Mccartney2002 Financial Reporting Inthe Context of Crisis Reconsidering Theimpact of The 'Mania' Onearly Railway Accounting

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Financial reporting in
the context of crisis:
reconsidering the
impact of the 'mania' on
early railway accounting
S. McCartney & A. J. Arnold
Published online: 25 May 2010.
To cite this article: S. McCartney & A. J. Arnold (2002) Financial

reporting in the context of crisis: reconsidering the impact of the 'mania'
on early railway accounting, European Accounting Review, 11:2, 401-417,
DOI: 10.1080/09638180220145687
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The European Accounting Review 2002, 11:2, 401–417
Financial reporting in the context of crisis:

reconsidering the impact of the ‘mania’ on
early railway accounting
S. McCartney and A. J. Arnold
University of Essex
ABSTRACT
The patterns of change in the nancial reporting practices of the early railway
companies, and their causes, are important aspects of the evolution of accounting
practice more generally. They have accordingly been widely discussed in the literature,
although the views expressed have rarely been supported by reference to any very
substantial or systematically derived bodies of empirical evidence.
One of the most interesting and important suggestions in this literature is the claim
that the early UK railway companies voluntarily made both quantitative and qualitative
changes to their published accounting statements, in response to a crisis in shareholder
con dence in the second half of the 1840s, consequent upon the collapse of the railway
mania of 1845–47. The quantitative response involved the disclosure of far more
information and the qualitative led to changes in the conceptual basis of reporting, from
a cash to an accruals basis, changes that met with the satisfaction of the shareholders
concerned and were important parts of the gradual evolution of nancial reporting.
The paper undertakes a systematic analysis of the nancial accounting practices of
the major early railway companies from 1840 until 1855. The mapping of the variety of
such practices, and their changes over time, enable a re-examination of these important
claims concerning the nature of the nancial reporting response to one of its earliest
crises.
1. INTRODUCTION
It has often been suggested that nancial reporting has changed and developed as
a response to crises and scandals. In the twentieth century, the changes were
largely determined by the state, as a means of ‘helping to sustain the basic
features of capitalist society’ and thereby maintain its own power base (Gallhofer
and Haslam, 1991: 487) although additional nancial disclosures were also
Address for correspondence

S. McCartney, Department of Accounting, Finance and Management, University of
Essex, Wivenhoe House, Colchester, Essex CO4 3SQ. Tel.: ‡ 44(0)1206 872373; Fax:
‡ 44(0)1206 873429; E-mail: mccas@essex.ac.uk
Copyright # 2002 European Accounting Association

ISSN 0963-8180 print=1468-4497 online DOI: 10.1080=09638180220145687
Published by Routledge Journals, Taylor & Francis Ltd on behalf of the EAA
402 The European Accounting Review
provided voluntarily from time to time by reporting companies, as in the UK in

the early 1930s when they responded to a crisis in investor con dence provoked
by the Royal Mail case (Rex v. Kylsant) of 1931 (see Edwards, 1989: 127–9).
Although the private sector was sometimes prepared to take the initiative and
repair the ‘de ciencies of government’ in this way, perhaps as a means of
ameliorating short-term public discontent (and thereby avoiding its potential
effects upon the cost of capital), appropriate responses to crises were widely seen
as ultimately a responsibility of the state.
In the UK in the middle of the nineteenth century, however, crises could

