5 Dec 2017 01:30pm

The 12 dates that shaped accountancy

From Enron to Excel, Mesopotamia to Bristol, economia takes a tour through the history of accounting, digging up key dates that shaped the profession. Think we’ve left off a vital event? Then Tweet us @economiamag or leave us a comment below

Caption: Illustrations: Rose Blake


The birth of accounting

There seems to be some dispute about the earliest evidence of accounting, with dates ranging from around 8,000BC to 5,000BC. But most historians agree that the first accounting records in evidence were made on clay tablets in Mesopotamia and may be related to temples’ trading activities and imposition of taxes. One example is a 5,000-year-old tablet that reads “29,086 measures barley 37 months Kushim”, which can be interpreted as: “a total of 29,086 measures of barley were received over 37 months. Signed Kushim”. If Kushim is the name of an individual rather than a generic title of office, then they are not only the earliest accountant but also the first person in history whose name is known to us. This would certainly knock Luca Pacioli off the top spot as “father
of accountancy” and the world’s most famous accountant. 


The magic of double-entry bookkeeping

In 1494 Luca Pacioli, Italian monk, magician, chess master, maths professor and mate of Leonardo Da Vinci, wrote a heavy-duty (632-page) reference manual, Summa de Arithmetica, Geometria, Proportioni et Proportionalità, which included 27 pages on double-entry bookkeeping. Contrary to popular myth, he didn’t invent the discipline – it had been developed in the 13th century and was widely used by Italian merchants – but he was the first to publish a treatise on it, and in vernacular Italian, which made it widely accessible. He chose to recommend the Venetian method over other versions: this included three books of account – the memorial (memorandum), the giornale (journal) and the quaderno (ledger) – and formed the basis for the double-entry bookkeeping practised today. ICAEW is the proud owner of not one but two original copies in its rare books collection. 


The big one

Little did Josiah Wade know when he set up his new business venture in Bristol in 1780 that he was taking the first step towards UK (but not quite world) domination. His firm, which specialised in auditing merchants’ accounts, would merge 199 years later with Deloitte, whose UK partners would then rebel against a proposed global merger with Touche Ross in 1989 (which created the Deloitte we know today) by voting to merge with Coopers & Lybrand instead. Nine years later, C&L merged with Price Waterhouse to form PwC. These manoeuvres down the years have not only ensured that Wade’s is the oldest firm in the world to trace its continuous existence, but have also helped to morph what was then the Big Eight into the Big Five (with Arthur Andersen) and, post-Enron, into the Big Four (with KPMG and EY). Deloitte, of course, is now the largest accountancy firm in the world and PwC, the UK’s largest firm, is a close second.


Accountants get institutionalised

The 1870s were when it all started for ICAEW with the establishment of the four founding district societies in London, Liverpool, Manchester and Sheffield, and a voluntary association called the Institute of Accountants of London, which held its first Council meeting on 13 December 1870. In 1872, the Institute voted to drop London from its name and widen its membership to the UK, but in 1879 rejected the idea of admitting non-practising accountants in business. In 1880 the Institute received its Royal Charter and was renamed the Institute of Chartered Accountants in England and Wales.

A year later, in its first disciplinary case, it censured a member for advertising for work in liquidation cases and in 1888 refused admission to a woman. (Despite a request in 1909 from the then board of trade president Winston Churchill, women were not admitted until 1919 when the Sex Disqualification (Removal) Act was passed. It would be another 81 years before the first woman president was elected.) Accountants in business were eventually admitted, although in 1942 their request to join Council was refused (this was overturned a year later). They were allowed to join a new committee dealing with tax and business finance matters: this enabled them to influence ICAEW affairs for the first time, and the series of accounting principles they published was the first programme by a professional body in the British Empire to give advice on proper accounting practice.


Royal Mail Steam Packet Company’s loss changes auditIn 1931, the chairman of the Royal Mail Steam Packet Company, Lord Kylsant, and its auditor, HJ Moreland, were tried for fraud. The case concerned the concealment of transfers from secret reserves into the profit account when in fact the company made heavy losses. Moreland was found not guilty but the chairman was imprisoned for a year. Accountancy bodies recognise the importance of stating true profit and loss accounts but this did not become a legal requirement until 1967. The case led to several major changes in the way companies are audited.


