplace. They also argue that, while the British Industrial Revolution brought about many advanced accounting practices, this fact alone does not explain how management accounting achieved such a substantial level of importance in the modern economy.
The Industrial Revolution Fleischman & Parker (1991) argue that despite the general consensus among historians that the introduction of scientific management in the asses brought about complex cost management techniques, there is evidence to suggest that these techniques existed before the Industrial Revolution. They examine records from 25 British firms in the iron and textile industries between 1760 and 1850 that show signs of using “sophisticated cost management” and speculate on the motivation for this.
They find evidence of complex use of cost management in four areas: cost control, accounting for overhead, “costs for routine and special decision making” (Fleischman and Parker, p. 366), and standard costing. Much evidence seems to exist of cost control being used during the Industrial Revolution by both the iron and textile industries, in particular Strut, a cotton producer that recorded costs such as training ND downtime “to a thousandth of a pence” (Fleischman and Parker, p. 365).
Surviving records show intricate methods of calculating overheads, particularly manuscripts from Greg, a cotton company who included in their costs of production “fixed assets, raw materials, waste, wages and an itemized ‘contingencies’ list” (Fleischman and Parker, p. 366) Iron companies Dairy and Carrot are seen to be using cost analyses in their decision making throughout the sass’s to the sass’s for matters ranging from lease options to the proposed introduction of a boiler to “time and motion studies on the mining process” (Fleischman and Parker, p. 6). Using standard costing, companies such as Seaworthy (cotton) were able to calculate prime costs, and in one such case for the company, this approach revealed a tiny profit margin on a particular twist count. The introduction of these techniques will have benefited iron and textile owners insofar as they will have led to better control over the use of materials and helped refine approaches to labor, while giving them a clearer indication of profit margins.
However, the authors agree to an extent with Pollard (1965), who argued that these cost management practices were insufficient, as they confusion between capital and revenue’; depreciation was not taken on assets… And cost data were rarely integrated into the financial records” (Pollard, 1965, p. 233, cited in Fleischman & Parker, 1991, p. 371). This early lack of sophistication and understanding may have meant profitable ventures being scrapped, and Jobs being lost.
Early 20th Century Industry The aims of Fleming et al (2000) in reviewing the shipbuilding, engineering and metals industries of this period were: to establish what cost accounting systems were in use in this period; how and to what extent these systems were in use; and to point UT that despite its seeming appropriateness for these industries, scientific management was not adopted as a result of an unwillingness to embrace standard costing and budgetary control. The study then looks at the effectiveness of costing systems preferred by these industries.
The majority of the companies examined used similar cost systems, using estimates for pricing bespoke work. In the production of vehicles and iron & steel however, where production was uniform, these products could be specified and costs known ahead of time. Most industries used as a means of “inmost” (overhead) absorption a labor based technique. Where estimates were taken, larger companies measured them against the resulting actual cost and revised future estimates accordingly.
Smaller companies did not generally deal with actual costs, but solely with the profit and loss figure at the end of the year and an in-depth understanding of each Job. Standard costing, and thus budgetary control, was not introduced in any meaningful way in this period. A reason for this would be the low regard held for scientific management, which would have required “time study, functional or divided forewoman’s, together with the standardization of all tools and implements and of the acts or movements of workmen for each class of work” (Fleming et al, p. 05). This may have made embracing the system more trouble than it was worth. Trade unionism was very strong in this era and being measured and studied in an attempt to lower labor costs and, by extension, wages would have met with unrest. Scientific management was also unpopular with upper management. As Sam Mambo (Chairman of Mambo & Collusion) observed, “although well suited to some industries, it can only be applied within narrow limits to general engineering” (Mambo, 1931).
The application of scientific management would have meant detailed and costly analyses and overhauls of all areas of the company who applied it. This would have been a very unattractive proposal over a period that saw two world wars. This unwillingness to embrace scientific management may seem myopic, but it may have been correct, as it seems as though the cost systems in place at the time were adequate for the industries that used them. Estimates carefully made and reassessed during and after each Job meant that losses could be identified quickly.
Contracts requiring large purchases of materials were priced ahead of time and used in the estimate before any commitment. Bonus systems or supervision controlled labor costs. These systems were sophisticated for the period and produced cost effective information, well used by upper management, and much cheaper than introducing standard costing and budgetary control. The information period. This reluctance will have held up the progress of management accounting as a recognized vital part of running a business.
Management at the time tended to address the engineering side of the business, regarding accounting practices as perhaps a nuisance. Ministry (1999) points out that Albino Motors’ cost department, o, was advanced for 1900. Costs were calculated across material, labor and overhead absorption rates. Albino adopted this system voluntarily from its inception; other firms only embraced them during World War l, when government contracts forced them to do so. Initially, Albino paid employees a time rate, but adopted the industry standard of bonus schemes before WWW.
However, the cost accounting department drew less attention from the board than the financial accounting department, and perhaps because of this, it grew stagnant, and was considered more and more underdeveloped as time passed. Again, this does not seem to have had a major effect on the fortunes of Albino Motors Conclusion Both financial and management accounting owe their origins, directly or indirectly, to religion. Management accounting practices in their infancy came about via changes in monastic orders.
Financial accounting owes its origins too man who pursued double-entry bookkeeping as a means of better understanding God. Both were devised as a means of having a clearer understanding of the processes and stability of a business entity. However, two things may be concluded: Firstly, accounting raciest, which have become a highly complex and vital part of international finance, have diverged from Piccolo’s original intent of sharing information with everyone, to one where information created by accounting practices is largely only understood by the practitioners; accountants.
The papers reviewed have shown that entities, whether Albino Motors or British Municipal Corporations, have been capable of keeping track of their own finances (in the case of Albino Motors, to a fairly advanced level) without the need to produce statements to anyone’s standards but their own. The public has benefited from this as well, as information has generally been produced in as simple a manner as possible for the sake of efficiency, and in so doing has been accessible too larger audience.
Thus Watts & Zimmerman (1979) seem to be correct in the benefits of positive accounting theory. The drive from accountancy bodies, such as CICS, to make comparable financial information for a greater simplicity, has ironically led to this information becoming more complex and therefore less well understood. This approach has led to the accountancy body coming a powerful entity in its own right, controlling the way in which information is gathered and distributed, which seems to be more in line with capture theory (Degas & Merman, 2011, p. 2-3). Under Fasciculation analysis however, this has led to a better understanding of foreign economies, albeit for accountants rather than laymen, which has meant more informed decision making in investments, which should in theory help maintain economies. Secondly, management accounting has been instrumental in the rise of the business entity from small factories to multinational corporations. Improved costing methods led to better decision making