function very differently, for the state was generally seen as less responsible for
economic problems and the resolution of crises. Although ‘laissez-faire’ was
never a consistent policy of British government, in the 1850s the ‘received
principle in commercial legislation [was] to leave people to act for themselves’
(Hunt, 1936: 118) and the doctrine clearly applied to the speci cation and
regulation of information ows between company boards and their members.
During the mid-nineteenth century, rates of economic growth, the rise of the
capital markets and the development of new working relationships between the
state and the private sector in a number of European countries were all strongly
in uenced by the patterns of promotion and construction in the railway industry.
In the UK, the early start due to technological innovation, widespread expecta-
tions of high investment returns and a general belief in competitive forces
produced an initial period of explosive growth; in 1845–49, railway construction
expenditures represented 4–5% of gross national product and even the wages paid
by the railway companies could amount to 2% of annual GNP (Gourvish, 1980a:
13, 21). Although private sector railway companies were constructing long-term
social capital, the legislature still did not specify the information that should be
disclosed to shareholders, but sought to prevent abuses largely by strengthening
the hands of shareholders vis-à-vis their boards.
In the absence of State regulation, the reporting practices of the early railway
companies displayed (not surprisingly) considerable variety. However, reporting
practices also changed quite quickly and the patterns of change, and their
causation, have been seen as important aspects of the evolution of accounting
practice more generally. Accordingly, they have been widely discussed in the
literature (see, for example, Edwards, 1985: 26–7, 34; 1989: 166–72; Glynn,
1984: 107; Pollins, 1956: 340–1; Lee, 1975: 21–2; 1976: 23–5; and Simmons and
Biddle, 1997: 214) although the views expressed have rarely been supported by
reference to any very substantial or systematically derived bodies of empirical
evidence.
Among the more interesting and important propositions in this literature are,
rst, Edwards’ general argument that the ‘shareholders’ demands for better
information concerning the progress of their existing investment and as a basis
for future investment decisions, are normally the root cause of improvements in
external nancial reporting practices. Management, realising that the cost of
external nance will otherwise rise, perhaps to unserviceable levels, responds to
Financial reporting in the context of crisis 403
these demands and makes available the information required’ and, second, the
more speci c assertion that this is what happened with the railways in the second
half of the 1840s (Edwards, 1985: 31–4). Thus, the early railway companies
voluntarily responded to a crisis in shareholder con dence in the second half of
the 1840s, consequent upon the collapse of the railway mania of 1845–47, both
by providing far more information and by changing the conceptual basis of
reporting (from a cash to an accruals basis), without need for the intervention of
the state. More speci cally, the decision of the London and North Western
Railway ‘to issue more comprehensive accounts from December 1848, was
followed by other companies who also began to apply the accruals concept
fully to credit transactions and publish a general balance sheet. . . . In general the
move was successful and the value of shares rose following the publication of
more detailed accounts’ (Edwards, 1989: 168).
This paper undertakes a systematic analysis of the nancial disclosure practices
of the major early railway companies from 1840 until 1855. The mapping of the
variety of such practices, and their changes over time, enable a re-examination of
these important claims concerning the nature of the nancial reporting response
to one of its earliest crises. The next two sections of the paper accordingly outline
the regulatory environment for nancial reporting and disclosure in the period
concerned and then summarize the views expressed in the existing literature on
the reporting practices of the early railway companies. The fourth section outlines
the characteristics of the data set used for the analysis and discusses the speci c
research objectives, and the fth section sets out the main results of the analysis.
These are discussed in the nal section of the paper as the basis for a number of
observations and conclusions concerning changes in the variability of accounting
practice during the rst half of the nineteenth century.
2. THE REGULATORY ENVIRONMENT FOR FINANCIAL

REPORTING, 1835–55
In the UK, before the passing of the Joint Stock Companies Act of 1855,
companies could obtain the bene ts of limited liability only by application to the
Crown or Parliament.1 This helped the early railway industry in particular to
attract investment nance and to become the key engine of growth in the British
economy. The opening of the Stockton and Darlington Railway, ‘the rst to make
use of steam railway techniques’ (Reed, 1975: 3–4) in 1825, led on to the
commercially more important Liverpool and Manchester line, which prompted an
upsurge in railway speculation from about 1835.2
The early railway companies, at least initially, offered much higher investment
returns than the 3% available on government securities (‘consols’) and for a time
they were virtually the only businesses to be nanced by the public on a truly
large scale (Edwards, 1986: 252). Trading on the London Stock Exchange,
previously concerned mostly with overseas and government securities, soon
extended to shares in railway companies and led to the opening of a number of

provincial stock exchanges.
A government initiative to provide ‘regulations for the control of railways as a
whole’ (Glynn, 1984: 103) led to the establishment of the Railway Department of
the Board of Trade in 1840, although the Board did not initially involve itself in
issues concerning nancial reporting and disclosure. The private Acts that
governed the conduct of individual railway companies at rst made few
references to such matters but, by the 1840s, standard provisions were being
inserted into railway Acts (Pollins, 1956: 337–9). These were codi ed by the
Companies Clauses Consolidation Act (CCCA) of 1845, which applied to all
newly established statutory companies, unless speci cally varied.
Normally, the directors were expected to keep ‘full and true Accounts . . . of all
Sums of Money received or expended on account of the Company’, provide a
‘distinct view of the Pro t or Loss which shall have arisen on the Transactions of
the Company in the course of the preceding Half Year’ (CCCA, 1845: Sections
115–16) and present an ‘exact Balance Sheet’, auditors’ report and ‘scheme’
showing the pro ts available for distribution (CCCA, 1845: Section 120), to each
half-yearly general meeting. The Railway Clauses Consolidation Act (RCCA) of
1845 required also that a publicly available version of the accounts was to show
‘the total Receipts and Expenditure of all Funds’ (RCCA, 1845: Section 107),
although neither Act explained how the accounts were to be drawn up, or how the
pro t gures should be determined, beyond stipulating in general terms that no
dividend was to be paid which reduced the capital (CCCA, 1845: Sections 121,
123). Standard formats for the accounts of railway companies were recommended
by the Monteagle Committee in 1849 (Third Report, Appendix D: 615–25) but it
was not until the Regulation of Railways Act of 1868 that a standard form of
railway company accounts was to be prescribed by the legislature.
3. THE VIEWS EXPRESSED IN THE LITERATURE

