An Icon in Auditing History: the Company, the Characters and the Case of the Kingston Cotton Mill

Roy A. Chandler Cardiff Business School

Re-submission date: June 2, 2010 Contact details: Roy A. Chandler Colum Drive Cardiff Business School Cardiff CF10 3EU Tel: 02920215579 Email: chandler@cardiff.ac.uk

Abstract The name of the Kingston Cotton Mill, a company which failed in 1894, remains famous to this day, yet almost nothing is remembered of the details of the company itself. This paper presents a history of the company based upon contemporary records, helping the modern reader to obtain a fuller conception of this mill. A plan to build an immense facility had initially received enthusiastic support in the locality of Kingston-Upon-Hull but in the event its promoters had to scale back their ambition. The company was never really prosperous though it was able to struggle on for nearly another 50 years. The companys demise ended in litigation against the directors and auditors which gave rise to the judicial use of the watchdog metaphor to describe the role of the auditor.

Key words: Auditing history; Kingston Cotton Mill; watchdog.

An Icon in Auditing History: the Company, the Characters and the Case of the Kingston Cotton Mill

Introduction

Cotton manufacturing has a long history in a number of countries but it was Britain which dominated the industry for much of the nineteenth century. Baines (1835, pp. 84-85), writing even before the full effects of Britains leading role in the industrial revolution could be fully felt, observed that that a country which started almost last in the race should have so far outstripped every competitor may appear surprising. The industry which became the backbone of Britains economic growth through the nineteenth century can trace its roots to a number of pioneers among whom probably the most famous is Arkwright whose inventions during the latter part of the eighteenth century paved the way for the technological advances which enabled British entrepreneurs to drive the pace of industrial development in the cotton mills to the extent that cotton became the biggest industry in Britain and remained in that position for more than a century. It was in the cotton industry that many aspects of factory life were pioneered; cotton mills were the first to use multi-storey, iron-framed buildings; they were the first public buildings to be lit by gas; they developed innovations in mass production techniques for mill machinery and improvements in mass housing for mill workers (Chapman, 1967, p. 68).

Of all the many cotton mills which sprang up in nineteenth century Britain, the name of the Kingston Cotton Mill (KCM) will be the most familiar to generations of students of accounting and auditing. The name is still heard in court rooms around

the world nearly 120 years after the conclusion of the original litigation with recent citations including: in Singapore, JSI Shipping (S) Pte Ltd v Teofoongwonglcloong and PlanAssure PAC v Gaelic Inns Pte Ltd [2007] 4 SLR 513; [2007] SGCA 41; in South Africa, Thoroughbred Breeders' Association of South Africa v Price Waterhouse [2001] ZASCA 82; [2001] 4 All SA 161.; and in the UK, Moore Stephens v Stone Rolls Limited [2009] UKHL 39.

Its longevity is due in large measure to a single phrase used by one of the judges in the Court of Appeal, Lord Lopes, whose remark that the auditor is a watchdog, not a bloodhound has echoed across the years. Yet relatively little is known of the KCM itself or the social, economic and financial conditions in which the KCM was founded and eventually foundered.

Kingston-Upon-Hull The principal place of business of the KCM was Cumberland Street, Kingston-uponHull, Yorkshire in the north-east of England. In contrast, the vast majority of

industrial factories and mills, especially those involved in the cotton trade, were based on the west coast, primarily in the Lancashire area. Hulls economy, at the start of the nineteenth century, depended upon whaling and ship-building but these declined during the first three decades quarter of the nineteenth century. Nevertheless, the city thrived as a conduit for the import and export of all manner of goods, to the extent that by, the time that cotton manufacture began, the town was ranked in the top five British ports in terms of Customs revenue and number and tonnage of ships passing through (East, 1931, p. 200).

A local artist, F. S. Smith, made numerous sketches of the city near the end of the nineteenth century. Smiths work (see Ketchell 1990) evokes very powerfully the atmosphere of that bygone industrial age and allows us to gain some impression of the KCM which had largely disappeared by the 1970s or 1980s. In two of these sketches (reproduced in Appendix 1), the description includes reference to Eggingtons Lane, renamed Fountain Road in 1862, which marked the northern boundary of the KCM.

Existing accounts of the cotton industry in Hull and the KCM in particular are few and far between. One rare example is Bellamy (1962) who provides a detailed insight into the east coast industry with particular emphasis on the Hull Flax and Cotton Mill 1 . In setting the scene, she reports (1962, p. 93) that more than two thirds of cotton twist and yarn manufactured in the UK was exported from Hull. She suggests that the lack of alternative investment opportunities drew Hull merchants towards the possibility of setting up their own manufacturing base. Certainly, it would have been natural for local entrepreneurs to want to take a greater share of the perceived profit of the trade passing through the port. Despite the fact that Hull in the early part of the nineteenth century had little or no manufacturing, the promoters of the KCM set out to build not only the largest but the most perfect [mill] in Europe (The Hull Packet and East Riding Times, November 21, 1845, p. 5).

Formed in 1836, its shareholders had unlimited liability and, 20 years later when it was unable to meet its debts, they faced calls on their personal resources from the liquidators. Meeting the calls was not without its difficulties but eventually the claims of creditors were substantially settled with the equivalent of 85p in the being paid. A new company to take over the project; this was formed in 1858 this time with limited liability but this too failed just over ten years later (Bellamy, 1962, p. 99). Other cotton companies were planned (The Hull Packet and East Riding Times, August, 15, 1845, p. 5; October 10, 1845, p. 8) and at least one mill was completed; the Eagle Cotton Mill was located on the eastern side of the River Hull a little to the south-west of the Hull Flax and Cotton Mill (map held by Humberside County Council Archaeology Unit).

The purpose of this paper is to explore, in as much detail as surviving records allow, the precarious existence of the KCM and what it tells us of corporate governance in nineteenth century Britain.

