There is Nothing New under the Sun: Modern Lessons from Victorian Bank Frauds Roy Chandler Cardiff University Cardiff, UK Abstract The Victorian era in Britain is remembered for many advances in technology and industry, scientific discovery, the development of commercial enterprises, social welfare and education. The era also witnessed the increasing professionalization of the occupational grouping of accountants with a number of professional bodies being formed and the value of the accountants’ work quickly gaining recognition. Not unrelated to this development was the proliferation of fraudulent schemes by which the investing public was duped into losing millions of its savings. Regarded as particularly cruel and deceitful was the bank fraud. Typically committed by a small number of powerful men situated at the top of the management structure of the bank’s hierarchy, this sort of fraud most often involved the making of loans to high risk projects or to concerns in which the perpetrators themselves were closely involved. The element of fraud came by dint of the production of financial statements which masked the true position of the bank once these loans failed to produce the hoped-­‐for returns. The role of accounting and the often inadequate audits naturally received a considerable amount of publicity once the frauds were brought to light. From the case of the Royal British Bank in the 1850s until the end of the nineteenth century there seemed to be a major banking fraud at least once every ten years. With each revelation came calls for tighter controls and better regulation of the banking sector and each time various measures were put in place as part of the official response to the perceived crisis. The last of these frauds was Dumbell’s Bank, situated on the Isle of Man. The involvement of a respected firm of chartered accountants was an insufficient safeguard for the shareholders’ and depositors’ interests. These cases are noteworthy because they demonstrate how little had been learned from the lessons of the previous 150 years by those involved with banks. The last case shocked the accounting profession because it was the first time that auditors had faced criminal charges. The series of cases also illustrates the severe damage that was caused when professional men, both bankers and auditors, failed to do their duty. Keywords: Bank audits; fraud; public interest; trust. There is Nothing New under the Sun: Modern Lessons from Victorian Bank Frauds ‘That which is done is that which shall be done, and there is nothing new under the sun’ (A Ruined Shareholder, 1879) Introduction In 2007, when Northern Rock became the first British casualty of the credit crunch which had already claimed Lehman Brothers in the US, queues of depositors were to be seen forming outside the Rock’s branches desperate to be among the first to take out all that they had deposited and unwittingly no doubt make it all the more difficult for the bank to be able to repay those towards the back of the queue. Scenes such as these are the stuff of nightmares for banking regulators, who more than anything fear a run on a bank. The media, keen to mark the historic significance of the event, reminded readers that Britain had not witnessed such scenes in over 150 years (e.g., The Economist, September 20, 2007). Such hyperbole was as unnecessary as it was inaccurate. One did not need to go back to the 1860s for evidence of a similar panic. When the doors of Dumbell’s Bank in the Isle of Man failed to open at 10.00am on Saturday, February 3, 1900, a large crowd gathered outside the bank, many of whom were widows whose life savings had been locked up in the Bank. They all wanted to get their money out while there was still a chance. In the end, those who needed money were permitted to withdraw up to 50% of their savings but only as a loan on which interest would be charged. Those already with loans and overdrafts at the bank found that they had to look elsewhere for credit. 8,000 2 depositors effectively lost their savings. This was the beginning of the sorriest story in the history of that small island. As one history put it “the effect of the failure cannot be imagined by the present generation” (Norris 1994, p. 59). This observation, while it pre-­‐dates Northern Rock, remains true: in 1900 there was no central compensation fund and very little prospect of the government or Bank of England stepping in to assist the beleaguered savers. They were on their own. Banking in the nineteenth century was a precarious business and shareholders did not have to be especially alert to be reminded of this, even on the tiny island which was home to Dumbell’s Bank. There, a rival, the Bank of Mona, had collapsed in 1878 along with its mainland associated, the City of Glasgow Bank. In the short term, this may have meant more business for Dumbell’s but in the long term, it would indirectly spell disaster. For one of the Mona’s branch managers, Alexander Bruce, was appointed general manager at Dumbell’s. Bruce, who had begun his banking career with the City of Glasgow would lead Dumbell’s to its destruction and that in turn would lead to the ‘most sensational trial ever known in the Isle of Man’ (Norris 1994, p. 76). This paper examine the last of the Victorian banking scandals which has tended to be overshadowed by other bank frauds in reviews of the British financial sector during the second half of the nineteenth century. The paper is organised as follows: the next section provides an historical background and context by presenting a brief review of those other, better known, Victorian bank frauds. A third section presents and analyses the evidence relating to the banking, accounting and auditing practices of Dumbell’s Bank itself from its beginnings to 3 its end. A fourth section then considers the aftermath of the calamity, focussing in particular on the chartered accountants, two who acted as auditors of Dumbell’s and one as the liquidator. The fifth section gives a flavour of the press coverage of the trial of the bank officials to gauge public reaction to the revelations and to the imposition of prison sentences. The final section contains brief concluding remarks. Victorian Bank Failures A casual observer might be forgiven for thinking that scarcely a decade passed during the reign of Queen Victoria without a new scandal involving a large loss of investors’ money caused by the collapse of a significant financial institution. Royal British Bank Wilson (2014 p. 146) refers to the failure of the Royal British Bank as ‘one of the most notorious banking collapses of the century’. Alborn (1995) uses the Royal Bank to demonstrate how a bank’s failure could be variously interpreted in the media and in popular perception. The Bank had been formed in 1849 by Royal Charter. Its openness in the first annual report was welcomed by the Bankers’ Magazine. However, a series of speculative loans to Welsh iron mines and some undisclosed loans to the directors themselves turned bad. Losses of £500,000 spelt the end of the Royal in 1856. This was just one of the celebrated scandals of the 1850s which Wilson (2000, cited in Taylor 2007) reports as causing a ‘moral panic’ in Victorian society. The failure resulted in losses for the 6,000 depositors, losses which