The absence of prescribed formats for the published nancial statements of the
early railway companies meant, of course, that disclosure practices were bound to
vary from company to company and the Monteagle Committee thought the
diversity so severe that:
. . . no adequate means are afforded to compare the nancial affairs of any two
Railways, or even to compare the Accounts of the same Railway from time to time.
. . . [This] deprives capitalists, seeking investments, of all power of ascertaining the
relative credit of the several Companies from a comparison of their Accounts. . . . It
leaves shareholders without any adequate check upon the governing body.
(Third Report, 1849: v)
Such a view was expressed by many of the witnesses, who thought the ‘want of
any prescribed and uniform system of account was a most serious omission in the
law’ (Parker, 1984: 70; see also Glynn, 1984: 112–13; Bryer, 1991: 460). Several
more recent authors also point to the lack of any generally acceptable accounting,
reporting and auditing standards that the early railway companies might have
been expected to follow (see Lee, 1979: 17; Edey and Panitpakdi, 1956: 360;
Edwards, 1989: 191; Lee, 1982: 81), although of course limited legal require-
ments do not necessarily lead to limited disclosure levels, as they only de ne a
minimum level that can voluntarily be extended.
The main variation in the literature appears to be the differentiation between
those who emphasize the essential variability of accounting practices (both
between different companies at any one point in time and even by the same
company over a period of time; e.g. Pollins, 1956: 348–9) particularly concerning
depreciation and those who assert that at least some of the changes across time
were systematic (such that the differences between companies at that time were
presumably the less) and driven largely by changes in the underlying economic
state of the industry (see Bryer, 1991; Edwards, 1985, 1989). Here, Bryer, for
example, sees the introduction of accrual accounting as pre-dating the railway
mania of 1845–47, arguing that ‘during the railway share boom of 1844–45 the
railway companies, after having appeared to accept the need for conventional
accrual accounting, began to deliberately and systematically overstate their
pro tability in their published accounts’ (Bryer, 1991: 443). This was mainly
effected by abandoning the practice of charging depreciation. After the mania,
pro tability was, it would seem, purposefully understated, and so the practice
recommenced, and was then ‘rapidly ousted by replacement accounting’ (Bryer,
1991: 473). Lee, on the other hand, seems to doubt the signi cance of the changes
that did take place, observing instead that ‘the major controversies in early
railway accounting turned upon the computation of pro ts available for dividend.
. . . There was no argument as to the crediting of the revenue account with gross
receipts from traf c, and its debiting with obvious working expenses; and the
half-yearly valuations of stocks of coal, spare parts, etc., made no serious
difference, whatever system was used’ (Lee, 1975: 21, emphasis added).
Probably the most important statement in this literature, is Edwards’s conclu-
sion that the early railway companies responded to a crisis in shareholder
con dence in the second half of the 1840s, consequent upon the collapse of
the railway mania of 1845–47, by providing far more information thereafter and
by changing the conceptual basis of the reporting system, in each case without the
need for new legislation.3 These changes were, it would seem, suf ciently
appreciated by the shareholders as to prompt an improvement in share values
(Edwards, 1989: 168).
Thus, Edwards argues, the early (pre-1850) accounts of the railway companies
(typically a capital account to demonstrate that money raised had been properly
expended on construction materials and a revenue account to identify the pro t
available for dividend) were prepared ‘wholly, or substantially, on the cash basis’
(Edwards, 1985: 21), despite the fact that accruals procedures were well known at
the time and that railway companies, as the largest businesses of their time,
‘might have been expected to employ the most up-to-date accounting techniques’
(Edwards, 1985: 23; 1989: 165). The initial use of the cash approach was
attributed to the possible in uence of the traditional practices of the early
chartered companies, estates and collieries (who used cash-based charge–
discharge accounting until well into the nineteenth century), to the requirements
of many railway company Acts to record cash movements or because the cash
basis could provide the scope for manipulation of the published reports (Edwards,
1985: 24–7).4
Then, according to Edwards, the crisis that followed the end of the Railway
Mania in 1847 provided a major impetus for change and railway managers
attempted to restore investor con dence (and ward off the threat of further
regulation) by moving away from cash-based accounts. Following the example of
the pioneering London and North Western (L&NW), other railway companies
‘began to apply the accruals concept fully to credit transactions and to publish a
general balance sheet’, in order to increase con dence (Edwards, 1989: 168)
although the process clearly took some time, since ‘[t]he continued failure of
the majority of companies to publish a general balance sheet was commented
on in evidence presented to the Monteagle Committee’ in 1849 (Edwards,
1985: 31). 5
4. RESEARCH OBJECTIVES AND METHODOLOGY

