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Banking in Scotland
Chapter III - Balance Sheets

The bank balance sheet of today is a very sizeable and comprehensive document and few people would argue that they should be made to reveal more information than they, at present, contain. Yet this has not always been the case. In fact the publication of balance sheets with related accounts is a late 19th century development. Before then no banks published their balance sheets although of course all banks compiled them.

In the very early days of banking the Bank of Scotland drew up a balance sheet only every three years. It is impossible to be certain about the Royal Bank for its archives have not survived for the early years. Yet by the mid-18th century when some of the early provincial banks were set up it does seem that the standard practice was to draw up balance sheets at least yearly. Some elements of these balances—particularly profit figures were read to shareholders at annual business meetings although they were not published. In this regard the Scottish banks were ahead of most other forms of business organisations at the time. One historian speaking of businesses generally down to 1830 wrote that—

"Balances are struck, not at regular intervals, as checks and controls, but at the end of books, to save transfers to new folios." (S. Pollard)

Given that most businesses at the time were simple partnerships with only a few partners most, if not all of whom, were involved in management this is not surprising, but many of the banks numbered their shareholders in scores and management was in the hands of elected boards of directors. So it was this early joint-stock form of organisation which made regular reporting necessary; for shareholders with unlimited liability could not be expected to commit their funds and bear the risks without receiving some information about the state of health of their business. There were frequent rows about the amount of information which should be given to shareholders with directors usually arguing that it was necessary to be secretive so that information which they regarded as sensitive did not fall into the hands of business rivals.

So the early accounts of Scottish banks were shrouded in secrecy but this reticence on the part of bankers to publish information has also obscured the very real contribution made by banks to the development of accounting practice and indeed to the accountancy profession.

The early development of banking in Scotland necessitated that elaborate book-keeping systems should be developed and that books should be balanced at regular intervals. This in fact happened in banking before it developed in other industries and banks therefore gave to their clerks a training which was to command high salaries elsewhere. Many who described themselves as accountants in the early 19th century had received at least part of their training in a Scottish bank.

An examination of the archives of 18th century banking, however, reveals that their were no uniform practices between banks. Most of the early balance sheets show no attempt to rank assets and liabilities in any particular order. For example, the balance sheets of the Perth United Banking Co. from 1767 list balances simply in the order in which they occur in the ledger but the ledger of the Aberdeen Banking Company from 1767 shows some attempt to rank balances in order of liquidity. For example an abridged version of the 1770 balance sheet reads:—

This balance sheet bears a striking resemblance to its modern day counterpart although a 20th century bank might be inclined to list the assets in reverse order with the most liquid at the top. Nevertheless, despite the similarities and despite the great advance in accountancy which this balance sheet represents it would not pass the scrutiny of a modern auditor. For example, the Stock (Capital) balance is the nominal capital and not the paid up figure. To get the correct figure the reader must subtract the Partners' balance of £70,500 on the assets side which represents uncalled capital. The real figure for paid up capital is therefore £29,500. The idea of treating uncalled capital as an asset is one which took a long time to die in the accountants' world. Similarly the figure for notes is in fact notes issued to the cashier and not notes in the hands of the public as it would be in a modern balance sheet. This means that the cash figure on the assets side is also wrong for it must contain a sum for the bank's own notes in the hands of the cashier not yet issued to the public. Fortunately the Aberdeen Banking Co. is one of the few banks for which it is possible to break down the cash figure into its component parts and this reveals that the notes and cash figures must be reduced by £61,782 to get a true picture of the bank's affairs. The balance sheet can now be redrawn.

The idea that a bank's own unissued notes could be part of its cash reserves was one which persisted well into the 19th century.

The keeping of proper accounts which were regularly balanced and ranked in order of liquidity was only one of the developments which emerged in Scottish banking. (It must be recognised, however, that the claim to be first is always a dangerous one to make. What is clear is that these accounting practices became common in Scottish banking before they became standard practice elsewhere.) Other accounting developments included provisions for bad debts, depreciation of fixed assets and revenue reserves.

Whatever the advances in accounting techniques the achievement of the bankers remained concealed until after 1857 when, following the failure of the Western Bank, the Clydesdale responded to public comment and began to publish an annual balance sheet. The other banks followed suit in 1865 but the information given was in a very truncated form.

Many of the problems which we have mentioned were overcome by the 1860s when the banks began to publish their balance sheets. An early report of the Bank of Scotland is reproduced here as an example of the amount of information which was published. An examination of this reveals that the problems of unissued notes and uncalled capital had been overcome but the reader of this balance sheet and the very brief report on profits and market conditions must have been left with some unanswered questions in mind. What was the basis of valuation of the property? Some items in the report suggests that it was not based on historic cost. If not then what was the historic cost, the amount of depreciation to date and the present market value? What implications does this have for the liabilities, especially the reserves? What are the maturities of the investments in Government securities and debentures? Without this information the liquid reserve ratio cannot be calculated. Is the reserve a capital reserve or a revenue reserve?

These are only some of the questions which a modern commentator would ask of the balance sheet. As to the report, even more questions could be asked of it. What are the elements of income? How many employees are there? Does the bank plan expansion? Are there to be changes in the Directorate? What are the principal activities of the bank? What is the provision for bad debts?

There was always a suspicion that banks did not declare their true profits each year and that in good years transfers were made to hidden reserves whilst in bad years these funds were transferred back to the main profit and loss account so that good profits could be declared and a regular dividend paid. Indeed this practice was, to some extent, legally condoned and it was not until 1969 that the practice was ended and banks were forced to disclose their true profits.

There was no requirement that accounts be audited but this was introduced voluntarily by all of the banks shortly after the failure of the City of Glasgow Bank in 1878. From then onwards the amount of information disclosed in annual reports was gradually increased either voluntarily or as a result of Companies Acts so that today the range of information disclosed is very extensive indeed. Most reports and accounts of Scottish banks now occupy a document of some forty pages although some of the content is of an advertising nature. Nevertheless this is a far cry from the two-page document of a century ago.

Today's reports contain, inter alia, the names of the directors, head office officials and senior managers. The report of the directors contains matter which is required to be disclosed by statute, profit and loss accounts and balance sheets both for the bank and for the bank plus subsidiary companies, notes of explanation and elucidation on the accounts, current cost accounts, auditors report and lists of branches. There may also be a chairman's report and some descriptive material on the activities of the bank. In short, the modern report is a weighty and important document which reveals much of the affairs of the bank. The age of secrecy has receded.

It is not possible to reproduce a copy of a report here but the table below gives the balance sheets of the three clearing banks which are then subtotalled. The West of Scotland Trustee Savings Bank is then included as an example, although it must be borne in mind that there are three other T.S.Bs at work in Scotland. The West of Scotland T.S.B. is, however, the largest. A comparison of the figures for the Bank of Scotland in 1871 and 1981 will reveal just how dramatic the growth has been in the economy in general and the banking system in particular. It may seem that there has been little improvement across the years in the range of figures produced but it must be remembered that the 1981 balance sheet is supplemented with several pages of explanatory notes whilst there was nothing to explain the 1871 figures.

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