Batiz-Lazo, Bernardo and Noguchi, Masayoshi (2011): Auditors and the supervision of retail finance: evidence from two small-sized building societies, 1976-1978.
Download (369Kb) | Preview
This study adds to the accounting history literature by looking at features common to major defalcations in two small-sized building societies (namely the Wakefield and the Grays). These features were the dominance of an individual over a building society’s systems, and poor systems of internal control and supervision. Because they failed to recognise the significance of these factors sufficiently, auditors of both societies were criticised for failing to discharge their duties as expected under the Building Societies Act 1960 (BSA60) (which had introduced a new auditing regime by requiring the auditors to examine whether the directors of a society complied with its requirement to establish and maintain a system of internal control and, if not, to report thereon). The cases of the Wakefield and the Grays were a turning point in the supervision of retail financial intermediaries. Prior to them the Chief Registrar of Friendly Societies (CRFS) had adopted a reactive approach to supervision, which effectively delegated the monitoring of the societies to external auditors. After the defalcations were uncovered, they showed there was a lack of productive communication between the Registry and external auditors. As a result, it was felt there was a need to reform and adopt a proactive approach to supervision of the societies under which the CRFS was to directly examine the quality of the auditor’s work. The professional accountants, as represented by the Institute of Chartered Accountants of England and Wales, initially resisted such reform. But ultimately, accountants could not help but to accept it.
|Item Type:||MPRA Paper|
|Original Title:||Auditors and the supervision of retail finance: evidence from two small-sized building societies, 1976-1978|
|Keywords:||corporate governance (the system of internal control); building societies; the Chief Registrar of Friendly Societies (CRFS); the Treasury; supervision of retail financial intermediaries; delegated monitoring; UK; accounting history; financial auditing|
|Subjects:||N - Economic History > N8 - Micro-Business History
M - Business Administration and Business Economics; Marketing; Accounting > M4 - Accounting and Auditing > M41 - Accounting
N - Economic History > N2 - Financial Markets and Institutions
G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks; Depository Institutions; Micro Finance Institutions; Mortgages
|Depositing User:||Bernardo Batiz-Lazo|
|Date Deposited:||12. Jul 2011 22:19|
|Last Modified:||13. Feb 2013 01:04|
Bátiz-Lazo, B. (2006) “Changes in the Depreciation of Buildings in an English Building Society, circa 1959: Financial and Governance implications” mimeo. http://ideas.repec.org/p/pra/mprapa/4617.html (Accessed May 10, 2010).
Bátiz-Lazo, B. and Billings, M. (forthcoming) “Accounting Regulation and Management Discretion in an English Building Society, circa 1960”, Abacus.
Bátiz-Lazo, B. and Noguchi, M. (2011a) “The Disciplinary Power of Accounting-Based Regulation: The Case of Building Societies, circa 1960” , mimeo (http://ideas.repec.org/p/pra/mprapa/28574.html accessed 28-Apr-2011).
Bátiz-Lazo, B. and Noguchi, M. (2011b) “Improving the System of Internal Control through Regulation: Cases of Small Building Societies, circa 1960”, in I. Elfernik, J. Mooij, A. de Jong and A. Perlinge (eds) Corporate Governance in Financial Institutions: Historical Developments and Current Problems, Frankfurt am Main: The European Association for Banking and Financial History, pp. 164-179.
Benston, G. J. and Smith, C. W. Jr. (1976) “A Transactions Cost Approach to the Theory of Financial Intermediation”, Journal of Finance, vol. 31: 215-31.
Berger, A. N. and Udell, G. F. (1998) “The Economics of Small Business Finance: The Roles of Private Equity and Debt Markets in the Financial Growth Cycle”, Journal of Banking and Finance, vol. 22: 613-73.
Berger, A. N. and Udell, G. F. (2006) “A More Complete Conceptual Framework for SME Finance”, Journal of Banking and Finance, vol. 30: 613-73. Black, W. K. (2005) The Best Way to Rob a Bank is to Own One, Austin: The University of Texas Press.