The main purpose of this paper is to re-examine these important claims, by
reference to the results of a systematic analysis of the nancial disclosure
practices of the major early railway companies from 1840 until 1855. This
section outlines the characteristics of the data set used for the analysis and
identi es the speci c research objectives.
In order to provide a more systematic, empirical body of evidence on the issues
discussed above, it was necessary to de ne a data set that would be broadly
representative of the British railway industry of the time, within the constraints
imposed by the dif culties of accessing historical data. As is often the case with
historical work, limited rates of data availability provide their own ‘survival bias’
and also militate against random sampling. A data set was therefore constructed
that concentrated upon the largest (quoted) companies, in order to maximize the
signi cance of the ndings in terms of their coverage of the railway industry as a
whole. In order to minimize possible distortion effects over time, the composition
of the set was held as constant as possible across the period under examination,
despite the amalgamations that became an increasingly important feature of the
industry. The results set out later in the paper should, however, be seen as
indicative of the practice of the leading companies in the industry, rather than of
the industry as a whole.
The railway industry was carefully analysed in terms of the companies of
which it was composed and their size and signi cance (as indicated by their
capital employed), as a prelude to the selection of a sample set that would provide
good coverage of the industry across the period 1840–55. The available data on
capital employed in the railway industry in its earliest years are ‘extremely
scattered’ and relatively unreliable (Reed, 1975: 32–3) although, in the period
1837–55, there were higher levels of investment in the industry, improved sources
of information and a better survival rate for the annual or half-yearly nancial
reports of the companies concerned. This meant that the composition of the
industry could be de ned in terms of its paid-up share capital using the series in
Reed (1975: 35–6) for 1840, the Report of the House of Lords in 1847–48 (PP
1847–48 (71) Vol. XIV: 1–27) for 1845 and the annual Board of Trade Returns
for 1850 (PP 1851 (623) Vol. LI: 199–221) and 1855 (PP 1856 (316) Vol. LIV:
533–65).
Analysis of the industry’s structure indicated that a set of the ten largest
companies in existence in 1855, for which published nancial reports could be
traced for two quinquennial dates before the 1847 crisis, namely 1840 and 1845,
and two after, i.e. 1850 and 1855, would provide a sample set, on a weighted
average basis, covering 66.6% of the capital employed in the industry across the
period under examination. Equally, it was clear that extensions of the set, given
the limitations imposed by company continuity and data availability as discussed
above, would not materially increase its coverage of the industry. The resulting
data set consisted of the Bristol and Exeter; Eastern Counties; Great Western;
Lancashire and Yorkshire; London, Brighton and South Coast; London and North
Western; London and South Western; Midland; the North Eastern; and the South
Eastern Railways.6
The data set was examined for evidence on the two types of response allegedly
provided by the railway companies as a response to the crisis of the late 1840s.
The rst type of response was essentially quantitative and concerned changes in
the overall level of information disclosure. Accordingly, the numbers of items
included in the main sections of the published nancial statements, the capital
account, the general balance sheet, and the income and expenses sections of the
revenue account of the sample set companies were identi ed at each of the four
dates concerned. It was expected at the outset that companies might well respond
to shareholder concerns by publishing more information, although it also seemed
likely that a (more gradual) increase in disclosure levels could have been expected
over the longer period, given the newness of the industry and the number of
amalgamations that were taking place. The key issue therefore concerned the
extent to which there was an ‘upward break’ between 1845 and 1850 in the more
gradual increase in disclosure levels that could have been anticipated over the
period 1840–55 as a whole.
The second type of alleged change, in the conceptual basis adopted in the
reporting system, was far more qualitative in nature. Observations of the
conceptual basis in use by the individual railway companies at any one point
in time were themselves limited by a common practice within the industry.
Initially, following on from a convention that appears to have worked satisfact-
orily in the canal industry, many railway companies presented only a revenue
account and a capital account, which did not fully articulate with one another. The
capital account provided a form of reporting highly focused upon stewardship,
rather than on the reporting of company assets and liabilities and simply recorded
the actual receipts (from shares and debentures) intended to fund and the actual
expenditures on a speci ed capital project (Edwards, 1986: 259; Parker, 1992:
102). This approach was based on the fact that, for companies ‘formed to
undertake public works under sanction of Acts of Parliament . . . the money
authorised to be spent [was] provided for a speci c purpose’ (Lisle, 1899: 79).
Once included in the cumulative record that was the capital account, there was no
mechanism available for writing off any of the constituent items so that even
preliminary expenses (which in the case of railway companies would include