had to be made good by the fewer than 300 4 shareholders, since the Royal Bank was an unlimited liability concern (see Taylor 2005). The idea of an unlimited liability company was simply a logical short step from the partnership form of business entity. Creditors were assured on seeing the quality of the names behind the company. It also was supposed to act as a spur on the members themselves to be vigilant supervisors of those they placed in charge of the management of the company. This was no easy task. One of the methods that shareholders might have adopted was the appointment of external auditors. In the case of the Royal British Bank, there were two auditors. One, Thomas Chandler, was a shareholder – a not unusual situation -­‐ whose occupation was as a surgeon as well as a brick-­‐maker – a rather rarer occurrence. Chandler had been induced to become an amateur auditor by the Bank’s solicitor who said that even a schoolboy could do an audit. He was also a customer of the Bank and a director of four companies, also Bank customers. In total, he was indebted to the Bank to the tune of £3,000. He was paid £25 p.a. as an audit fee. His financial involvement coupled with his lack of accounting training probably contributed to the lack of effectiveness of his auditing methods; the audit mostly took only a few hours and concerned seeing entries in the books being supported by other records and relying on the assurances of the general manager that the Bank’s customer balances were good debts. In bankruptcy hearings, the manager of the Royal claimed that he had helped to mislead the auditors but that one of them had himself claimed that the ‘audit was a mere farce’ (The Banker’s Magazine, 1857, p. 496). When examined on his inclusion of a debt as a good debt, though he must have known it to be bad, he replied simply ‘it is worth what it is worth’. Later he was also forced to admit he 5 had not fully revealed the contents of a ‘suspense account’ which included a significant balance in the Welsh mines as well as purchases of the Bank’s own shares (p. 502). Commissioner Holroyd opened his judgement with these stinging words ‘I do not believe that a scene of greater recklessness, fraud, and criminality of conduct in the management of a banking establishment was ever exhibited in a court of justice’ (p. 526). Following the Bank’s collapse, there were calls for the appointment of government auditors for banks. However, as Taylor (2007, p. 702) notes, the legislature at that time thought that the better means of controlling the wayward management of banks was through a more active shareholder body rather than through legislative intervention. Dealing with the aftermath of the collapse of the Royal was not straightforward; the directors claimed that they were ignorant of the true state of affairs of the bank and that they had been deceived by the managers. There was reluctance to pursue legal action against them; the prevailing notion was that the criminal law should not extend to business relationships which had turned sour (Taylor 2013, p. 122). Eventually, the perpetrators were tried and convicted of falsely representing the condition of the bank. The stiffest sentence meted out to the worst of the Royal’s culprits was 12 months. The case did successfully bring about changes to the criminal law in order to make it easier to prosecute fraudsters (Taylor, 2007, p. 720); new legislation was passed in the form of the Fraudulent Trustees Act 1857 which formed the basis of the Larceny Act 1861. 6 Overend, Gurney The crisis in the mid-­‐1860s was sparked by the failure of Quaker firm of Overend, Gurney (Elliott, 2006). This once prudent bill-­‐broking firm (discount house) fell upon hard times, incurring losses on speculative loans made during the 1850s. The ambitious projects into which they ploughed investors’ money included a middle-­‐eastern shipping line, a transatlantic shipping line, the building of perhaps (until the Titanic) the most ill-­‐fated ocean liner and that same ship’s eventual triumph in laying the first transatlantic telegraph cable (Elliott, 2006). By the middle of the 1860s the directors had sought to shore up its failing liquidity via a market flotation. 100,000 £50 shares were to be issued, £15 paid-­‐
up. A prospectus was produced but failed to reflect the fact that the business was insolvent. Overend, Gurney collapsed a year later with substantial debts. One of the first actions of the liquidators was to make calls upon the shareholders for the unpaid element. This of course caused serious problems for some but did at least provide the funds to pay off the creditors in full (Barnes 2005). These collapses occurred despite the fact that generally the financial management of institutions was based on sound, prudent domestic finance principles; the increasing professionalisation of the banking sector during the last third of the century changed that philosophy and introduced less not more conservative practices (Alborn 1995). 7 City of Glasgow Bank Regulators at the Bank of England (Button et al 2015) have recently re-­‐assessed the impact of Overend Gurney on contemporary banking practice and they note close parallels to the crisis of 2007 and its aftermath. The collapse of the City of Glasgow Bank resulted from very similar and equally disastrous lending policies as the Royal British Bank. If Overend Gurney was a fraud brought about by the rise in limited liability companies, the City of Glasgow Bank sounded the death-­‐knell of unlimited liability banks. Acheson and Turner (2008) challenge the conventional wisdom that the Glasgow scandal caused a rush of shareholders to get out of unlimited companies and suggest instead that the legislature’s response, the passing of the Companies Act 1879, promoted the benefits of limited liability. This scandal rocked the financial markets because of the scale of the deficit revealed when the Bank failed: the shortfall was more than £5m. The Bank had just over 1,800 shareholders who were called upon to make good the deficit. The first call on the shareholders was for £500 per share and, as the average shareholding was just over 4.5 shares, each individual had to find more than £2,000. A typical example is provided by William Howe, a Glaswegian cashier and holder of 5 shares; he had been impressed by the Bank’s ability to absorb a loss of £8,000 following a theft from its Isle of Mona branch (Anon 1879, p. 193). In fact, it would be the shareholders who would have to bear the loss and by the end of the liquidation, fewer than 300 of them remained solvent. 8 Charges were successfully brought against those responsible for producing misleading financial statements; and, as before, the sentences handed down to the perpetrators seemed lenient, the longest being 18 months penal servitude (Acheson and Turner 2008). From the point of view of a ‘Ruined Shareholder’ (1879), the sentences were inadequate but what appeared to rankle more was the impunity with which the handful of borrowers had been allowed to enjoy the benefits without bearing any of the costs of the Bank’s reckless lending policy. In particular, the target of the invective, James Morton, was said to be a religious man, though he was indebted to the tune of £2,320,591.18.9. The three other main borrowers, Smith, Fleming, & Co, J. Nicol Fleming and John Innes Wright & Co. between them owed the Bank just under £3.6m. (Anon, 1879, p. 55). There were no auditors of the Glasgow Bank, a situation that was not abnormal (Edwards 1989, p. 144). Part of the legislative response to the crash was the 1879 Companies Act which required banks to appoint auditors. London & General Bank The penultimate of the major banking scandals of the Victorian era was the collapse of the Liberator Building Society and its relation, the London and General Bank (McKie 2004). Following the now familiar pattern, a well-­‐