Boléat, M. (1981) Building Societies - A Descriptive Study, London: Building Societies Association.
Calomaris, C. and Kahn, C. (1991) “The Role of Demandable Debt in Structuring Optimal Banking Arrangements”, American Economic Review vol 81(3): 497-513.
Cawson, A. (1985) “Varieties of Corporatism”, in A. Cawson (ed) Organized Interests and the State: Studies in Meso-Corporatism, London: Sage, pp. 1-21
Cleary, E. J. (1965) The Building Society Movement, London: Elek Books. Congdon, T. and others (2009) The Failure of Northern Rock - A Multidimensional Case Study. Vienna: SUERF - The European Money and Finance Forum.
Davies, G. (1981) Building Societies and their Branches: A Regional Economic Survey, London: Fianey & Co.
Davison, I. H. and Stuart-Smith, M. (1979) Grays Building Society: Investigation under Section 110 of the Building Societies Act 1962, London: HMSO.
Diamond, D. (1984) “Financial Intermediation and Delegated Monitoring,” Review of Economic Studies, vol. 51 (July): 393–414.
Diamond, D. and Dybvig, P. (1983) “Bank Runs, Deposit Insurance and Liquidity”, Journal of Political Economy, vol. 91: 401-419.
Drury, C. (1994) Survey of Management Accounting in UK Building Societies, London: ICAEW.
Edwards, J. R., Chandler, R. A. and Anderson. M., 1999. The ‘public auditor’: an experiment in effective accountability. Accounting and Business Research 29, no. 3: 93-105.
Gabbioneta, C.; Greenwood, R.; Mazzola, P.; Minoja, M. (2011) “The Influence of Institutional Context on Corporate Illegality”, Accounting, Organization and Society Conference on Corporate Fraud, London: Imperial College (http://www.business.ualberta.ca/Conferences/FraudInAccountingOrganizationsAndSociety/~/media/University%20of%20Alberta/Faculties/Business/Faculty%20Site/Conferences/FraudInAccountingOrganizationsAndSociety/Documents/parmalat_march_14.pdf accessed 23-Jun-2011).
Guénin-Paracini, H.; Gendron, Y. and Morales, J. (2011) “Neoliberalism, Fraud and Expertise: A Triangle of Reinforcing Influences?”, Accounting, Organization and Society Conference on Corporate Fraud, London: Imperial College (http://www.business.ualberta.ca/Conferences/FraudInAccountingOrganizationsAndSociety/~/media/University%20of%20Alberta/Faculties/Business/Faculty%20Site/Conferences/FraudInAccountingOrganizationsAndSociety/Documents/Version_07_Neoliberalism_and_fraud_-_AOS_Fraud_Conference_-_March_2011.pdf accessed 23-Jun-2011).
Guinnane, T. W. (2002) “Delegated Monitors, Large and Small: Germany’s Banking System, 1800-1914”, Journal of Economic Literature, vol. 40: 73-124.
Guinnane, T. W. (2003) “A ‘Friend and Advisor: External Auditing and Confidence in Germany’s Credit Cooperatives, 1889-1914”, Business History Review, vol. 77: 235-264.
Hollis, A. and Sweetman, A. (2007) “The Role of Local Depositors in Controlling Expenses in Small-Scale Financial Intermediation: An Empirical Analysis” Economica, 74: 713–735.
Humphries, J. (1987) “Inter-War House Building, Cheap Money and Building Societies: The Housing Boom Revisited”, Business History, vol. 29 (3): 325-45. ICAEW (1960) Audits of Building Societies, London, Institute of Chartered Accountants of England and Wales.
ICAS (1954) A History of the Chartered Accountants of Scotland from the Earliest Times to 1954, Edinburgh, Institute of Chartered Accountants of Scotland.
Jeremy, D. J. (1998) A Business History of Britain 1900-1990s, Oxford: Oxford University Press.
Koppell, J. (ed) (2011) Origins of Shareholder Advocacy, London: Palgrave Macmillan.
