Royal Mail Case
The Royal Mail Case or R v Kylsant & Otrs was a noted English criminal case in 1931. The director of the
As well as its immediate impact, the case instigated massive changes in the way companies were audited. In 1947, the Companies Act was passed, criminalizing the failure to disclose the use of secret reserve accounts.[1] The case highlighted flaws in the way company accounts were reviewed, and "probably had a greater impact on the quality of published data than all the Companies Acts passed up to that date".[2] The case "fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds",[2] and has also been linked to reduced public trust of big businesses. The case is also seen as the reason for the demise of accounting with the aid of secret reserves.[2]
Background
The
The company had prospered during the
In 1929 the company asked HM Treasury for an extension of the period in which government loans to the company could be paid. The Treasury first demanded an audit of the company accounts, and sent Sir William McClintock to write a report on the financial state of the company. McClintock's report revealed that the company had not earned any trading profits since 1925, but was still paying dividends by taking money from the reserves. The company had reported £439,000 profits for 1926,[n 3] but had drawn £750,000[n 4] out of the reserves and falsified accounts to make it appear that the money came from trading.[7] In 1927 the company made a trading loss of £507,000,[n 5] but money was again drawn from the reserves to make it appear that the company had made a profit of £478,000.[n 6][8] As a result of this, and a report that in 1928 the company had issued a fraudulent prospectus inviting customers to buy shares in the company and saying that it had earned an average £500,000 a year in the last decade, arrest warrants were issued for Lord Kylsant and John Moreland, the company auditor.[7] At the time the ruse was discovered the company had a trading deficit of £300,000 a year,[n 7][9] the reserves were completely exhausted, and the company owed £10 million.[n 8][10]
Trial
The trial began at the
The main defence on the use of secret reserve accounting came with the help of Lord Plender. Plender was one of the most important and reliable accountants in Britain, and under cross-examination stated that it was routine for firms "of the very highest repute" to use secret reserves in calculating profit without declaring it.[14] Patrick Hastings said that "if my client ... was guilty of a criminal offence, there is not a single accountant in the City of London or in the world who is not in the same position."[15] Both Kylsant and Moreland were acquitted of counts one and two, but Kylsant was found guilty on count three[16] and was sentenced to 12 months in prison.[17]
Kylsant appealed his conviction on count three and was bailed pending the appeal. The appeal was heard in November 1931 where the
Aftermath
Following Kylsant's conviction the company was
A second major change was in the approach accountants took to their job. Previously the attitude was that accountants were only required to do their legal duty, but after the Royal Mail Case accountants were more and more expected to use their ethical and moral judgement in making decisions.[20] Contemporaries said that the case "probably had a greater impact on the quality of published data than all the Companies Acts passed up to that date".[2] The case "fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds",[2] and has been linked to reduced public trust of big businesses.[2]
Following his release in 1932, Kylsant stayed mainly out of the public eye despite a brief return in 1933.[4]
Influence on contract law
The case also affected
In the later case of
See also
- the Great Depressionand of the collapse of confidence in the Royal Mail Steam Packet Company.
Notes
UK CPI inflation numbers based on data available from Measuring Worth: UK CPI
- ^ £1,500,000 in 1910 would be worth approximately £162,900,000 in 2024.
- ^ £1,000,000 in 1919 would be worth approximately £48,890,000 in 2024.
- ^ £439,000 in 1926 would be worth approximately £27,110,000 in 2024.
- ^ £750,000 in 1926 would be worth approximately £46,310,000 in 2024.
- ^ £507,000 in 1927 would be worth approximately £32,196,000 in 2024.
- ^ £478,000 in 1927 would be worth approximately £30,350,000 in 2024.
- ^ £300,000 in 1929 would be worth approximately £19,400,000 in 2024.
- ^ £10,000,000 in 1929 would be worth approximately £646,770,000 in 2024.
References
- ^ ISBN 978-1-107-01224-0.
- ^ a b c d e f Camfferman (1998) p.4
- ^ a b Shipping Lines: Royal Mail Steam Packet Company[usurped]
- ^ required.)
- ^ Hyde (1960) p.220
- ^ Stacey (1980) p.150
- ^ a b c Hyde (1960) p.221
- ^ Green (1982) p.72
- ^ Edwards (1989) p.151
- ^ Green (1982) p.93
- ^ Brooks (2008) p.1
- ^ Brooks (2008) p.3
- ^ Brooks (2008) p.2
- ^ Hyde (1960) p.224
- ^ Hyde (1960) p.226
- ^ Brooks (2008) p.262
- ^ Brooks (2008) p.266
- ^ R v Kylsant [1932] 1 KB 442
- ^ Camfferman (1998) p.6
- ^ Camfferman (1998) p.7
- ^ Derry v Peek [1875] 14 App Cas 337
- ^ Doyle v Olby [1969] 2 QB 158
- ^ Hadley v Baxendale [1854] EWHC Exch J70; (1854) 9 Ex Ch 341; 156 ER 145
Bibliography
- Collin Brooks, ed. (2008) [1933]. The Royal Mail Case. Read Books. ISBN 978-1-4437-4016-6.
- Camfferman, Kees (1998). Perceptions of the Royal Mail Case in the Netherlands. Vrije Universiteit.
- Edwards, J. R. (1989). A history of financial accounting. Routledge. ISBN 0-415-00432-2.
- Green, Edwin (1982). A business of national importance: the Royal Mail Shipping Group, 1902–1937. Taylor & Francis. ISBN 0-416-32220-4.
- Hyde, H Montgomery (1960). Sir Patrick Hastings, his life and cases. London: Heinemann. OCLC 498180.
- Stacey, Nicholas (1980). English accountancy: 1800–1954, a study in social and economic history. Ayer Publishing. ISBN 0-405-13548-3.