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Accounting Regulation and Management Discretion in a British Building Society Circa 1960

Batiz-Lazo, Bernardo and Billings, Mark
University of Leicester, University of Nottingham, UK
May 2009


This article explores the manipulation of published financial reports in order to counter the potentially unfavourable impact of newly introduced regulation. In this case the reported capital ratio of a major building society was enhanced using a sale and leaseback transaction with a related party and a change in depreciation policy, methods which reflected limited alternatives. Analysis of the case is set in the context
of the mid-term performance of the building society sector and addresses the questions of whether the manipulations involved were within then-prevailing generally accepted accounting principles and why, despite disclosure in the society‟s financial statements, these failed to attract public comment or concern, regulatory action or an audit qualification. In examining a major British mutual financial organisation we depart from traditional analyses of managerial discretion in accounting choices in manufacturing, mining and transport companies prior to the watershed Companies Act 1948.


this article examines an otherwise neglected area in the history of financial reporting, providing a detailed case study of „creative accounting‟ in an industry and period not known for manipulative activity, and in an organization which survived and was not subject to investigation. Stolowy and Breton (2004, p. 6)
describe „creative accounting‟ as a journalistic term that represents the exercise of management‟s discretion to make accounting choices or design transactions so as to modify apparent performance and enable transfers between the company and society (political costs), fund providers (cost of capital) or managers (compensation plans). The potential impact of these transactions will depend on the market context (Stolowy and Breton, 2004, p. 10).

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