The Company

The idea of the KCM began to take concrete form with its provisional registration in May 1845. A Provisional Committee was formed that same month (BT41/335/1937) made up of merchants, drapers, a banker and a soap manufacturer. The Committee set about finding suitable land on which to build, advertising in the Hull Packet and East Riding Times (May 16, 1845, p. 1) even before the company was formally established. The publication of a single-page prospectus occurred on May 23, 1845 and was reproduced a week later in The Hull Packet and East Riding Times along with a pro forma application for shares with a closing date for applications of June 19 (The Hull Packet and East Riding Times, June 6, 1845, p. 1). In its appeal to potential

shareholders, the prospectus listed various advantages to locating the company in Hull: ease of access by water and rail, the availability of numerous building plots close to river banks, and a plentiful supply of labour especially women and children. Perhaps most telling was the reference to the success of the existing cotton mill, the Hull Flax and Cotton Mill, (to which the KCM was often compared unfavourably and perhaps unfairly). Although the KCMs prospectus gave no details, investors were probably aware that the other mills 100 shares were trading at between 230 and 240, and its shareholders had received an unprecedented dividend of 12.5% (Manchester Examiner and Times, September 26, 1856, reproducing an item from the Eastern Counties Herald). Hopes of a similarly successful venture no doubt fuelled demand for the KCMs shares with applications for more than 110,000 being 6

received before the end of May (The Hull Packet and East Riding Times, May 30, 1845, p. 5). Not everyone in the locality was in favour of the expansion of the cotton industry in the town, (Hull Packet and East Riding Times (March 6, 1846, p. 5)).

The purpose of the company was the purchase, import and export, spinning, manufacturing and selling of flax and cotton and other related business. The capital to be raised was first set at 200,000 then later raised to 250,000, divided into shares of 100. To facilitate the investment, a deposit of a mere 10 shillings was required with further calls of no more than ten pounds per share being made at intervals no less than three months apart. Further incentive came in the form of an allowance of interest of 4% on these calls to be payable until the mill had been in operation for a year. By mid-summer, 1845, the partly paid up shares were reported to be trading at a premium and such was the interest in this industry that there was talk of forming a third cotton mill company (The Hull Packet and East Riding Times, August 15, 1845, p. 5).

The KCM was completely registered in 1846. The rush to obtain shares caused some investors difficulties. A letter to a local paper complained that some stock brokers were not honouring contracts made on behalf of clients for the delivery of share certificates, using as an excuse the fact that the legal formalities in setting up the company had not been completed at the time the share dealings were transacted (The Hull Packet and East Riding Times, June 5, 1846, p. 4).

It is worth noting that Hull was ahead of Lancashire when it came to the formation of joint stock companies in the cotton industry (Farnie, 1979, p. 215), which had seen a rise in the numbers employed of more than 35% since 1829 (Yates, 1967, p. 50). Yet it was an industry that generally was experiencing falling profit margins (Chapman, 7

1972, p. 69) and the phase of the most rapid expansion had ended or was about to end (Robson, 1956, p. 3; for statistics on the fall of the rate of increase in the volume of production beginning in 1840 see Shapiro, 1967, p. 188). The removal, in 1843, of the prohibition on the export of textile machinery from Britain allowed other countries to produce similar quality cotton yarn and begin the erosion of the competitive advantage which earlier British cotton spinners had enjoyed (Aspin, 1981, p. 4; Robson, 1956, p. 3). One may conclude therefore that the timing of the foundation of the KCM was ill-considered.

The Mill - Location A 12-acre site for the KCM had been found in the Sculcoates area of Hull (see Appendix 2). Foundations were dug during the autumn of 1845 (The Hull Packet and East Riding Times, October 10, 1845, p. 8). Perhaps an indication of the scale of the KCM development is given by the comment in The Hull Packet and East Riding Times (December 5, 1845, p. 5) we were much surprised at the immense extent of the first double mill. Another contemporary notes that the KCM plot wasbounded on the North by Skidby Drain, on the East by Cumberland-street, on the South by a new street, called Cotton-Mill-street 2 , and on the West by Sculcoates footpath. The KCMs balance sheet of December 31, 1850 records the cost of the land at 14, 812.

The proximity of the river was obviously an important logistical consideration for the routing of supplies into and out of the factory but it also posed a threat to the factory itself; in 1868, it was reported to have been inundated to a depth of four feet (Manchester Times, February 15, 1868).
2

In 1863, the name of Cotton Mill Street was changed to Barmston Street. Markham (1998, p. 13) jokes that the whole of the area with its immigrant workers (many Irish) had a bad reputation and the residents no doubt intended to upgrade their address by naming it after nearby Barmston Drain.

The Mill - Building

The foundation stone was laid by the chairman of the company, Alderman Thomas Thompson, on December 3, 1845 (The Hull Packet and East Riding Times, December 5, 1845, p. 5). The design of the mill building was the work of James Lillie & Sons of Manchester. More than 2,000 tons of cast iron supporting pillars would be required in its construction (The Hull Packet and East Riding Times, November 21, 1845, p. 5). Two years later, the massive construction was almost complete; it had cost 59,000 (The Hull Packet and East Riding Times, March 10, 1848, p. 8). Before the end of 1847, an editorial writer in The Hull Advertiser (December 10, 1847, p. 5) appeared to be impressed The length of the mill in which operations will shortly commence is 501 feet, and its width 85 feet. It is in five stories and the average height of each story is twelve feet. ... The engines are four in number, of 100 horse power each ... reaching to the fourth story in height and having two fly-wheels, forty feet in diameter. The engines had been ordered from Peel, Williams and Peel of the Soho Iron Works, Manchester and the machinery from, among others, Jenkinson and Bow, also of Manchester (Hull Packet and East Riding Times, November 21, 1845, p. 5).

The committee of investigation, set up in 1850 to identify why the company was not more profitable, found that the mill was a very splendid building, but a very needless sort of building for cotton spinning, and the outlay was far too great. The 1850 balance sheet would show that expenditure on the building amounted to 72, 847. But the mills design contained one fundamental problem: the boilers had been placed in the centre of the building where they not only posed a danger but also took up

valuable space. The KCM manager, Mr Sleddon, had voiced similar concerns but he had been ignored (The Hull Packet and East Riding Times, April 12, 1850, p. 5).

