Measuring profit and performance, a cautionary tale: Birmingham Small Arms c.1911–c.1936

ABSTRACT

Prior to the enactment of the Companies Act 1948, the ability of British company directors to largely determine the nature and form of the corporate financial statements published by their company, renders the information provided in those statements highly problematic. Of particular concern were the ability to hide transactions affecting reserve account balances and the lack of any legal requirement for companies which owned subsidiaries to present consolidated accounts. In the light of the problems and pitfalls identified previously in the literature, this study analyses the usefulness of reported profit figures as a means of measuring company performance, through an examination of the published financial statements of the conglomerate manufacturing firm, Birmingham Small Arms Co. Ltd., between 1911 and 1936. Although the analysis, which utilises internal accounting records, suffers from the usual problems associated with a single case study, it does complement earlier findings, thereby extending our understanding of the extent to which directors of British conglomerate companies manipulated corporate financial statements in the interwar years.

KEYWORDS:

• Corporate financial statements
• profits
• secret reserves
• profit-smoothing
• conglomerate companies
• accounting manipulations

Acknowledgements

I am grateful for the assistance provided by archivists at the Modern Records Centre, University of Warwick, at Coventry Archives and at the Library of Birmingham in facilitating the research upon which this paper is based. The original submission benefitted from insightful comments on early versions by my colleague, Dick Edwards, and from participants at both the online, pre-session workshop, held on 18 June 2021, and at the ‘Accounting resources for economic and financial history’ session at the World Economic History Conference, Paris, 2022. The focus of the current version owes much to suggestions made by one of the reviewers of the original submission. I would also like to express my appreciation to the journal’s editor for her forbearance and advice in relation to the content of this revision. The usual disclaimer applies.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The minute book for 1917–1920 was consulted at the Library of Birmingham.

2 The acquisition in 1919 was of Jessops, which had a shareholding in Savilles. Following the acquisition of further shares, by the mid-1920s Savilles was referred to in BSA minutes as a subsidiary.

3 In the subsequent analysis, where relevant for identification purposes, the terms ‘subsidiary companies’ and ‘associated companies’ are used as they were within BSA. Otherwise, where the discussion relates to all companies controlled by BSA or some mixture of companies from both groups, the more general term ‘subsidiaries’ is used.

4 Though in their 2006 study, Lloyd-Jones et al do note that the preference dividend shown is for only six months.

5 The rate on these debentures was 6 per cent. In November 1936, this issue was redeemed through a new issue of debentures at 4 per cent.

6 While a separate profit-and-loss account was published from 1930 to 1936, it is of a minimalist nature. The figures presented in columns (5) and (6), therefore, being taken from BSA’s published balance sheet in conformity with earlier financial periods.

7 For example, the ordinary dividend of £60,000 for 1915 was not paid until 1916, while the dividend of £100,000 for 1916 was not paid until 1917, alongside the £100,000 for that year (CovA, PA1358/6/1).

8 In the main, the parent company’s profits in the early 1920s comprised preference dividends declared by subsidiaries, plus rent and net interest on loans made thereto, less profit-and-loss account charges incurred.

9 In the light of the one-for-one bonus share issue made in October 1918, the effective return for a pre-October 1918 shareholder was 10 per cent, albeit still only half of what they had been used to during the latter part of the war.

10 A Stock Reserve of £30,000 had existed prior to the war, but in 1918 this sum was transferred to the profit-and-loss account.

11 In the first year a debit balance was taken into BSA’s profit-and-loss account, the amount need not reflect the year’s result, due to being reduced by any credit balance brought forward from the previous year’s account. Once a zero balance had been established, the amount taken over in a subsequent year would represent the reported loss of the subsidiary for that year.

12 The figures for J.J. Saville are only for 7 months since its financial year end had formerly been 31 December.

13 Evidence for BSA for subsequent years indicates that, in addition to the depreciation charged directly to manufacture, further depreciation was, from time to time, charged as a ‘Profit and Loss account’ item.

14 Notes accompanying the Daimler balance sheet as at 31 July 1918 (CovA, PA594/5/2/2/6), present profit figures after deducting all charges but before income tax for 1911 to 1914 respectively of: £157,756; £29,446; £133,183; and £119,523.

15 In BSA’s CFS for 1925, the sum of these two amounts, £438,106, was presented twice on the liabilities side of the balance sheet, once as dividends received from the accumulated reserves of subsidiary companies, and immediately underneath as a deduction for writing down investments in those companies, as shown on the assets side of the balance sheet.

16 The figure for dividends declared presented in Table 5 of £67,807 reflects the fact that £12 of the £2,632 dividend declared by British Abrasive Wheel was payable to an external shareholder.

17 The five were those numbered 2 to 6 in the listing provided earlier. Other evidence, not reported here, also clearly indicates the use of method 9.

18 One possible explanation for this action may have been the desire to boost profits prior to the conversion of the 6% 1928 debenture stock to 4% debenture stock in November 1936.