Parliamentary expenses) or expenditures on abandoned objects were bound to
remain in the capital account (Jenkinson, 1910: 52; Brennan, 1919: 512). Equally
there could be no expectation that depreciation would be charged to the capital
account, as the latter was attempting ‘perpetually to show that – and how – the
capital authorised to be raised had actually been spent only upon the authorised
purposes’ (Dicksee, 1892: 118).
In cases where companies published only their revenue account and capital
account, without any (general) balance sheet, it was therefore not always possible
to identify the conceptual basis in use although the wording of some individual
items in the revenue account could provide strong indications. The balance on the
capital account was in principle unspent cash, but revenue accounts could be
prepared on either a cash, funds or accruals basis, each of which would produce a
different set of assets and liabilities on a general balance sheet. The contents of
such a general balance sheet would inevitably de ne the basis on which the
revenue account had been prepared, but the absence of the general balance sheet
did not necessarily mean that a strict cash basis had been used in the revenue
account (for which the articulation onto a general balance sheet would provide
merely a second cash balance) since it was entirely possible for the funds or
accruals basis to have been used in the revenue account but for the general
balance sheet (carrying a range of assets, liabilities and allocated funds) to have
remained unpublished.
Accordingly, the nancial reports of each of the sample set of companies were
examined for indications, by way of either practices or terminology, of the extent
to which companies were using either the cash or accruals basis at each of the
four quinquennial dates previously identi ed. The key issue here concerned the
extent to which accruals accounting was recognized in the 1840s as an inherently
superior form of accounting to cash-based approaches by railway company
managers and shareholders alike and whether a discernible shift from one to
the other took place between 1845 and 1850.
5. THE MAIN RESULTS

The evidence on the disclosure levels of the sample set of early railway
companies is set out in Table 1, in the form of the means and standard deviations
of the numbers of items shown in the main sections of the published accounts at
Table 1 Information disclosure levels in the nancial reports
No. of items disclosed in: 1840 1845 1850 1855

Capital Account Mean 27.7 32.7 50.2 60.0
(SD) 6.5 16.1 15.9 23.5
General Balance Sheet Mean N=A N=A 17.5 20.2
(SD) N=A N=A 9.5 5.8
Revenue Account Income Mean 4.4 9.2 21.0 21.9
(SD) 3.3 5.1 15.0 5.2
Revenue Account Expenses Mean 11.4 32.0 48.0 72.0

(SD) 10.1 12.2 13.0 17.5
Notes:
N=A: in the years concerned, only one company presented a General Balance Sheet.
Sources: The published nancial statements of the sample set of railway companies, as de ned in the
text.
each of the four selected quinquennial dates. Table 2 shows a classi cation of
(nine) different indications of the use of the cash or accruals basis, based on
whether:
° a general balance sheet (GBS), reporting payables and receivables, was

included in the accounts;
° a depreciation charge was disclosed in respect of the rolling stock or
permanent way;
° the headings of the revenue and capital accounts indicate the use of a cash
basis;
° the debits=credits on the revenue and capital accounts indicate a ‘cash book’
basis; in other words, whether these accounts were actually summaries of the
cash book (so that, for example, if items of ‘income’ in the Revenue account
were shown as debits, these could actually have been ‘cash received’).7
Disclosure levels as a whole increased consistently across the period 1840–55;

the variability of disclosure levels (note the relative size of the standard deviations
as against the mean) reduced over the period, although less consistently (see Table
1). There is also evidence of a marked increase in disclosure and a reduction in
the variability of disclosure levels in the capital account, in each case in the ‘key
period’ between 1845 and 1850. Similarly, there is an apparent ‘break point’
between the same two dates in terms of the increase in disclosure levels provided
by the publication of the general balance sheet. In the case of the two sections of
the revenue account, however, the position is less consistent. The (proportional)
rise in income disclosure was similar in both 1840–45 and 1845–50, and practice
was far more variable in 1850 than in either 1845 or in 1855, when norms of good
practice had clearly been established in the industry. In the (important) case of
expense disclosure, the major advance in disclosure levels clearly took place
before, rather than after, 1845 and was (proportionately) just as large in 1850–55
Table 2 Conceptual basis of nancial reports
Indications that Accounts 1840 1845 1850 1855

preparation on cash basis.
No. of companies that:
On revenue account
(i) Prepare a GBS that 1 1 8 7
reports payables and
receivables
Disclose a charge for