The outward appearance of the mill was intended to impress and was proudly displayed on the companys promotional material 3 (see Appendix 3). Schroeder (1852, p. 103) remarked that the mill was considered to be one of the largest in the country under one roof. Melvilles Trade Directory for 1855 records that the works are very extensive and as complete as any in the kingdom. One can only begin to imagine the superlatives which would have greeted completion of the original plan the addition of another two identical factories at right angles to the first with a railroad on all sides (Hull Packet and East Riding Times, November 21, 1845, p. 5).

Contemporary descriptions never fail to mention the chimney which was located in the centre of the planned square of mills (Hull Advertiser, December 10, 1847, p. 5). Sheahan (1864) described it as magnificent with an internal diameter of 19 feet at the base and 8 feet at the top. It stood 245 feet high, the tallest in the city and nearly 100 feet taller than that of its local rival. From this chimney top, it was possible to see the newly erected, 128 foot Pelhams Pillar on the Yarborough in Caistor, 23 miles to the south (Hull Advertiser, July 16, 1847, p. 8). The superior height of the KCM chimney invited use as a navigation aid (The Hull Packet and East Riding Times, July 4, 1851, p. 1) but nearly brought about its downfall when it was struck by lightning on June 7, 1867. This was not the first incident of this nature, a similar event having occurred nearly a year previously, this strike was sufficient to dislodge the masonry at
3

Some artistic licence appears to have been used to create the impression that the KCM extended as far east as the river bank. This is not corroborated by maps either contemporaneously or more recently drawn up, which all show the KCMs premises extending no further east than Cumberland Street. If in fact the company did have its own wharf alongside the factory, there would have been no call for the lock gates at the end of Skidby Drain to have been moved west to give water-borne access to the companys premises (see Hull Advertiser, December 10, 1847, p. 5).

10

the top with some pieces of masonry being thrown 200-300 yards (The Hull and Lincolnshire Times, June 8, 1867, p. 4). As a result, the chimney was lowered by about 20 feet (Bulmers Gazetteer, 1892).

The Mill - Machinery

Installation of the machinery in the factory began in the early autumn of 1847 (The Hull Packet and East Riding Times, September 3, 1847, p. 5). Schroeder (1852, p. 103) commented that the machinery is of exquisite workmanship and contains the most recent improvements. The investigation committee were of a similar opinion the machinery ... throughout the mill [is] of first rate style and workmanship, and has been supplied by some of the most eminent machinists in the kingdom (The Hull Packet and East Riding Times, April 12, 1850, p. 6). The committees report gives details of the machinery: nearly 31,000 throstle spindles capable of producing numbers 16-40 yarns (the numbers represent the twists per inch) and 68,000 mule spindles, the output of which were the higher number yarns, 36-60. Bt the end of 1850, the cost of the mill gearing, engine and boilers totalled 33,518 and that of the machinery and utensil 86,503.

Reflecting on this grand mill more than a century later, Bellamy (1962, p. 91, fn 4) notes, en passant, that the KCM possessed more than eight times the national average number of spindles for spinning mills (for details of these averages, see also Farnie, 1979, p. 215; Robson, 1956, p. 136). This superior capacity might have been a strength if the management had sought to exploit economies of scale but the committee of investigation was to find that both machinery and material were not

11

used to best economic advantage with lower quality yarn being produced from relatively high quality material.

The Beginning of Trading

Even though 1847 was to see the completion of the construction of this collosal factory, the year was not without its problems for the KCM. First, the impatience of the shareholders to get some return led to their resolution at the first ordinary general meeting to payment of interest on called up capital (The Hull Packet and East Riding Times, March 5, 1847, p. 1). In fact since no profit had been earned (the company had not even made any cotton let alone said any), such payment must have amounted to a return of capital rather than a return on capital. This was an unnecessary drain on much needed resources.

A second problem, not unrelated to the first, was the need to look for loans of up to 100,000. It required two extraordinary general meetings for the directors to obtain the shareholders authorisation to borrow the necessary funds (The Hull Packet and East Riding Times, July 16, 1847, p. 6). An invitation to potential lenders was issued in the press one month later (and again around the end of the year, The Hull Packet and East Riding Times, December 17, p. 1 and December 24, 1847, p.1).

The third problem was the resignation of its chairman, Alderman Thompson (The Hull Packet and East Riding Times, July 2, 1847) for reasons unknown. He was replaced by his fellow councillor, Alderman Gresham.

12

Just two years after the laying of the first stone, the mill began work on January 1, 1848, though the fifth story was to be left empty for another year. When in full production, the KCM consumed nearly 2,300 tons of raw cotton and 7,800 tons of coal (Sheahan, 1864, p. 583). Sheahan and Whellan (1857, p. 108) record that the KCM employed 1,000 people and produced 1,850 tons of cotton per year. With such infrastructure the prospects for this venture should have been bright.

1848, the first full year of trading, however, produced mixed results: while production of yarn had grown from 5,000lbs per week in January to 31,000lbs per week in December, sales for the year amounted to only 25,000 and the venture returned a loss of just over 1,000. The shareholders may have been justified in feeling some disappointment when they considered that some 161,000 of their money (and that of the bankers) had gone into the mill and machinery. However, at least one shareholder complained that he found it difficult to discover the companys true position because of the lack of information and clarity in the presentation of the accounts; one of the directors promised to rectify the problem next year (The Hull Packet and East Riding Times, March 9, 1849, p. 2). Indeed, such balance sheets as still exist (the earliest is drawn up as at December 31, 1850) appear to be clear enough.

During 1849, the fifth storey of the mill had become operational, turnover had trebled and the profit on the spinning account came to 5,763 from which other expenses were deducted to leave a profit available for distribution of 4,737. However, the dividend of 2 per share was not enough to placate the shareholders who began a long and protracted debate concerning a possible amalgamation with the Hull Flax and Cotton Company (The Hull Advertiser, March 8, 1850, p. 3). During this debate some disparaging comments were made about the management and the state of the local 13

competition. In the end, it was agreed to appoint a committee of seven shareholders to investigate the state of affairs at the KCM (some of the findings of this committee have already been alluded to).