respected, ambitious and domineering character assembled around him a group of compliant underlings. With promises of financial prudence in the running of the bank’s business, an unsuspecting public was duped into providing funds which would eventually disappear in grand schemes of property development and loans to enterprises closely associated with the bank directors. A London 9 firm of chartered accountants added apparent credibility to the outfit. Although these auditors became aware that assets appeared in the balance sheet at inflated values, still they were reluctant to make known their concerns to shareholders and depositors. The conduct of the audit was the subject of a civil action which reached the Court of Appeal in 1896. One of the auditors, Morell Theobald, had also acted as a director of a company in the group, and for this part in the scandal received a four-­‐month prison sentence (Chandler and Macniven 2014). The mastermind behind the fraud, Jabez Balfour, was jailed for 14 years, of which he served 10. Dumbell’s Bank In the face of the regular reminders to bank shareholders of the risks they ran if they allowed speculative lending policies to be pursued, if they tolerated the presence of a dominant senior figure and if they took figures at their face value, it seems remarkable that, at the turn of the century, yet another scandal along familiar lines was about to unfold. Dumbell’s Bank had been formed on November 1, 1853. Officially, it was called the Douglas and Isle of Man Bank; but it was known to all as Dumbell’s Bank, after its founder. George William Dumbell was born in 1804 in North Wales where his father had spent some time in jail for bankruptcy. Sometime around the 1820s, the family moved to Man where George began a legal career. He then moved into banking. The early history of Dumbell’s Bank, like that of its founder, was not smooth – it had to suspend payment within four years of its formation, 10 but it soon recovered and not long after was granted a licence to issue its own bank notes (Solly 2002, p. 18). Twenty years later, on August 27, 1874, it was re-­‐formed as a limited liability company with a nominal capital of £180,000 made up of 30,000 £6 shares. However, for the shareholders, the apparent security of limited liability was a little illusory given that only one third of the nominal value was paid up; thus, should they have been required, they remained liable to contribute the unpaid element. One can easily imagine that this technicality might have been forgotten as the years rolled by. But it was a liability which would cause a number of them, including the chairman, much misery when the end of the Bank came some 25 years later. Described as haughty and domineering, George Dumbell was ‘arguably one of the most influential Manx businessmen of his generation’ (Crumplin 2007, p. 783), known as ‘the King of Man’ (Chappell 1983, p. 4). He took advantage of the failure of Holmes Bank in 1853 which had got into difficulties following its speculation in mainland railway shares (Winterbottom 2000, p. 229). He set up his own financial institution, in spite of himself having been linked to the collapse of an earlier bank, the Isle of Man Joint Stock Bank in 1843. Crumplin’s analysis of the Manx business environment is based on the notion of opaque networks which unscrupulous entrepreneurs use to pursue their own interests. He asserts that Dumbell was granted banking licences because of his involvement with members of the legislature and others in influential positions. 11 Even to this day, many business deals are based on personal acquaintances and it is not hard to imagine that, in the literally insular world of Manx commerce, personal relationships counted for a great deal. It is worth remembering here that the total population on the Isle in 1851 was just over 50,000 and 50 years later it remained much the same (Beckerson 2000, p. 425). There is debate among economists about the cause of financial speculation. Galbraith (1954, p. 39) is emphatic: the assumption ‘that people will always speculate if only they can get the money to finance it … [is] formidable nonsense’. Yet according to Crumplin (2007, p. 786), half of the joint stock companies in the Isle of Man were so speculative that they were unsuitable for investors and most of these companies were connected to Dumbell’s. The lack of adequate corporate governance and financial expertise, he says, ‘created conditions perfect for financial misfeasance’. Substantial loans were made to ordinary tradesmen, many well beyond their ability to repay; often the loan had been used to finance ‘unwise speculations on the stock market’ (Crumplin 2007, p. 787). During the 1870s, perhaps to add a veneer of respectability to the enterprise, Dumbell had engaged a mainland accountant to perform the audit of the Bank. William Aldred was an accountant based in Manchester. He is entered in the 1841 census as an accountant’s apprentice and in later censuses as an accountant or a public accountant. Thus he was one of those individuals who had been in practice before the establishment of any of the professional bodies in the UK. In Manchester he was regarded as a man of “high repute” and he became a Council member of the Manchester Institute at its inception in 1873 and would 12 go on to become President of the Manchester Society of Accountants. He was admitted to the ICAEW on its formation in 1880. By 1891, William had outlived his wife, though he was not living alone; sharing his house in Flixstone were two sons and two daughters. One of the sons, Harold Vincent, who had also become a chartered accountant, was by this time aged 24. William Aldred had first been appointed as a joint auditor to Dumbells in 1875. He was replaced in 1876 after the death of his co-­‐auditor and then reappointed in 1880 following the death of one of those who had replaced him four years earlier. From 1880 until 1900, William remained in post. There is some doubt about whether Aldred had the character to stand up to Dumbell’s general manager who from the mid-­‐1870s, was Alexander Bruce. Bruce moved in the highest circles on the Island. He held a public office as Borough Treasurer of the Douglas Corporation. His friends included the Governor of the Island, the judges, the law officers and the clergy; he was regarded as a man of “spotless character” (Norris 1994, p. 6) and as the ‘King of Finance’. Contrary to the claimed philosophy of the Bank’s founder, Bruce engaged in highly speculative lending to property developers especially during the tourist boom of the 1890s. In this Bruce was aided by the Bank’s manager, John Shimmon. The two had joined Dumbell’s at the same