The software revolution begins

One of the key ingredients behind the success of the Apple II computer in the late 1970s was the then ground-breaking number-crunching package Visicalc, first released in 1979. The non-sequential approach of the software was described by US IT legend Ted Nelson as “a new way of thinking about the world”, that forever changed how computations were made. Visicalc was later improved on (and subsequently replaced by) Lotus 123, which could also handle databases and graphics. Ultimately it was with the launch of Microsoft Excel in 1985 that the spreadsheet came into its own. It has grown to become arguably the most important computer program in workplaces around the world.

1 April 2001

IFRS spans the world

The vision was to create global accounting standards; consistent, common standards that investors could use to make more accurate, direct comparisons and judgements. On 1 April 2001, the International Accounting Standards Board assumed its responsibilities to develop and approve International Financial Reporting Standards (IFRS). ICAEW had long been contemplating convergence and its Financial Reporting Faculty warned the transition might not be straightforward. Although IFRS are standard in many parts of the world, the US has not yet committed. In 2015 PwC’s IFRS and US Standard Setting leader, David Schmid said that, while the ambition remained, the move to globally-accepted standards was not imminent.


Sarbox rises from Andersen’s ashes

Originally one of the Big Five international accountancy firms, Arthur Andersen collapsed after fraud on a massive scale was discovered at its audit client Enron, which subsequently crashed. A US district court had found Arthur Andersen guilty of shredding documents relating to the Enron audit and although the US Supreme Court eventually overturned the conviction and exonerated the firm, the ruling came too late to save it. By then Andersen’s client base had melted away. The catastrophic failure at Enron brought US lawmakers together to cut down on the incidence of corporate fraud. Senator Paul Sarbanes and representative Michael Oxley penned the Sarbanes-Oxley (Sarbox) Act.

9 August 2007

This was the day the credit crunch began.

Earlier that year HSBC had announced losses linked to US subprime mortgages, Freddie Mac had said it would no longer buy riskier subprime mortgages and New Century Financial Corporation, a big subprime mortgage lender, had filed for bankruptcy. But the crisis really took hold when French bank BNP Paribas announced it was freezing the assets of three hedge funds exposed to the US subprime mortgage market. It told investors they would not be able to take money out of the funds because it could not value the assets in them, owing to a “complete evaporation of liquidity” in the market. The sharp escalation in the cost of credit for all banks lead to the subsequent run on Northern Rock, the demise of Lehman Brothers, and the bailout of Royal Bank of Scotland and Lloyds/HBOS – to say the least.

2008 (ish)

Blockchain arrives

Depending on whom you believe (nobody really knows), either Dr Kelce Wilson or an anonymous collective called Satoshi Nakamoto invented blockchain. Bitcoin, a digital currency experiment, came first and is now used by millions of people for payments, including a large and growing remittances market. It became apparent that blockchain, the technology on which bitcoin operated, could be separated and used as an incorruptible digital ledger for economic transactions – not just financial transactions but virtually anything of value. Many major financial institutions are still investigating its potential and it is being extensively tested to find out whether it will make business more efficient. In October this year, BNP Paribas and EY announced they were collaborating on using private blockchain technology to improve the bank’s global internal treasury operations. Xavier Toudoire, BNP Paribas’ head of ALM Treasury IT strategy and architecture, said that while the future development of blockchain was unclear, it’s potential was clear.

April 2012

The Campaign for Real Time

Since the turn of the century, HMRC, like all large organisations, has had to digitise its operations. It hasn’t all been plain sailing. Many businesses were caught out by auto-enrolment. By comparison, RTI – which requires a business to submit information to HMRC in real time when it pays an employee – went relatively smoothly when it was introduced in April 2012. Making Tax Digital, the government’s plan to shift tax online, is broadly supported by the profession (although sufficient detail is lacking). Trials are ongoing.

13 July 2016

Nature gets audited

The Natural Capital Protocol, produced by the Natural Capital Coalition and backed by ICAEW, helps business managers around the world make informed decisions based on a trusted, credible and actionable source. It helps businesses understand their relationship with nature’s assets. “The days of defining business success by financial metrics alone are over,” said Peter Bakker, president and CEO of the World Business Council for Sustainable Development. “As we move to fulfil the Paris Agreement and achieve the SDGs, business will need to take a holistic view and start including information on natural and social capital in the definition of performance.”