Perhaps mindful of their own limitations, these gentlemen saw the necessity of engaging three industry experts from Lancashire to assist their investigation which concluded a month later with a report containing not only criticism of the positioning of the boilers and the poor use of the high quality machinery, but also the structure of the senior management. What was needed in place of the current oversight of the board of directors was a single uniting and controlling individual with experience of the cotton trade. He should also have a stake in the company in order to align his interests with those of the proprietors.

The committee also recommended that a dedicated, salaried agent be employed to buy raw cotton on behalf of the company and also to sell the yarn produced rather than the expensive use of brokers and commission agents. The experts produced their own financial calculations of the companys financial performance and concluded that the actual loss was immense perhaps 11,000 per annum. Their calculation allowed for a cost of capital of 3.5% and wear and tear of 2.5% which of course the KCM directors had not included in the figures presented to the shareholders. In fact, the question of a consistent and adequate provision for depreciation was to dog the KCM for the rest of its days. The committee also recommended improvements in the accounting system with stock taking and balancing of accounts on a quarterly basis and meetings of shareholders every six months. The report of the committee was received but not adopted at the meeting in April 1850.

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The uncomplimentary comments which had been uttered by some KCM shareholders on March 4 caused a certain resentment when they were repeated three days later at a similar meeting of the KCMs competitor on the eastern bank of the Hull River (The Hull Packet and East Riding Times, March 8, 1850, p. 5). With such antagonism at the outset, a merger of the two mills was never likely to have been smoothly completed. Nevertheless, as it was a recommendation of the investigating committee, it had to be considered (The Hull Packet and East Riding Times, April 12, 1850, p. 6). Some shareholders supported the idea (see a letter in The Hull Packet and East Riding Times, August 9, 1850, p. 8). Ultimately, thoughts of an amalgamation came to nothing, which was perhaps fortunate for the KCM shareholders since their rival was wound up before the end of the decade (Manchester Examiner and Times, September 26, 1857).

The frustration of the KCM shareholders can be seen from a letter to The Hull Packet and East Riding Times (May 3, 1850, p. 6) which raised a number of issues, the most crucial of which focussed on two critical weaknesses in the KCM management: the board of directors had too little knowledge of the cotton industry and they, along with the manager, lacked sufficient financial interest in the company.

In spite of the fact that the KCM had only just managed to survive the first few years of its existence, at the seventh annual general meeting in 1853 the shareholders wasted no time in approving an 8% dividend for themselves at the same time as instructing the directors to explore ways of appropriating the surplus land near the factory (The Hull Packet and East Riding Times, March 11, 1853, p. 5).

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When the Joint Stock Companies Act 1856 allowed limited liability, the KCM shareholders were among the first to avail themselves of that protection (The Morning Chronicle, November 12, 1856, p. 5). Nevertheless, this process did not prevent legal disputes over liability for the companys debts continuing after the demise of the KCM in 1894.

Employment at the KCM

The original KCM prospectus had stated that labour was plentiful in Hull, yet the majority of its employees had to come from Lancashire and Norfolk as well as Ireland, and had made the move specifically to work in the KCM. When it came to hiring, preferential treatment was given to those who could bring their wives and daughters to work with them (Gillettt and MacMahon, 1980, p. 334). Calvert (1978, p. 215) indicates the scale of employment in the cotton mills in Hull: six per cent of the total working population were engaged in either spinning or weaving.

Not much remains in the surviving records as to the conditions enjoyed by the workforce. The committee of investigation had remarked on the wages being higher than average but not extravagantly so (The Hull Packet and East Riding Times, April 12, 1850, p. 6). To encourage punctuality it was common practice to penalise those who were late for work by the deduction of a quarter of a days pay and it may have been this that caused a tragic accident on the morning of December 7, 1848, when a boat ferrying workers across the River Hull from their homes in the Groves to the KCM capsized killing fourteen of the KCM operatives, including three from one family, and three others (The Hull Packet and East Riding Times, December 8, 1848, p .5). The Coroner accepted that the accident had been caused by the behaviour of the 16

passengers and absolved the boatman from blame (The Hull Packet and East Riding Times, December 15, 1848, p. 6).

There is evidence that the KCMs directors and shareholders took pains to care for the employees. The third AGM in 1848 saw the shareholders discuss the need to build a bath house for the workers, for which project the former chairman had donated 200 of his own money. The directors were empowered by the shareholders to complete the facility. A brass band was formed in 1855 (http://www.ibew.co.uk/) and soon gained honours (The Hull Packet and East Riding Times, July 3, 1857, p. 6). Such musical diversions may have helped some KCM employees to cope with what must have been a hard working life. The provision of a library at the mill provided others with a different form of recreation and education (Gillett & MacMahon, 1980, p. 331).

In 1850, a factory inspector informed the local magistrates that the KCM was exceedingly well conducted in fact it was the best regulated establishment in the whole of the district; nevertheless, children were employed in the factory and accidents, some of them fatal, happened (The Hull Packet and East Riding Times, November 1, 1850, p. 5). The use of child labour and the education of children employed in the factory remained issues for at least the next three decades (see The Hull Packet and East Riding Times, August 4, 1876, p. 8; The Hull and Lincolnshire Times, June 21, 1878, p. 6).

The Cotton Famine Forces Temporary Closure

The American Civil War had caused considerable hardship in manufacturing districts throughout Britain, and in Hull the impact was devastating (Crawford, 1984, p. 31). 17

The ports in the southern states were blockaded by the forces of the northern states and supplies of cotton dwindled forcing the KCM to close at the end of 1861 (The Hull Packet and East Riding Times, September 5, 1862, p. 5). The KCM directors attempted to alleviate the distress of the unemployed workers by making a grant of 500 to assist the unemployed operatives but that sum was not sufficiently large to provide much help to a workforce of about 1,000. Mr W. S. Brownlow, a director, personally donated 100 to the cause and in a letter to The Hull Packet and East Riding Times, Mr Sleddon, the manager, urged others to follow suit (October 24, 1862, p. 8). These efforts were not sufficient to keep some of the unemployed from the workhouse where they were forced to do tasks such as breaking stones and teasing oakum which were generally held to be unsuitable for cotton spinners whose nimble fingers were essential for working thin yard and thread (Crawford, 1984, p. 33). Some workers were sent to Leeds but soon returned home having found the mills there too damp (Crawford, 1984, p. 35).