time. Bruce was paid a salary of £800 and Shimmon £700. Involved too was Charles Nelson, a local 13 barrister. The other directors knew nothing of the highly speculative loans to property developers (Solly 2002, p. 19), as is evidenced by the chairman of the Bank, W. B. Stevenson, continuing to increase his holding in the Bank’s shares until he held 1,600 of them. Of course, this increased his liability on the unpaid element – £4 per share -­‐ and it would virtually ruin him (Chappell 1983, p. 96)). For the next 25 years the bank reported profits and paid regular dividends at an impressive level. While Dumbell himself had been alive, the policy was to pay 10% on the paid up capital. On the date of his death in 1887, the level of dividend went up to 15%. In the final year of its existence the Bank declared a dividend of 18% ‘as usual’. The Bank was said to be ‘flourishing’ and had ‘a good captain in charge of the ship’. Later investigations were to show that at no time since 1874 was the Bank solvent, let alone profitable. The collapse of the Bank hastened the death of the founder’s son and led to the imprisonment of the directors and auditors. For many ordinary Manx people who had been led to believe in the probity of this august institution, the crash was the start of years of financial hardship. Rawcliffe (2003) claims that it was this calamity which first brought the activities of accountants to the attention of the public, though the questions ‘where were the auditors?’ and ‘what is the value of an audit?’ had frequently been asked in the general media for some years previously. In many ways, this bank crash was like others which gone before it and others that were to follow. What made it different from bank crashes on mainland Britain was the impact that it had on the tiny island community amongst whom it caused ‘widespread misery’ (The Spectator, November 24, 1900, p. 7). What 14 makes it of interest to an accounting audience is the nature of the financial manipulations and the role of the auditors, a father and son team of chartered accountants. After the collapse, The Manx Sun was generally supportive of the Bank and its management. One reason may have been that it (or its owner) was a debtor of the Bank. On the other hand, Mona’s Herald was more forthright, seeming to be unsympathetic to the position of the directors. “The business of Banking is now reduced to a science, and banks fail only through mismanagement springing from the incompetence or dishonesty of the men in control”, it asserted. The paper most strongly objected to the appointment of one of the Bank’s directors, Mylrea, as a joint liquidator. On February 12, 1900, Mylrea claimed that the directors felt their responsibility very heavily. He stated that the directors held one seventh of the shares. There seemed to be some sympathy for the directors’ plight, though Shimmon was greeted with prolonged hisses when he entered the shareholders’ meeting. Mylrea confessed that the board should bear the whole blame for having been deceived but he did not think it right that those who had perpetrated the deceit should escape untouched. He admitted that the directors had had blind and misplaced confidence in the trusted officials of the Bank. He went on to say that while he at one point had had loans from the Bank, he had repaid these immediately that he had learned of the Bank’s need for money. He also said that he had never used that money to speculate. He stated that the directors had learned only two months previously that all was not right with the Bank but that they had received little help from Bruce or Shimmon who persisted in their “suicidal policy of concealment”. 15 A representative from Parr’s Bank, Cruikshank, outlined a proposed scheme of rescue whereby Parr’s would take on all the assets and liabilities from Dumbell’s; Parr’s undertook to pay £50,000 for goodwill if the assets met the liabilities. The proposal allowed in the event of a dispute about valuations for the President of the ICAEW or a Fellow of the Institute to adjudicate. He then referred to a clause which had been inserted after the verbal negotiations in London. This allowed Parr’s to pull out of the agreement if an audit of the balance sheet at 31 December 1899 found that gross liabilities exceeded the stated amount by £20,000. During the course of the initial negotiations with Parr’s, Shimmon and Bruce had signed declarations that the balance sheet correctly contained all the assets and all the liabilities of the Bank. On the basis of these assurances Mylrea and Nelson had also signed the agreement with Parr’s. However, errors in the books were then discovered: claims against the Bank had been under-­‐recorded, but the creditors concerned had agreed voluntarily to reduce theirs claims so that the £20,000 threshold was not breached. All this counted for nothing: once Parr’s had been informed of the errors, they exercised their right to rescind the agreement and, in turn, produced an alternative offer – that of £40,000 for the goodwill and £15,000 for the premises throughout the Island. The shareholders unanimously accepted this offer and part of that deal was that Mylrea would be one of the liquidators. The Herald was indignant suggesting that preventing the shareholders from appointing their own liquidator was an 16 indication that the directors had something to hide. The Herald doubted whether Mylrea was up to the job, having had no training in that type of work and possessing ‘a deep-­‐rooted aversion to every kind of drudgery’. The Herald then revealed that it had reason to believe that a previously undisclosed liability of £65,000 had been discovered in the Bank’s records. This £65,000 had been money raised for the Isle of Man Tramway Company and supposedly had been deposited at the Midland Bank. (The Tramway Company itself would be wound up a few months later.) In fact it was an undrawn loan facility. Dumbell’s treated this as if it were cash, although there was no corresponding credit in the liabilities side of the balance sheet. The Attorney General was incredulous that the auditors had simply accepted the claim that Dumbell’s had cash in the vaults of another bank (to whom Dumbell’s was indebted to a much larger extent of nearly £190,000.) Moreover, the claim was made that any bad or doubtful debts were more than covered by the reserve fund, yet they were never written off and continued to be shown at full face value as if they were good debts. In this connection the Attorney General referred to a letter from the auditors to the directors in 1885 recommending an analysis of the book debts under the headings: secured, unsecured, bad and doubtful. This showed that the auditors had at that earlier time significant doubts about the quality of the Bank’s assets. Another revelation was that at the shareholders’ meeting in February 1883, Dumbell’s chairman had reassured shareholders that the auditor had ‘faithfully carried out his duty to look into the solidity of the securities in the bank’s books 17 (Chappell p. 79). Aldred in fact was sufficiently concerned about the lack of communication with the board that he, with his local co-­‐auditor, wrote to them to explain his anxiety. Chappell suggests that the letter was probably intercepted by Bruce and never