depreciation=renewal of:
(ii) Permanent way 0 0 6 6
(iii) Rolling stock 2 4 6 2
(iv) Have headings indicating 6 4 1 3
cash basis
(v) De ne end-of-period 4 1 0 0
balance as cash balance
(vi) Show debits=credits on 3 1 0 0
‘cash book’ basis
On capital account
(vii) Have headings indicating 9 6 6 6
cash basis
(viii) De ne end-of-period 6 3 1 0
balance as cash balance
(ix) Show debits=credits on 3 2 1 1
‘cash book’ basis
Sources: As Table 1.
as during the ‘key period’ of 1845–50. The variability in expense disclosure

levels (relative to the size of the mean) also declined steadily across the overall
period, 1840–55.
The contents of the nancial statements of the major early railway companies
indicate that there were changes in general practice during the overall period
through to 1855. This is not surprising. In 1835, very few companies had opened
their lines to traf c, although by 1840 all but the South Eastern Railway of the
sample set of companies had done so. Following the precedent of the canals, the
railway companies maintained their capital accounts, which provided a simple
stewardship record of receipts from shareholders and lenders and expenditures on
the routes approved in detail by Parliament, on a cash basis. Indeed, this remained
the case in 1855 (and was eventually to provide the basis for legislative support
for the double account system in 1868), even though the major railway companies
had realized that the closure of the capital accounts that had proved possible for
the canals could not function in an industry that was continually extending its
routes (see Pollins, 1956: 350).
The railways also began to come to terms with the operating aspects of their
new businesses. As late as 1835, ‘locomotive technology was con ned to a
relatively few companies and it was not until the early 1840s that locomotives
were equal to the task of hauling heavy goods trains. Moreover, it was only in
1839 and 1840 that there was a clear recognition by government that railways
should exclude private operators and monopolise the conveyance of traf c on
their lines’ (Gourvish, 1980a: 27). The process of technological change in the
industry continued and, whereas, until the late 1840s, it was generally believed
that the ‘permanent way’ had an almost in nite useful life, the new, heavier and
more powerful engines made track replacements necessary (with heavier rails)
and also changed perceptions about the permanency of the lines (see Lardner,
cited in Pollins, 1956: 343–4; also Gourvish, 1970: 49; Edwards, 1986: 256).
Amalgamations proceeded at a great rate, extending and complicating the
operations of the companies concerned. As one might expect, these changes in
the basic operating realities had implications for the way that the railway
companies chose to report their operations.
The most obvious change in reporting practice was the publication of a general
balance sheet by large numbers of companies within the ‘key period’ 1845–50. As
far as the sample set is concerned, whereas only one company (the London and
Birmingham) had produced a general balance sheet in 1840 and 1845, seven more
companies did so in 1850 (Table 2(i)). Since the capital account always was (and
remained) cash based and because it was the general balance sheet that listed the
current assets and liabilities (including payables and receivables) it is possible to see
this as incontrovertible evidence of a change in the reporting basis from cash to
accruals. The capital account clearly articulates (in the technical sense) only with the
bank account8 and not with the revenue account. The general balance sheet (when
published) can only articulate with the revenue account, such that, if payables and
receivables are shown in the former, they must mean that incomes and expenditures
in the latter are on a funds rather than cash basis. However, the non-publication of
the general balance sheet in 1840 and 1845 cannot prove that the revenue accounts at
that time were being prepared on a cash basis. Instead, the widespread publication of
general balance sheets between 1845 and 1850 need be no more than part of the
industry’s acceptance that the volume of disclosures needed to rise (see above),
rather than that the conceptual basis of those disclosures needed to be changed.
Indeed, the relevant revenue accounts provide little, if any, evidence of any
conceptual shift in the period 1845–50. The descriptions in use suggest that, if
such a change was taking place, it had already largely occurred before (rather than
after) 1845 (see Table 2(iv–vi)). As far as the vexed question of depreciation is
concerned, six companies provided some sort of charge for the permanent way in
their revenue account in 1850 that had not done so in 1845, although the increased
recognition had as much of a technological as a conceptual basis (see above). If
charges against revenue for rolling stock are considered, the pattern is more
complicated, with the number of companies making some sort of charge rising to
a peak in 1850, and then falling back (see Table 2(iii)).
Evidence is also provided by a comparison of the revenue accounts for 1845
and 1850 of the seven companies in the sample set that rst produced a general
balance sheet in 1850 (Table 2(i)). Three show a change from cash to accruals in
their revenue accounts,9 one (London, Brighton and South Coast) provided no
evidence in either direction and the contents of the revenue accounts of the other
three suggest that the accruals approach was as well established in 1845 as in
1850. 10
6. DISCUSSION AND CONCLUSIONS