The KCM directors, who worked without pay for the duration of the war (The Hull Packet and East Riding Times, April 29, 1870, p. 5), sought relief on behalf of the company, by asking for it to be excused paying the local taxes. Initially they met with no success (The Hull Packet and East Riding Times, September 18, 1863, p. 6), the councils Clerk of Accounts having ascertained that idle mills in Manchester, Bolton and Preston were still assessed. Later, however, on appeal before the courts, the council agreed to reduce the rates by 20% to just under 2,000 (The Hull Packet and East Riding Times, July 8, 1864, p. 7).

The American Civil War ended in April 1865, yet the KCM directors appear to have been in no hurry to re-open. At an extraordinary meeting in October 1865, the 18

manager, Mr Sleddon, stated that having made enquiries in Manchester and elsewhere in Lancashire, he had been advised not to re-commence spinning until the new year when the price of cotton would be lower (The Hull Packet and East Riding Times, October 27, 1865, p. 8). This was at odds with a report in The Hull Advertiser (October 28, 1865, pp. 4-5) that claimed that Manchester mills and those of the other cotton districts in Lancashire were profitably working day and night now that the war was over. In contrast, the successor to the old Hull Flax and Cotton Mill managed to keep working throughout the cotton famine, albeit on reduced hours.

By the time of the annual general meeting in 1866, the directors were able to report that the company had resumed operations under favourable circumstances (The Hull Packet and East Riding Times, March 9, 1866, p. 3). However, the share price remained depressed at 23 as the hoped-for fall in cotton prices failed to materialise (The Hull Packet and East Riding Times, December 28, 1866, p. 8; December 27, 1867, p. 5; January 1, 1869, p.5; December 31, 1869, p. 5). The loss for 1866 came to 4,000; the directors and auditors fees were cut by one half and Mr Sleddon was directed to devote his entire time to the companys affairs (The Hull Packet and East Riding Times, March 8, 1867, p. 3), whereas during the cotton famine he had been allowed to run his own business.

At the end of another year, the share price had fallen further to 18 (The Hull Packet and East Riding Times, December 27, 1867, p. 5). At the annual general meeting in March 1868, the shareholders were told that the reduction in the price of cottons during the past year had militated against the interests of the concern but that when it was considered that only 13,000 had been lost since the commencement of the American war until the present time, the position of the company could not be 19

deemed other than satisfactory (The Hull Packet and East Riding Times, March 6, 1868, p. 6). However, by the end of 1868, accumulated losses had grown to over 20,000 and a year later they had increased by nearly another 7,000. It was only at this late stage that the directors made the final call of 10 on each share to raise in excess of 20,000 (Hull and North Lincolnshire Times, December 10, 1870, p. 7). By this time, the debit balance on the profit and loss account stood at 35,329.

With no remaining records and few reports in the press, it is impossible to create a picture of the last decade of the KCM in its first incarnation. Suffice to say that 7-8 were the last prices quoted for KCM shares (The Hull Packet and East Riding Times, May 17, 1878, p. 5).

Reconstitution and Final Closure

The company was reconstituted as a limited liability company on May 30, 1879, with capital of 210,000 of 10 including 5,000 preference shares; 10 new shares 7 paid up and 2.5 preference shares were issued in exchange for one 100 share in the old company (The Hull Packet and East Riding Times, June 13, 1879, p. 5). However, the shareholders of the old company, knowingly or not, were to remain personally liable for at least one of that companys debts, a loan from the Scottish Provident Institution (The Leeds Mercury, November 6, 1896).

The end of the KCM came suddenly on April 3, 1894: After the holidays the cotton-spinners anticipated fuller time, but on Friday night the following startling announcement was posted on the mill door facing Cumberland-street: -THE MILL IS TO REMAIN CLOSED UNTIL 20

FURTHER NOTICE BY ORDER (The Hull Packet and East Riding Times, April 7, 1894, p. 7).

One report attributed the immediate cause to the death of a major backer who had financed the company through loans to the tune of more than 60,000 (Liverpool Mercury, June 5, 1894, p. 8). The lenders executor pressed for the loan to be repaid which the KCM simply could not do. The 1,300 employees were put out of work (Hull Times, April 7, 1894, p. 7). The Mayor of Hull, in making an appeal on April 13, 1894, for public assistance to alleviate the distress caused cited the KCMs excellent labour relations by saying that in 37 years there had not been a strike or labour dispute involving the stopping of the mills, but that on the contrary, the most harmonious relations have happily subsisted between the employers and the employees (CWM/151). The distress fund grew to more than 700 (The Daily Mail, June 18, 1894, p. 4) but this was too small an amount to be of much use.

The Role of the Directors and Auditors in the Failure

We now look at the role of the directors and the auditors in the downfall of the company.

The KCM Directors

Incompetence on the part of those at the head of the company has been identified as one of the main reasons for the failure of cotton manufacture in Hull (Bellamy 1962; Allison 1969). Certainly in the case of the KCM, some of the directors appeared to be very remote from the business of spinning cotton. For example, at the meeting of shareholders and creditors on May 10, 1894, Mr. Lambert, the chairman of the board 21

of directors, admitted that he had no knowledge of the business whatsoever, although he had been a director since the new company was formed. He also claimed that he insisted that the directors should receive no remuneration while the shareholders received no dividend; rather than placate the shareholders, this statement caused one to reply that voluntary services are of very little use (The Daily Mail, May 11, 1894, p. 4).

A lack of honesty on the part of at least some of the directors is evident. Mr J. J. Midgley, who had been auditor from 1872-78, was asked why he had put his name to accounts which he knew were wrong; he simply answered that he thought the company would pull round (Liverpool Mercury, December 7, 1895; p. 6). He had had a lot of experience of the cotton trade; when taking stock, he would weigh the bobbins to determine how much cotton was there. He estimated that there were about one quarter of a million bobbins in the KCM but gave no indication of how many of these he actually weighed.