reached its intended recipients. In this letter the two auditors queried the value of loans to customers. The bank had been rolling up unpaid interest on customer balances, simply adding to the customers’ indebtedness. It is easy to see Aldred ‘s cause for concern: those who could not afford to pay off the principal were unlikely to be able to pay both principal and interest. At the reconvened extraordinary general meeting on March 9, Mylrea repeated his accusations against the managers, which were refuted the next day by Bruce in a letter to the press. If a technical error had been made in the balance sheet, he said, it had been purely accidental. Shimmon too rejected the claims made against him and objected to the fact that Mylrea of all people had implicated him. Mylrea, he reminded readers, was a director not only of the Bank but also of the Tramway Company which had received the £65,000 from the Bank and therefore should have known about it. On March 16, the liquidators required all overdrafts and loans to be repaid within the week and on March 21 required shareholders to contribute the unpaid £4 per share. 18 In November 1899, John Curphey, the head cashier with 25 years’ service at the Bank (Norris 1994, p. 67), resigned accusing the management of gross neglect and warning that the bank was in serious trouble. He claimed that the management, auditors and every member of staff knew the true position (Chappell, p. 96). When the crash came, Bruce the culprit denied any wrong-­‐doing saying that if there were an error in the balance sheet it was accidental. For their part, the auditors said a missing liability of £65,000 was a mere legal quibble. No one seemed willing to accept that the information given to shareholders, depositors and the public generally was grossly misleading. At the Masonic Hall just ten days after the Bank’s closure, an extraordinary general meeting of shareholders decided that the bank be wound up. One London, Thomas Mylecreest, and one local liquidator, John Mylrea, were appointed. Initial reports were hopeful that the loss to creditors was not serious (The Accountant’s Magazine, February 24, 1900, p. 204). These proved wildly optimistic. On March 9, 1900 following another extraordinary general meeting, the appointment of an additional liquidator was announced, William Walker, a chartered accountant from Liverpool. Walker had been a government auditor in the Isle of Man for the last 13 years. (Walker would continue as sole liquidator until his death in 1923 by which time the winding up had been substantially though not completed processed.) Mylrea had resigned that same day, (and 19 Mylecreest would resign five months later). At the same meeting, it was resolved to sell the goodwill for £40,000 and the buildings and premises for £15,000 to Parr’s Bank Limited. Parr’s had been in secret negotiation with Bruce since the end of 1899 with a view to taking over Dumbell’s and, perhaps Bruce felt, of avoiding exposure of the fraud which he had perpetrated for so long. In the event, Parr’s investigations uncovered the misstatements and led them to withdraw their initial offer to absorb Dumbell’s – essentially to rescue the Bank and save its depositors. Norris, a correspondent of the Liverpool Mercury began sending detailed reports to his editor. One of his published pieces indicating that arrests were imminent provoked the Aldreds into threatening to sue the paper claiming £1,000 damages for libel (Norris 1994, p. 73). It is possible that Bruce and his cronies, because of their establishment connections, believed themselves to be above any more serious ramifications. So it was that the delivery of arrest warrants came like a ‘bolt from the blue’ (Norris 1994, p. 72). A formal complaint was made by the Chief Constable and warrants for the arrest of both Aldreds and leading officials of Dumbell’s were issued on June 9, 1900. The Aldreds were in Manchester so the Manx police officers travelled to arrest them there and brought them back to face Manx justice. They appeared before the High Bailiff in Douglas four days later. The proclaimed their innocence ‘at every stage’ (Chappell 1981, p. 107). All the accused were refused bail, though Bruce, the instigator of the fraud, had become too ill and was allowed to remain at home. 20 They were charged on June 13 with intent to deceive and defraud the members, shareholders and creditors of the Bank. The particular documents that were the medium for the deceit were the half-­‐yearly balance sheets from June 30, 1898 which they knew to be false in presenting the state of the Bank’s affairs. Specifically, the cash in hand and at bankers of £85,210 was overstated by £65,000, the deposits were overstated by £15,210, the profits were overstated by at least £4,000 by the inclusion of unpaid interest, the overstatement of a reserve fund of £40,000 which did not exist, the inclusion in assets of debts of about £286,000 which were bad or irrecoverable. In addition, the directors were also charged with misapplying the bank’s funds for their own purposes. All defendants pleaded ‘not guilty’ to the charges against them. In July 1900 a formal court of enquiry was held in order to test the evidence supporting the charges. This hearing was set for July 17 in front of a jury of six men. The defendants were ordered to surrender themselves into the custody of the court. The enquiry was heard before Deemster Kneen. For the criminal prosecution, a leading barrister from the mainland was appointed by the Lord Chancellor as the senior presiding judge; Henry Shee QC of the Northern Circuit was to become Deemster Shee for the duration of the proceedings. Subsequent comment in the press would question whether this did not signify a lack of faith in the insular judicial system. Yet, at the same time, the jury were drawn from the local population whose emotions were still running 21 high even after the passing of nearly a year. This too would draw adverse comment at a later stage. Evidence before the various hearings confirmed that the audits lasted three or four days from 10.00-­‐4.00. His son, Harold, accompanied him in recent years and checked the additions. In one half year, when Rogers, the local auditor, was absent through illness, Harold had taken his place in ticking off the balances. This was the only part he took in the audit. However, at the end of one half-­‐year audit, he had actually written out the audit report. At some stage in the 1890s, Harold had begun to take a part in the affairs of his father’s Manx client. Aldred employees but also the Aldreds themselves had been used as nominees in applying for shares in a new venture to be financed by the Bank. The Aldreds had received commission of £932 in connection with the floating of the Breweries Amalgamation company, a scheme to buy up all the public houses on the Island. Applications for shares in this concern were through nominees so as to disguise that it was the promoters applying for them. An employee of the Aldreds had written more than 200 separate cheques apparently from these nominees. The names of both Aldreds were among the nominees (The Accountant, January 5 1901, p. 8). Outside of business activities, he helped the Bank’s Corresponding Clerk to arrange one of the first golf tournaments at King