This paper has been concerned with an early response of nancial reporting to
crisis and with the effects of this upon the diversity of accounting practices.
Whereas, in the twentieth century, changes were made both by the state and
voluntarily by reporting companies, in the middle of the nineteenth century crises
functioned differently, as the state was generally seen as less responsible for
commercial matters.
One of the earliest crises was caused by the aftermath of the ‘railway mania’ of
1845–47 and Edwards has suggested that the early railway companies voluntarily
provided a dual response to the crisis in shareholder con dence, by providing far
more information and also by changing the conceptual basis of the reporting
system. In this paper, a systematic analysis has been carried out of the nancial
reports of a sample set of major early railway companies. The companies could
not be randomly selected, because of data availability limitations, but are a highly
signi cant group in that they had two-thirds of the capital employed in the
industry at quinquennial dates from 1840 until 1855.
As far as the ‘quantitative’ response to the crisis is concerned, disclosure levels
in all the main parts of the nancial reports increased consistently across the
period 1840–55. At the same time the variation in disclosure levels amongst
companies decreased, although less consistently. There were marked increases in
balance sheet disclosure levels in the ‘key period’ 1845–50, particularly concern-
ing circulating rather than long-term capital items (the general balance sheet),
although the evidence concerning the revenue account was more mixed. Income
disclosure rose to an equal extent in both 1840–45 and 1845–50 (while practice
was far more variable in 1850 than in either 1845 or in 1855) and, in the
important area of expense disclosure, the major advances in disclosure levels
clearly took place before, rather than after, 1845 and also continued at a similar
pace from 1850–55 to that observed in 1845–50. The evidence on the key issue,
the extent to which there was an ‘upward break’ between 1845 and 1850, in the
more gradual increase in disclosure levels that could reasonably have been
expected of the leading companies in a relatively new industry over the period
1840–55 as a whole, was on balance supportive of Edwards’s thesis, but not
consistently so.
On the more signi cant, related claim that there was also a ‘qualitative’
response, a shift in the conceptual basis of the reporting system from cash to
accruals, the evidence is rather different. Capital accounts continued to function
as cash-based documents, consistent with their basic stewardship function,
throughout the period. The sharp increase in the publication of general balance
sheets by 1850 provided an appearance of a possible conceptual shift but one that
could only be de ned by the basis in use within the revenue accounts in 1845 and
1850. Here the evidence, as summarized in the previous section, seemed far from
convincing and does nothing to suggest that there was a concerted conceptual
shift in the basis of the reporting system between those years.
The changes in accounting practices and disclosures that took place within the
highly important UK railway industry, during its rst twenty years of existence
(broadly 1836–55) thus appear to have been largely quantitative. Such qualitative
changes as took place were largely driven by technological developments in the
nature of the business. The industry did not readily nd a solution to the vexed
issues of capital asset replacement and depreciation charges and treatments varied
widely between companies and over time.
The conclusion that the conceptual basis of the reporting system changed in a
gradual, piecemeal and inconsistent manner over an extended period of time can
only be inferred from speci c items and words in the published accounts, because
the accounts themselves typically do not state the principles on which they are
based. This in itself is important and helps to undermine the view that directors
adopted the accruals basis in response to pressure from investors who regarded it
as qualitatively superior to the cash basis. Had this been the case, directors would
have made the change in the conceptual basis of their nancial reporting much
more obvious than they did. Further, although the Report of the Monteagle
Committee (in 1849) proposed that ‘Railway Accounts should not only be made
uniform, but more detailed and explanatory’ (Third Report: vi), it made no
mention of the conceptual basis that companies should adopt in preparing these
accounts.
As noted above, Edwards points to the pioneering role of the largest railway
company in the late 1840s, the London and North Western, whose decision to
increase the level of disclosure from the second half of 1848 was regarded as a
model for others to follow (Edwards, 1989: 168). For example, when the
chairman of the second largest railway, the Midland, presented the accounts for
the rst half of 1849 to the shareholders, he expressed:
. . . regret that we have not been able to place before you a more lucid statement of
accounts. It was originally our intention to have rendered an account as complete as that
lately presented to the proprietors of the London and North-Western Company, which I
regard as a model for all companies . . .
(Railway Times, 8 September 1849, p. 932)
The London and North Western was also a pioneer of accruals accounting: as
noted above, its predecessor company, the London and Birmingham, has been
credited with devising the double account system, and is the one company in
our sample set to publish a general balance sheet in both 1840 and 1845. But it
was not this aspect of the London and North Western’s nancial reporting
that impressed contemporaries. Although the December 1848 accounts are
commented on favourably by witnesses to the Monteagle Committee and are

reproduced as an appendix to its Report (First Report, Appendix H: 294–9) the
model accounts proposed by the Committee are in fact a form of ‘cash ow
reporting’, rather than accruals accounting (Edwards, 1985: 25; the model
accounts are in Third Report, Appendix D: 615–25) and strongly suggest that
the Committee did not take the view that the accruals basis was superior or
particularly desirable.
The evidence set out and analysed in this paper thus suggests that the
conceptual basis of the reporting system of UK railway companies did not