The financial management of the company did not help its progress. Raising capital from its shareholders too gradually forced it to borrow more. The difficulty in collecting calls on the shares also did not help cash flow; Paying returns to the shareholders, even if genuine profits had been made, was to leave too little available to be retained; as Shapiro (1967, p. 207) concludes of the industry generally the plowing back of profits was crucial. The size of the profits from which reinvestment came was probably a product of rising productivity and large scale manufacture except that in the case of the KCM, such profits rarely materialised.

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But perhaps there was a fundamental flaw in the plan to build a cotton spinning mill in Hull. In Calverts opinion, the decisive handicap proved to be the excessive freight for bringing American cotton to Hull instead of Liverpool (Calvert, 1978, p. 215). His case seems logical enough so it seems strange that no other author has concurred with his analysis.

The Auditors The original companys constitution appears to have foreseen the need for reliable information to be provided to investors. The constitution required there to be two auditors and that each was to hold at least three shares in the company. It was also required that they face annual election. The maximum fee allowed for the audit was 105 per annum. The auditors received 94.10.0 in total during the years 1845-47 and 52.10.0 for 1848 (BT/41/335/1937), a figure which seems to have been maintained for a number of years. (see, for example, The Hull Packet and East Riding Times, March 11, 1853, p. 5). Such remuneration seems fairly generous especially as it is clear that the founders had no intention of appointing a professional auditor (at least, not one who was local to the area) since the Deed of Settlement prohibited the holding of the position of director, auditor or other officer of any other company in or within ten miles of Kingston-upon-Hull. The duties of the auditors of the KCM as originally constituted were to inspect the balance sheet and to confirm it or to report specifically thereon.

When the company was re-constituted in 1879 under the Companies Act 1862, the KCMs new constitution, so far as the audit and accounts were concerned, was similar to the model articles in Table A of the Act:

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The auditors shall make a report to the members upon the balance-sheet and accounts, and in every such report they shall state whether in their opinion the balance-sheet is a full and fair balance-sheet, containing the particulars required by these articles, and properly drawn up, so as to exhibit a true and correct view of the state of the company's affairs; and in case they have called for any explanation or information from the directors, whether such explanation or information has been given by the directors, and whether the same has been satisfactory; and such report shall be read, together with the report of the directors, at the ordinary meeting.

Gone were the requirements for there to be two auditors, for the auditor to be a shareholder and for the audit fee not to exceed a certain sum. The opportunity to change the constitution to require the appointment of a professional auditor was missed although, as it turns out, either the directors or the shareholders chose to make such an appointment. From its reconstitution until 1891 4 , the KCMs sole auditor was Benjamin Pickering, a chartered accountant. In 1892, Pickerings firm, Pickering, Peasegood & Judge, was appointed auditor and the 1893 auditors report was signed in the firms name (In Re Kingston Cotton Mill Company (No. 2), Chancery Division [1896] 1 Ch. at 333).

Pickering was a founding member of the ICAEW (ICAEW Register of Members No. 488) and clearly a man of some importance in Hull. In late October, 1887, he had

The last year for which a balance sheet is available at the East Riding Archives is 1884. Despite the direction in the companys articles as to the form of the auditors report, Pickerings report reads simply Audited and found correct it is undated, though it must have been prepared before February 21, 1885 (the date of the directors report for the year 1884).

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been invited to be Sheriff of the Borough (The Accountant October 29, 1887, p. 598) but he declined the invitation.

The KCM Cases

The failure of the KCM led to litigation against the auditors and directors of the company. The official receiver and liquidator brought an action for misfeasance under s. 10 of the Companies (Winding-up) Act 1890 and Mr. Justice Vaughan Williams was asked to decide the question of whether the auditors were officers the company. He unequivocally opined (at 13-14): I prefer to say at once that I think these auditors are officers of the company because they have to perform a duty which is prescribed by the articles a duty which they have to perform in conjunction with the officers of the company a duty the performance of which, as appears by the articles, will necessarily be the basis of the action of the shareholders in reference to the annual declaration or non-declaration of a dividend. I cannot conceive why such persons should not be officers.

The auditors appeal to the Court of Appeal was dismissed without comment on Justice Vaughan-Williams rationale, their Lordships considering themselves bound by the decision in a similar and contemporaneous case In re London and General Bank where it had been concluded that the auditor was an officer.

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Having gained victory in that case, the liquidator then went on to pursue the auditors in a second case, Re Kingston Cotton Mill Co. (No 2) 5 , for misfeasance in failing to detect the overstatement of the companys premises and stock of material, and against the company directors for making the misstatements. It became clear during the course of the hearings that the auditors suspicions would have been aroused, had he only reviewed the physical quantities of cotton being bought and sold. Alternatively, as The Accountant (January 11, 1896, pp. 24-5) was quick to point out, a review of the gross profit margins over the four years, 1889-1892, would have prompted enquiry. In fact, most telling of all is an analysis of the stock turnover ratio, as discussed in the editorials and correspondence of The Accountant, (January 18 and 25, 1896), though there was no suggestion at the time that this should have been reviewed (see Table 1).

In a controversial judgement, the Court of Appeal reversed the lower courts decision imposing liability on the auditors, on the grounds that, in the absence of suspicious circumstances, auditors were entitled to rely on statements made by management. It was Lord Lopes who produced the enduring summary of an auditors duty (at 288-9): It is the duty of an auditor to bring to bear on the work he has to perform that skill, care, and caution which a reasonably competent, careful, and cautious auditor would use. What is reasonable skill, care, and caution must depend on the particular circumstances of each case. An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound. He is justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable

Acct. L.R. May 23, 1896, 77.

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care. If there is anything calculated to excite suspicion he should probe it to the bottom; but in the absence of anything of that kind he is only bound to be reasonably cautious and careful.

Lord Lopes is generally thought to have been the original source of the watchdog metaphor but in fact Chandler (1998) has shown that this figure of speech had been used at least two years prior to the KCM judgement.