Edward Bay in 1895 (jones 2003, p. 44). At the trial it would be asserted that Harold’s involvement was at a junior level but it is telling that nearly ten years earlier he had been criticising the Council of 22 the ICAEW for what he felt was the wrong emphasis in the examination curriculum: “it is Bookkeeping and Accounts which should be the first and foremost study of a student of accountancy, and I fear that there has always been a tendency on the part of the Council to lead the student into the study of intricate points of law at the sacrifice of practical questions in accountancy” (The Accountant, 8 November 1890, p. 616). The local auditor, Rogers, gave evidence that confirmed that the auditors had substantially accepted whatever they were told by the managers. However, he too at one point had threatened to resign unless some security could be produced for certain overdrawn accounts. And yet he had not resigned. His claim that he would not have signed anything that was not honest merely provoked laughter in the court. In summing up, Counsel for Rogers tried a technical defence that the criminal law under which the defendants were accused did not specifically state that an auditor was a public officer. The Act referred to ‘director, manager and other public officer’. On the other hand, Deemster Shee had no doubt that an auditor was a public officer. However, he could point to no authorities which clarified the criminal liability of auditors. He did however refer to the Kingston Cotton Mill case; when an auditor’s suspicions were aroused he had to make further enquiries. However, in this case, the auditors were only anxious not suspicious. The balances on the ledger accounts were called out and ticked off a list of account balances. When ask if he ever examined accounts in detail, William replied in the negative. He occasionally compared the opening and closing 23 balances on individual overdrafts and ‘kept an eye on the calculation of interest’ and the accuracy of the additions in the accounts. The checking of these balances took about three days. William never saw the ledgers of the branch but ensured that the certified balances on the returns agreed with the extract of balances. When challenged that his work did not correspond to his audit report, which stated that he had examined the branch books, he was forced to admit that his report was not correct. Occasionally, Shimmon would produce some supporting documentation as evidence for certain transactions but it was never done at the request of Aldred himself. Essentially the staff of the client were determining what was made available for the auditors to inspect. As for the contentious balance sheet items, he never imagined it at the time to be wrong to treat the unissued notes as cash in hand. He took the £65,000 and treated it as he found it in the ledger, as an asset, cash in hand. The Bank had the right to issue another £15,000 in notes and these it had always treated as cash in hand, although no corresponding liability had ever been shown. William Aldred now accepted that this was wrong. The Accountant later (December 15 1900 p. 1134) reproduced the last audit report on the balance sheet at June 30 1899. It was dated 28 July 1899: We have examined the several item of the foregoing Balance Sheet and Profit and Loss Account in detail, and find them to be correct; we have 24 also examined and satisfied ourselves as to the Bills and Securities above named, and find them to be satisfactory and in order; and we further Report and Certify that upon a full examination of the Books and Certified Branch Returns, we believe that the Balance Sheet exhibits a true and correct view of the state of the Company’s affairs at the date thereof. This form of wording was a departure from that required under the Bank’s articles of association. Article 109 required that the auditors state their opinion on whether the balance sheet was full and fair, containing the particulars required by the articles, and properly drawn up so as to exhibit a true and correct view of the state of affairs; and where they had asked for information or explanations from the directors, that they had received that information and had been satisfied; and whether the debts or assets shown by the balance sheet were good, bad or doubtful and shall distinguish between the good, bad and doubtful assets from each other to the best of their judgement and ability. At the conclusion of the preliminary hearing, bail was applied for and granted on condition of £2,000 each from two sureties of £1,000 each. It transpired that the Aldreds had offered to retire in mid 1899 such was their disquiet about the real state of affairs at the bank. In a letter to Bruce they stated that the Bank would be much better off if Dumbell’s transferred some of its accounts to its rivals. One remedy might be for the Bank to obtain adequate security from the borrowers. All these factors indicated, according to the Attorney General, knowledge on the part of the Aldreds about the true state of 25 the Bank’s affairs. Notwithstanding his concerns, William Aldred had a savings account at the bank with a balance of £331 at the time the Bank closed. Long before that however they had written in 1885 casting doubt on the bank’s true state and drawing attention to the fact that for the last five years interest had not been charged on a number of overdrafts. Hughes-­‐Games appeared for the Aldreds. He called two character witnesses, both Knights of the Realm and both past Mayors of Manchester. Both bore witness to the elder Aldred’s irreproachable and unblemished character. A third witness, a barrister of 32 years standing said that Aldred had a very large practice and a general reputation which ‘could not be better’. A fourth, a Justice of the Peace, said that ‘no man stands higher for honesty and integrity in his profession’. In his concluding remarks, Hughes-­‐Games admitted that ‘no expert could say that the audit was properly performed and that was the reason they had not brought forward the evidence of experts’. He claimed that the Aldreds had acted in good faith and had been ignorant of the full facts. The treatment of the £15,000 unissued bank notes he had to admit was wrong. As for the £65,000 item said to be at the London and Midland Bank, it should have been corroborated by the production of voucher, but that was not done. Counsel characterised William as ‘a silly old man’. The manner of his audit was incomplete since he had never looked at the books of the branches. Twenty years ago William Aldred had been the auditor of the Manchester Savings Bank but he had not now ‘the discretion or 26 ability to grapple with the audit of this Bank’. But his position had been difficult: if he had simply resigned the result might have been disastrous for the Bank; ‘if ever a man stood between the devil and the deep sea it was Mr. Aldred’. Instead of wasting his judgement on the position of the Bank, he had wasted his time on ‘checking the accounts for a few pence error. That was not the class of man required for this audit’. His fee was considered to be ‘paltry’. Counsel concluded that the elder of his clients was an old man ‘without judgement who had been deceived’. The other directors had received a ‘fool’s pardon’, and Aldred