This page contains some chronologically-arranged remarks on how accounting practice has changed over the years - as regards financial reporting and the presentation of financial results, rather than strictly bookkeeping. I should characterise the change as a move towards formalisation and, ostensibly at least, enforceability.
The "old school" approach relied on the professional judgment of the accountant in summarising an enterprise's financial results in the form of a profit and loss account (where required), a balance sheet, and notes thereto. The Companies Act 1929, sect. 134(1) required the auditor of a company's balance sheet to offer an opinion whether the balance sheet "is properly drawn up so as to exhibit a true and correct view of the state of the company's affairs..." which indicated the objective of the accounting draughtsman who was to prepare the accounts. The phrase "a true and correct view", which originated in the Companies Act 1879, was changed in the Companies Act 1947 to "a true and fair view" (maybe, as Myddelton suggests, because some people thought that the term "correct" was too rigid when dealing with the estimates inherent in a set of accounts) - although the current interpretation of this phrase is influenced by the meaning it has accumulated through the operations of the legal system, and thus, it is worth stressing, the everyday sense of the words "true" and "fair" cannot be relied on as a guide.
"It is evident that in all but the simplest cases a balance sheet must be 'a highly compressed summary of an exceedingly numerous and complex set of facts.' It is further evident that if such a summary is to be satisfactory, it must on the one hand exhibit enough detail to enable a correct judgment to be formed, and on the other it must condense boldly enough to make rapid comprehension possible. The ultimate test of accounting draughtsmanship is the skill with which a compromise has been effected between these two opposed necessities." (Rowland, p. 217)
Myddelton points out (op. cit., p.33) that "The sections of the early Companies Acts dealing with accounts tended to copy existing practice. How fortunate that commercial accounting in those days was allowed to develop freely." The (d)evolution of accounting standards since those early days has closely followed the model of political ideologies described by historian and political theorist Michael Oakeshott in his "Rationalism in Politics", and rehearsed, with some sarcasm, in his response to an uncomprehending review of that book, in the journal "Political Studies" (1965, p. 90):
"Practical discourse is the process in which (among other things) we elicit from [a] 'tradition' decisions about what to do and justifications of acts or proposals to act.
"To the 'rationalist', who insists upon getting a straight answer, this multi-voiced creature seems to be a most unreliable oracle. How can conduct be assimilated to a norm while there remains a variety of often circumstantially conflicting norms all demanding to be taken into the account? And, in order to get his straight answer, he proceeds, by a process of selection, abridgement and abstraction, and guided by his own prejudices, to construct a permanent, stable, universal, self-consistent 'creed' or set of 'principles' out of this somewhat miscellaneous material. This makes him feel more confortable, and it induces the illusion that having acquired a self-confident guide he will never be led astray. And he tells us that unless we get ourselves into this situation we shall be incapable of making (or giving any rational justification of) any practical decisions whatever. Shall we?"
Oakeshott was writing generally about any practical activity, and satirising the rationalist who does not understand the nature of human conduct. This includes, of course, the practice of accounting. Accounting academics have made many attempts to devise "philosophies of accounting", "conceptual frameworks of accounting principles", and the like, which could then, it was hoped, be applied to particular accounting problems in order to determine the correct approach to accounting and reporting. These conceptual frameworks have been putatively derived from a general consideration of the requirements of various consumers of accounting information. The fact is, however, that the requirements and expectations of users of accounts have themselves been shaped by accounting customs. You can extract various common themes from accounting customs, which were dignified with the name of fundamental concepts in the UK's Statement of Standard Accounting Practice no. 2 (1971), viz, going concern, accruals, consistency, and prudence. But no accountant would deny that these principles are in themselves inadequate to support a conceptual framework that determines accounting treatments in all the various practical questions of accounting: in the problem cases, it is useless to resort to the principles, since they suggest conflicting solutions. Oakeshott suggests that his 'rationalist' would expect there to be a super-Norm to deal with this conflict of laws, and settle which principle would prevail: but practical reasoning is not a deductive science and does not operate like that.
Since 1970, a corpus of accounting standards has grown, that defines the correct accounting treatment for an ever-greater number of practical questions of accounting - the types of questions that formerly would have been left to the accountant's judgment. Accounting standards, I should explain, mandate various practices of both measurement (the determination of an accounting figure - many of these figures, more than the layman would suspect anyway, are based on estimates), and disclosure (that is, whether to give certain items of information or not).
At an Annual General Meeting of Trust House Forte plc in the 1980s, a shareholder got up and complained that the accounts did not show the true value of the business. The finance director, the Hon. Rocco Forte (as he then was), a Chartered Accountant, replied (rightly to my mind) 'Of course they don't - they're not meant to.' Myddelton discusses the battle between those who wish to defend the historical role of financial reporting, that of a report on stewardship, which offers limited but real benefits to the users of accounts - and those who wish to value businesses and incorporate all manner of projections of future income, etc. in the accounts. One example of this is the vexed question of the treatment of football players in clubs' accounts. "Putting the players on the balance sheet" makes the club look financially stronger, to a novice accountant at least. But the old-fashioned, prudent treatment would have been to write off transfer fees when they are incurred, and treat the players like any other members of staff, at least now that slavery has been abolished and players cannot legally be the property of the club. Why anyone supposes that capitalising players would be beneficial to a stock-market-quoted club is beyond me. It has no effect on the underlying cash realities of a club's operations, as analysts well know.
To govern the accounting practices in the charity sector (for example), there is an instrument entitled the "Statement of Recommended Practice", or SORP, for charities' accounts, which has recently been issued in a revised edition. There are a number of SORPs, each of which deals with financial reporting in a particular sector and is issued by an authoritative institution related to that sector, under the auspices of the Accounting Standards Board. The Charities SORP was issued by the Charity Commission. Note the word "Recommended". It does not even have the status of an accounting standard (these merit a mention in Schedules to the Companies Acts, even if their explicit legal backing is ambiguous). Nowhere in the Charities Acts 1992/ 1993 is there a requirement to comply with the SORP, amongst the legal requirements to prepare accounts. Nevertheless, the preamble to the SORP, by the Charity Commission, assures the reader of the following:
"The Commission expects charities to comply fully with this or any other applicable SORP. In so far as a charity diverges from the SORP in material respects, the charity's accounts should identify any divergence clearly and provide a full explanation. If no explanation is given, or the explanation is unsatisfactory, the Commission may raise the matter with the charity and, if circumstances warrant it, institute an enquiry.
"Where, [sic] the Commission finds that difficulties have arisen as a result of any divergence from this or any other applicable SORP, the Commission will take such divergence and any explanation the Trustees have given into account. The failure of Trustees without good reason to apply the appropriate SORP principles may be relevant to their responsibility for the difficulties arising."
That strikes the "official tone of veiled menace" exactly. Now, it is one thing to say that charity trustees may let the finances deteriorate though lax management and poor information, and may therefore be guilty of a breach of trust - but quite another to insist that trustees comply with financial reporting regulations contained in a document that is over 100 pages long, and which in any case must be read in conjunction with the other applicable accounting standards, and so on. Any challenge to this regime would end up in the Court probably at the trustee's own expense.