The Accountants response to the result of the appeal was decidedly luke-warm. While acknowledging that it would be unreasonable for the auditor to perform the sort of analysis conducted by the Official Receiver over the course of two years and working with the benefit of hindsight, there was something of a snub for Pickering in the comment that if this decision has the effect of making shareholders a little more careful whom they elect as directors and auditors, no one can pretend that the ultimate result will be other than beneficial to the community at large and to the profession in particular (The Accountant, June 6, 1896, pp. 459-460).

A small but significant detail which appears not to have featured in the evidence brought before either court is the level of Pickerings involvement in the KCM. Shareholders returns filed at the National Archives show that from the formation of the new company in 1879, Pickering had held at least 350 ordinary shares. While two of the directors held 2,000 shares or more, most of the directors shareholdings amounted to no more than 200 each. By the time of the collapse, Pickerings

shareholdings had increased to 410 ordinary shares, 120 10 preference shares and 83 5 preference shares. That he increased his stake in the company during the difficult trading conditions of the 1880s may say something of his desire to see the company 27

succeed. It may be that he felt a particular loyalty to the company that his father, a draper, had helped to found in 1845. It may also account for his unwillingness to see the publication of more accurate financial statements.

However, the case of the KCM was not the first time that the quality of Pickerings audits had been called into question. A few years before the KCMs collapse, a fraud amounting to about 20,000 was discovered at the Hull and Holderness Conservative Building Society, one of Pickerings audit clients (The Hull Daily News, October 10, 1887, p. 2; The Accountant, November 5, 1887, p. 606). It may have been the revelation of the fraud which caused Pickering to decline the citys mayoralty. The Hull Daily News commented on the scale of the defalcations committed by the Societys secretary and speculated on the nature of the auditing methods: the greatest surprise appears to be how he could have taken this great amount away without its being missed. The poor fellow must have been put to very serious trouble for many years past in presenting the accounts to the auditor. We do not know who was the auditor nor the system adopted, but it will occur to most people that there was something defective in the whole business, or such a serious leakage must have been discovered long ago. It may be that the auditing has been done by members of the society, who have been satisfied with the statements laid before them by the secretary, without troubling themselves to go through the books.

One method used by the fraudulent secretary to hide the deficiency was the underrecording of the amount of deposits received from savers (The Hull Daily News, October 7, 1887, p. 3). Other methods discovered by the investigating accountants 28

included purported payments of interest to savers, mis-castings in the receipts book and duplicate entries to record withdrawals by depositors. The auditors appear to have stumbled across two instances of false entries but accepted the secretarys explanation that these were simply errors (The Hull Daily News, October 26, 1887, p.3). The Hull News (October 22, 1887, p. 4) reported remarks made at a meeting of the affected depositors to the effect that that too frequent practice of auditing on production of sheets prepared by Secretaries, instead of examining every book, voucher, and credit note, will have to be abandoned, or confidence in Building Societies will be seriously shaken. The Accountant (November 5, 1887, p. 605) accused Pickering of either gross negligence or incompetence, concluding a damning analysis with the following remarks:

The Building Societies whose accounts are audited by chartered accountants are comparatively very few. The practice, however, of

appointing professional accountants is growing. That movement has great and solid importance for the members of the Institute as a whole, but a few more audits conducted in a manner similar to that of Mr. BENJAMIN PICKERINGs on behalf of the Hull and Holderness Society will put an effectual stop to it (p. 606).

However, Pickering appears have escaped both legal redress and professional sanction but his audit of the KCM was to expose once again his shortcomings as an auditor. Despite the blots on his copy-book, Pickering remained an ICAEW member until he resigned in January 1901 (he had resigned in January the year before but had been readmitted a month later (ICAEW Register of Members 488)).

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Conclusion
The history of the KCM is one which starts with a grand plan devised by local merchants with no real knowledge of the industry they were seeking to enter. Their aims were laudable in that they sought to bring employment and prosperity to a city that was witnessing the decline of the traditional industries. However, the timing of the endeavour was unfortunate, coinciding as it did with a decline in trading conditions generally and the beginning of foreign competition which would eventually put paid to the rest of the cotton industry in Britain. The founders were not helped by the scale of their ambition, their reluctance both to commit sufficient resources at the outset and to allow the company to retain adequate funds during the life of the project. Their keenness to reward themselves as the providers of capital whether or not returns were merited by performance starved the enterprise of much needed cash. The truth was hidden from the shareholders though it remains a mystery why questions were not raised at an earlier stage about the reason for maintaining the mill at close to its original cost for so many years after its construction. The financial interest of one of the auditors in the KCM is a feature which has not been raised before and though it was not unusual for auditors to hold shares in audit clients the extent of Pickerings investment in the KCMs shares is noteworthy. Whatever the causes of the KCMs failure, we are left with an icon in the auditing literature. This paper has attempted to add some depth and breadth to our knowledge of the context in which the KCM was established, struggled and finally collapsed.

Postscript
In 1898, part of the mill was demolished (Bellamy, 1962, p. 104) and shortly afterwards the northern-most part of the KCM plot was divided by the laying of two roads, Main Street from north to south and Central Street for east to west through its 30

centre (National Archives: DBHT/9/541 undated). The remaining building became the Co-operative Wholesale Societys Preserve Works and was known locally as the Jam Factory (Smith, 1998, p. 142) until production ceased in 1932. On the 1928 Ordnance Survey map, the eastern half of the KCM site is labelled White Standard Works (Confectionery) and the western half is simply described as Sawmills. As a major port, Hull was naturally an important target for German bombers during the Second World War 6 . A Luftwaffe map of the north-east of England had the former KCM site marked as a potential bombing target although it was labelled Preserve Works (DMX/25), but more critically, the map shows that just a short distance to the north of Fountain Road, lay a larger and a more valuable target, an oil installation. Bombs are reported to have fallen on Central Street (and Glasshouse Row on the opposite side of the River Hull) during a raid on February 14/15, 1941 causing damage to oil mills and a warehouse (Geraghty, 1989; Ripley and Pears 2010). Geraghty (1989, p. 61) reproduces a photo showing the CWS Mill in Cumberland Street in 1941 almost completely destroyed and an aerial photograph taken by the Royal Air Force in 1946 appears to show large parts of the former KCM plot razed to the ground and yet relatively little damage to the oil refinery (TAY 54/0930 SE). This is difficult to reconcile with the claim of Calvert (1978, p. 216) that parts of both the KCM and its rival were still standing near the end of the 1970s.