senior deserved an old man’s pardon. In its review of the case, The Accountant (November 24 1900 p. 1045) found a number of points in favour of the Aldreds which do not appear to have been pressed home by their Counsel: it takes time to build up suspicion sufficiently convincing to pull up a bank; the local auditor, Rogers, was involved in the misrepresentation and that may have helped distract the Aldreds; thirdly, an amount equal to three years fees was left by William Aldred in a current account in the Bank; because this was a criminal case, the judgement went beyond previous judgements which had been limited to damages. In addition, to the surprise of The Accountant which dubbed it a ‘most remarkable omission’, almost nothing was said in regard to the younger Aldred, who was likely to be under influence of his father and his role was more that of a clerk than anything else. In reply to the Aldred’s counsel, the Attorney General claimed the jury would have to bear in mind the relative magnitude of the various items. On the other 27 hand, he appeared to say that it was the auditors’ duty to test every figure in the books. The younger Aldred had attended the audits, had written the letters and had allowed his name to be associated with the firm. He said that had the auditors just dropped a little note to the directors they might have saved themselves. Motives did not enter into it. The jury only had to decide whether the auditors knew the truth and whether they told it. The jury took 72 minutes to come to their verdicts. All were guilty though for Harold they added the rider ‘in a minor degree’ which was intended to indicate their desire for mercy for the younger auditor. Sentences were delayed until a related case was concluded the following day. With that out of the way, on November 17 1900, the judges heard pleas of mitigation and then retired to consider their sentences. After 30 minutes they returned to impose custodial terms of five years on the directors. The local auditor was ‘the worst of the three’ and was sentenced to 18 months with hard labour; the elder Aldred,aged 77, was given 12 months with hard labour and his son, half of that time. Within a few weeks of his incarceration, William Aldred was so ill it was thought he might die. The prison doctor recommended early release and the ICAEW petitioned the Home Secretary in similar fashion. Clemency was granted and Aldred senior was released from prison on January 5, 1901. His son served out the full term of his sentence; he is listed in the first census of the 20th century in the Isle of Man Gaol in Douglas. The Accountant (December 1, 1900 p. 1070) considered that, given the facts of the case, the errors in the balance sheets and the doubts the auditors had 28 expressed to the manager but not to the directors, the guilty verdict came as no surprise. William Aldred had been respected in Manchester though he was thought ‘somewhat guileless, and possibly weak’. He never had a large practice and the range of his clients was limited. The Accountant (p. 1071) viewed the punishment as harsh and not justified on the grounds of protecting the public from a recurrence of the offence. As for its possible impact on the profession as a whole, if criminal liability were added to normal duties, then ‘it is questionable whether capable and reputable auditors will not become extinct’. However, one of the good results of the trial was that it emphasised that an audit involves greater responsibilities and expenditure of time and skill than has hitherto been appreciated by shareholders and directors. What this meant for the profession of course was a ‘corresponding increase in remuneration’ (p. 1072). In Scotland, The Accountant’s Magazine (December 1900 p. 564) while expressing some sympathy for the plight of these auditors on balance thought that the case might benefit the profession: ‘One cannot but pity them [the Aldreds] … if they had done their work better or worse than they did, they would have escaped the punishment meted out to them. If they had simply accepted the statements made to them, they could not have been charged with the guilty knowledge imputed to them. …The facts brought out at the trial disclose, in truth, a gross neglect of duty on the part of the auditors. … It was argued for them that they were only guilty of failure of duty and errors of judgement … but it was shown that they knew the balance-­‐sheets to be wrong in material particulars …’. The piece concluded (p. 565) ‘Auditors must not only have the skill to discover error and deception, they must also have the courage and resolution to expose 29 them. … Accountants need not regret the verdict in this notable case. It will strengthen their hands in dealing with difficult situations.’ The Aftermath Although for two months prior to its collapse there had been rumours circulating about the state of the Bank, the impact of the crash was immense both financially and on the morale of the Island. There was not a family that was not affected in some way. Dumbell’s second son, Alured, who had been knighted in 1890, was the Island’s senior judge. Though he was not involved in the affairs of the Bank, on hearing of its failure, he retired to his home just outside Douglas and died there six weeks later. Bruce (on April 25), Shimmon, Nelson (on May 7) and Rogers (May 23) were all made bankrupt (Norris 1994, p. 71). Bruce never stood trial. He died in July just a few days before the preliminary hearing. His estate was valued at just over £8,000 but his liabilities were nearly £270,000. Shimmon’s estate had assets came to a little more than £50 against which his creditors’ claimed over half a million. Nelson had assets valued at £18,000 but he owed more than a quarter of a million. Only Rogers was still solvent by the end of the reckoning. Three members of the House of Keys, the Manx legislative assembly, resigned as a direct or indirect result of the Bank’s failure. Mylrea remained a member until his resignation on May 22. There had been calls for him to go at an earlier stage, 30 one call made even by a member of the clergy and it had been rumoured that he had tendered his resignation some weeks before. The Aldreds Professional discipline was taken by the ICAEW against the Aldreds although it was
not especially quick about it. Both were suspended from the ICAEW for two years
(The Accountant, August 10, 1901, p.882). This was the maximum period of time for
which a suspension of membership could be imposed. It is noteworthy that most
members who had been convicted of a criminal offence were excluded almost
immediately. The relative leniency of the penalty suggests that there may have been
some sympathy for the Aldreds in the corridors of power at Moorgate Place.
Evidence of a reduction in their circumstances is contained in the minutes of the
ICAEW’s Investigation Committee in its consideration of whether an advertisement
bearing the Aldreds’ name for a boarding house (the head of which was actually
William’s elder daughter) was in breach of professional ethics. The Committee,
perhaps out of sympathy for their situation, chose to take no action (MS28418, Vol. 2,
folio 127). Upon the expiration of their suspensions, the Aldreds resigned from the
ICAEW (The Accountant, October 10, 1903, p. 1228).