Laffont, J.-J., and Tirole, J. (1991) “The Politics of Government Decision-Making: A Theory of Regulatory Capture” The Quarterly Journal of Economics, 106( 4): 1089-1127.
Lamoreaux, N. (1996) Insider lending: Banks, personal connections, and economic development in industrial New England Cambridge: Cambridge University Press.
Lee, T.A., Clarke, F. and Dean, G. (2008) “The Dominant Senior Manager and the Reasonably Careful, Skilful, and Cautious Auditor”, Critical Perspectives on Accounting, vol. 19: 677–711.
Mason, D. L. (2004) From Buildings and Loans to Bail-Outs: A History of the American Savings and Loan Industry, 1831-1995. Cambridge: Cambridge University Press.
McLaughlin, E. (2011) “Regulatory Capture in Microfinance: Loan Fund Societies and the Loan Fund Board in Ireland, 1860-1914”, University of Edinburgh, mimeo.
Noguchi, M. and Bátiz-Lazo, B. (2010) “The Auditors’ Reporting Duty on Internal Control: The Case of Building Societies, 1956-1960”, Accounting, Business & Financial History, vol. 20 (1): 41-66.
Perks, R. W. (1977) “Building Society Accounts and the Control of Operating Performance”, unpublished dissertation, Accounting and Finance, Glasgow, University of Strathclyde.
Phillips, B. H. (1983) Building Society Finance, London and Wokingham, The Chartered Building Society Institute and Van Nostrand Reinhold (UK). Prechel, H. and Zheng, L. (2011) “Financial Malfeasance in the Largest U.S. Financial Services Corporations, 1994-2004”, Accounting, Organization and Society Conference on Corporate Fraud, London: Imperial College (http://www.business.ualberta.ca/Conferences/FraudInAccountingOrganizationsAndSociety/~/media/University%20of%20Alberta/Faculties/Business/Faculty%20Site/Conferences/FraudInAccountingOrganizationsAndSociety/Documents/Prechel__Zheng_FIRE_AOS_3-14-11.pdf accessed 23-Jun-2011).
Registrar of Friendly Societies (RFS) (1976), Report of the Chief Registrar of Friendly Societies for the Year 1975: Building Societies (Part 2), London: HMSO.
Scott, P. (2008) “Marketing Mass Home Ownership and the Creation of the Modern Working Class Consumer in Interwar Britain”, Business History, vol. 50, 4-25.
Scott, P. and Newton, L. (forthcoming) “Advertising, Promotion, and the Rise of a National Building Society Movement in Interwar Britain,” Business History, vol. 52.
Shin, H. S. (2009) "Reflections on Northern Rock: The Bank Run That Heralded the Global Financial Crisis", Journal of Economic Perspectives, vol. 23(1): 101-19.
Solvin, M.B., Sushka, M. E., Hudson, C.D. (1990) “External Monitoring and its Effect on Seasoned Common Stock Issues”, Journal of Accounting and Economics, vol. 12 (4), 397-417.
Spicer, E. E. and Pegler, E. C. (1908) Audit Programmes, London, H. F. L. Swank, J. (1996) “Theories of the Banking Firm: A Review of Literature”, Bulleting of Economic Research, vol. 48 (3): 173-207.
Townsend, R. M. (1979) "Optimal Contracts and Competitive Markets with Costly State Verification", Journal of Economic Theory, vol. 21(2): 265-293.
Vinten, G. and Greening, M. (2001) “Internal Control and Fraud in the Smaller Building Society”, Journal of Financial Crime, vol. 8 (3): 201-6.
Vives, X. (2010) “Competition and Stability in Banking”, Banco Central de Chile, DT 576 (http://d.repec.org/n?u=RePEc:chb:bcchwp:576&r=his accesed 26-Apr-2011).
Wadhani, R. D. (forthcoming) “Organizational Form and Industry Emergence: Mutual and Nonprofit Firms in the Development of the American Personal Finance Industry”, Business History.