Gibson (2008, p. 6) claims that Hull was the third most heavily bombed city in Britain and Geraghty (1989) reports that out of Hulls housing stock of more than 92,000 fewer than 6,000 escaped damage during the war.

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References: Primary sources: National Archives: BT 1/462/6 General In-letters and Files BT 31/86/306 Company No 306 Files of Dissolved Companies BT 31/2530/13108 Company No 13108 Files of Dissolved Companies BT 41/335/1937 BT 41/336/1937 J 13/851 Companies Winding-up Proceedings Modern map references: Hull in relation to England: http://maps.google.co.uk/?ie=UTF8&ll=53.754636,0.332057&spn=6.395415,14.0625&z=6 Hull in relation to the Humber: http://maps.google.co.uk/?ie=UTF8&ll=53.750639,0.33165&spn=0.02497,0.054932&z=14 The neighbourhood of the Kingston Cotton Mill: http://maps.google.co.uk/?ie=UTF8&ll=53.754636,0.332057&spn=0.006242,0.013733&z=16 The sites of German bombs dropped on Hull during the Second World War: http://www.rhaywood.karoo.net/bombmap.htm Other sources of maps consulted: Hull History Centre: Aerial Photo by Royal Air Force for Ordnance Survey, May 1946, TAY 54/0930SE The sites targeted by German bombers: Militargeopgrphische Objektkarten mit Objektbildern, 3 Nordest-England. 1941 Ac. No. 82 DMX/25 Various maps made over the last two centuries. Humberside Archaeology Partnership: Maps showing the location of historical and industrial sites. Other References: Allison, K. J. (ed.) (1969) Modern Hull, A History of the County of York East Riding: Volume 1: The City of Kingston upon Hull, pp. 215-286. (http://www.britishhistory.ac.uk/report.aspx?compid=66776) 32

Aspen, C. (1981) The Cotton Industry, Shire Publications Ltd, Aylesbury. Baines, E. (1835) History of the Cotton Manufacture in Great Britain, H. Fisher, R. Fisher and P. Jackson, London. Bellamy, J. M. (1962) Cotton Manufacture in Kingston-upon-Hull, Business History, Vol. 4 Issue 2, 91-108. Calvert, H. (1978) A History of Hull, Phillimore, London. R. A. (1998) Exploring the Pedigree of the Watchdog Metaphor, The Accounting Historians Notebook, October, pp. 9-10. Chapman, S. D. (1972) The Cotton Industry in the Industrial Revolution, Macmillan, London. Crawford, P. (1984) The Impact of the American Civil War on Hull 1861-1865, The Journal of Regional & Local Studies, Vol. 4 No. 1, Spring, pp. 31-40 East, W. G. (1931) The Port of Kingston-upon-Hull during the Industrial Revolution, Economica, No. 32, pp. 190-212. Farnie, D. A. (1979) The English Cotton Industry and the World Market 1815-1896, Clarendon Press, Oxford. Geraghty T. (1989) A North-East Coast Town Ordeal and Triumph, Mr Pye Books, Goole. Gibson, P. (2008) Hull Then and Now, Carnegie Heritage Action Team, Hull. Gillett, E. & MacMahon, K. A. (1980) History of Hull, Hull University Press, Hull. HDLHRG (Hull & District Local History Research Group, Hull) (2007) A Breath of Sculcoates, Developing our Communities, Hull. Ketchell, C. (1990) F. S. Smiths Drawings of Hull Images of Victorian Hull Vol 2, Hutton Press Ltd, Beverley. Markham, J. (1998) Streets of Hull: A History of their Names, Highgate Publications, Beverley. Ripley, R. and Pears, B. (2010) North-East Diary 1939-1945, see under Hull, raid number N531 at http://www.ne-diary.bpears.org.uk. Robson, R (1956) The Cotton Industry in Britain, Macmillan & Co. Ltd, London. Schroeder, H. (1852) The Annals of Yorkshire from the Earliest Period to 1852. George Cosby, Leeds. Shapiro, S. (1967) Capital and the Cotton Industry in the Industrial Revolution, Cornell University Press, Ithaca, New York. 33

Sheahan, J. J. (1864) The History and Description of Town and Port of KingstonUpon-Hull, (2nd Edition), Simpkin, Marshall & Co., London. Sheahan, J. J. and Whellan, T. (1857) The History and Topography of the City of York, the East Riding and a Portion of the West Riding Vol. 2. John Green, Beverley. Smith, J. E. (1998) The Shop for the People, Hutton Press, Beverley. Wyke, T. and Rudyard, N. (1997) Cotton, A Select Bibliography on Cotton in North West England, Manchester. Available on-line at www.spinningtheweb.org.uk. Yates, B. (1967) How to Find Out About the United Kingdom Cotton Industry, Pergamon Press, Oxford.

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Illustration 1 Kingston upon Hull 1852

Source: A New Plan of Hull, 1852, Nicholson & Rayner.

Illustration 2 - Close up of the KCM plot

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Illustration 3 Kingston Cotton Mill

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Illustration 4 Eggingtons Lane with Old Cotton Mill on right, c.1885.

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Illustration 5 KCM Promotional Material

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Illustration 6

Illustrations 3-6 reproduced with the kind permission of the Wilberforce House Museum, Hull City Council.

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Table 1 1889 120,590 21,775 92,455 (29,760) 36,119 29.95 102 1890 123,950 29,760 101,951 (44,483) 36,722 29.63 133 1891 107,180 44,483 77,565 (53,918) 39,050 36.43 231 1892 92,393 53,918 63,468 (60,966) 35,973 38.93 330

Sales Less: Opening Stock Purchases Closing Stock Gross Profit Gross Profit Margin (%) Stock turnover (days) Source:

Based on the re-presented figures featured in The Accountant (January 11, 1896, pp. 24-5), which in turn were taken from the balance sheets and other information provided by Pickering, Peasegood & Co.

41