William Aldred lived for a further five years after his release from prison, appearing in the 1901 Census living at the home of his eldest daughter, a spinster who ran a boarding house in Buxton, Derbyshire. Harold became a journalist 31 and, still single in 1911, remained living with his sister in North Wales; her private means were enough to employ two domestic staff. Liquidation After concerns had been raised about the appointment of the initial liquidators, Walker from Liverpool took their place. He began work immediately. One of his first actions was to call on the remaining capital -­‐ £4 per share which had not been subscribed when the shares were issued partly paid. This was done -­‐ and the call had to be paid -­‐ before the end of March (The Accountant, March 31, 1900 p. 306). This meant that the fall-­‐out from the Bank’s failure was soon felt on the mainland since many of its shareholders resided in Manchester and Liverpool. The Accountant, for one, thought that shareholders ought reasonably to have been given a longer period of time to find the cash. Rawcliffe (2003, p. 171) asserts that some of the accounting profession’s prestige was recovered by the obvious competence of Walker as a liquidator. The winding up of the affairs of the insolvent Dumbell’s took more than twenty years to complete. In May 1922, the liquidator announced a ninth and final dividend of 6½d in the £ bringing the total paid to the unsecured creditors to 12s 7½d in the £ -­‐ just under 65% of what they had been owed when the Bank failed early in in 1900. Not all those who were due a dividend had made a claim to receive it. Interestingly, one of these was Rose Aldred, the sole surviving executrix of William’s will. In July 1923 she put in a belated claim to receive the last eight of 32 the nine dividend payments, amounting to more than £150. It is not clear from the records whether this claim was successful. Press Coverage of the Case The Dumbell’s Bank case was sufficiently newsworthy that its progress and conclusion received reviews in most of the national and regional newspapers. Of particular interest is the general feeling that the case would serve as a wake-­‐up call to the accounting profession. Also of note is the sentiment expressed more than once that the sentences erred on the side of leniency. The Daily Chronicle admitted that the sentences handed down to the officials of the bank were severe but went on, a little inelegantly, “no one who has followed the case will think they err on the side of severity. … it is clear that the bank officials, and even the auditors, must have know of its instability”. The Daily Express went further “The criminals of Dumbell’s Bank have got off lightly. … we are not sure that hanging is not too good for them”. In regard to the auditors, the paper went on “It raises once again the question of the value and efficiency of audits … Many commercial and financial authorities regard audits as commonly practised, as futile and misleading”. The Globe seemed to concur “a more cruel crime it would hard to discover, and the prisoners have every reason to think themselves exceedingly fortunate in the light sentence they have received”. 33 The Speaker considered that any sympathy for the auditors was “misplaced”; they were paid to do a duty and if they failed they should be punished. The Pall Mall Gazette hoped that the case would serve to make auditors generally better understand the extent of their obligations and responsibilities”. In a similar vein, The Economist declared “It will be an instance of good coming out of evil if this moral of the Dumbell Bank prosecution, so far as it affects the duties and responsibilities of auditors, is properly appreciated by weak-­‐kneed members of the profession”. The Standard “the revelations … as to the irregular operations of the bank officials, the neglect of their duty by the auditors, and the utter disregard by nearly everybody concerned in the business, alike of the general law and of the rules prescribed by the Company’s constitution, show how great a need there is for the creation of a higher standard of public morality in matters of joint stock enterprise”. The Times “nothing could be clearer than … the scandalous dereliction of duty by which the three auditors aided and abetted the plundering of innocent investors and depositors. … On public grounds there is every reason to rejoice that these men have received their desserts; and it is especially satisfactory that something has been done to break down the too prevalent notion that auditors have no responsibility for the substantial accuracy of the balance-­‐sheets they sign.” 34 The Manchester Guardian “It cannot be emphasised too strongly that auditors are public officials, with public responsibilities, and that their duty to the public stands higher even than their duty to their immediate employers”. And in a separate issue on November 20, the Guardian suggested that an improvement in bank audits might come about if Government auditors were appointed to banks. The Law Journal advised “[auditors] do not adequately discharge the duties of their office by merely protesting and threatening to resign when things are to their knowledge going wrong, still less by acquiescing in inaccurate balance sheets.” Norfolk Daily Standard perhaps exaggerated the role of the audit when it said: “when it is considered that an auditor is called in as a guarantee that everything is square, sound, and solvent, the wonder is that the punishment was not more severe. Directors and managers might have conspired in vain had not the auditors set their seal deliberately to what they knew was false beyond a doubt.” The Spectator (November 24, 1900, p. 7) charged the auditors with the ‘most scandalous negligence, not to say fraud, in duties where the obligation of honesty and circumspection should be peculiarly binding’. The paper set out its view of the purpose of an audit “An auditor is there to protect the interests of the shareholders or depositors from any risk of deception by the Bank officials. He has to see that the balance-­‐sheet is so drawn up as to exhibit a correct view of the state of the bank’s affairs as shown by its books, and he has to see that the 35 books themselves are fully and accurately entered”. There was no suggestion that the court erred on the side of severity in passing sentence. The Spectator went on to develop a general argument against the apparent laxity of the sentences handed out for financial crime calling fraud the ‘most unsocial and misanthropic of all crimes’. Further commenting in a tone recently echoed in connection with the UK Co-­‐op Bank: ‘what business has a man to take the position of chairman of a bank unless he has some rudimentary knowledge of its affairs?’. The Spectator’s rant ended with a wish that with the ‘demand of a more rigorous audit in certain commercial affairs, we can lessen the chances of temptation’. Conclusion The impact of the failure of Dumbell’s on the Isle of Man should not be overestimated according to Winterbottom (2000, p. 232). Although times were very hard for those who had lost some if not all of their savings, the Isle’s economy soon recovered on the back of the continued growth in the tourist trade. For the individuals concerned, the consequences of their involvement in the scandal varied. For some of the victims of the fraud, the result was calamitous with a number committing suicide or suffering ill-­‐health through anxiety, not to mention the stress of having to live on reduced means. As for the perpetrators, Bruce of course died; the Aldreds lost their livelihoods as well as, temporarily, their freedom; Nelson served his time, went to Canada, returned to the Isle of 36 Man in 1905 and in what Chappell calls ‘one of the most curious events in the history of Dumbell’s Bank’, was re-­‐admitted to the Manx Bar in 1907. Clearly not all those tainted with the smear of fraud suffered the humiliation which supposedly was more effective in keeping men on the straight and narrow than the threat of criminal proceedings (Taylor 2005). 37 Primary Sources Isle of Man Public Records Office Manx National Heritage Library Arrest warrants Articles of Association Manx Sun articles Chappell’s draft and notes Balance Sheets References Acheson, G. G. and Turner J. D. (2008) The death blow to unlimited liability in Victorian Britain: The City of Glasgow Bank failure, Explorations in Economic History, Vol. 45 No. 3, pp. 235–253. Alborn, T. 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