change signi cantly between 1845 and 1850 and it is doubtful that investors of
the time cared greatly one way or the other. Instead, the leading companies in the
industry defended themselves against investor criticisms by a relatively consistent
and largely quantitative response. Their published accounts became increasingly
standardized and included ever more detailed analyses of routine items, helping
to submerge recognition that the more dif cult and conceptual issues would be
resolved far more slowly, if at all.
ACKNOWLEDGEMENTS
The authors gratefully acknowledge the support of the ESRC, under research
grant R000222974 , awarded in 1999, and the helpful comments of the two
anonymous referees on an earlier version of this paper.
NOTES
1 General registration was permitted under the Joint Stock Companies Act of 1844,
albeit with unlimited liability.
2 By 1849, over £200 million had been raised by the industry (Mitchell and Deane,
1962: 225; Hunt, 1936: 73, 105; Gourvish, 1980b: 130–1).
3 Even if new legislation was threatened at one time by the government.
4 Clearly there were exceptions to the initial use of the cash basis, as Edwards also states
that ‘where the accruals concept was applied, adjustments were commonly made only
for outstanding interest and the depreciation of rolling stock’, giving the Manchester
and Leeds (June 1841) and the North Midland (December 1840) as examples of the
former and the Manchester and Leeds (June 1841) and the Great Western (December
1841) as examples of the latter (Edwards, 1985: 25).
5 Although eight out of ten companies in the sample set did publish a General Balance
Sheet in 1850.
6 In some cases there were amalgamations, in which case the main company included in
the amalgamated group for which data were available has been included, as follows: the
Manchester and Leeds Railway Co. for the Lancashire and Yorkshire Railway in 1840
and 1845; the London and Birmingham Railway Co. for the London and North
Western Railway in 1840 and 1845; the North Midland Railway for the Midland in
1840; and the York and North Midland Railway for the North Eastern in 1840, 1845
and 1850. The London Brighton and South Coast Railway was previously known as
the London and Brighton Railway.
7 In a limited number of cases, the published accounts were not available and an
apparently truncated set of statements published in the railway press was used instead.
The latter were excluded from Table 1, although not from Table 2, in order to avoid the
risk of bias.
8 Although it is quite possible for a slightly ‘looser’ semi-funds rather than cash version
to operate, whereby the end-of-period balance would be composed of a combination of
cash in the bank less amounts contracted for and due to be paid to contractors and=or
suppliers of capital equipment. The fall in the number of companies that de ned the
end-of-period balance as ‘cash’ from 1840 to 1855 (Table 2(viii)) may be accounted for
by this, although the way that the expenditures were described in the capital accounts
do not enable this to be identi ed with certainty.

9 The Midland (where there were provisions for rolling stock and bad debts in 1850 but
not previously), York and North Midland (where there were reserve funds in 1850 for
the permanent way and rolling stock) and South Eastern (where there were reserve
funds for renewals and bad debts).
10 The Eastern Counties, Lancashire and Yorkshire (where depreciation funds appeared in
the revenue accounts in each case) and London and South Western (where sundries and
stores were being charged out to stations from central stores in several ways at the
earlier date).
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Financial reporting in the context of crisis:

Address for correspondence

Copyright # 2002 European Accounting Association

provided voluntarily from time to time by reporting companies, as in the UK in

In the UK in the middle of the nineteenth century, however, crises could

2. THE REGULATORY ENVIRONMENT FOR FINANCIAL

extended to shares in railway companies and led to the opening of a number of

3. THE VIEWS EXPRESSED IN THE LITERATURE

4. RESEARCH OBJECTIVES AND METHODOLOGY

preliminary expenses (which in the case of railway companies would include

5. THE MAIN RESULTS

No. of items disclosed in: 1840 1845 1850 1855

Revenue Account Expenses Mean 11.4 32.0 48.0 72.0

° a general balance sheet (GBS), reporting payables and receivables, was

Disclosure levels as a whole increased consistently across the period 1840–55;

Indications that Accounts 1840 1845 1850 1855

Disclose a charge for

as during the ‘key period’ of 1845–50. The variability in expense disclosure

6. DISCUSSION AND CONCLUSIONS

commented on favourably by witnesses to the Monteagle Committee and are

conceptual basis of the reporting system of UK railway companies did not

do not enable this to be identi ed with certainty.

to 1911’, Accounting and Business Research, 16(63) Summer: 251–63.

Reed, M. C. (1975) Investment in Railways in Britain, 1820–44. Oxford: Oxford

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do not enable this to be identi ed with certainty.