Royal Mail Case
Encyclopedia
The Royal Mail Case or R v Kylsant & Otrs was a noted English criminal case in 1931. The director of the Royal Mail Steam Packet Company
, Lord Kylsant
, had falsified a trading prospectus with the aid of the company accountant to make it look as if the company was profitable and to entice potential investors. Following an independent audit instigated by HM Treasury
, Kylsant and John Moreland, the company auditor, were arrested and charged with falsifying both the trading prospectus and company records and accounts. Although they were acquitted of falsifying records and accounts, Kylsant was found guilty of falsifying the trading prospectus and sentenced to twelve months in prison. The company was then liquidated, and reconstituted as The Royal Mail Lines Ltd with the backing of the British government.
As well as its immediate impact, the case instigated massive changes in the way companies were audited
. 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". The case "fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds", 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
.
was a British shipping company founded in London in 1839 by James MacQueen. It became the largest shipping group in the world when it took over the White Star Line
in 1927. Lord Kylsant
had been chairman of the company since 1902. He had expanded the company rapidly: aside from the White Star Line, he bought the Pacific Steam Navigation Company
in 1910 for £1.5 million,£1,500,000 in 1910 would be worth approximately £ as of . the Union-Castle Line
in 1912, and assumed control of the Harland and Wolff
shipyards in 1924.
The company had prospered during the First World War as the government paid to requisition its ships as military supply vessels and troop transports. The company had saved the profits, predicting that it would need them to cover income tax
and excess profits tax
. After these taxes had been paid there was approximately £1 million left,£1,000,000 in 1919 would be worth approximately £ as of . which they again saved, hoping to use this to cover any financial difficulties that might arise. The reserves were again boosted with government money paid under the Trade Facilities Act 1921, but between 1921 and 1925 the profits of the company rapidly dropped and, beginning from 1926, the directors supplemented the company income by taking money from the reserves
.
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,£439,000 in 1926 would be worth approximately £ as of . but had drawn £750,000£750,000 in 1926 would be worth approximately £ as of . out of the reserves and falsified accounts to make it appear that the money came from trading. In 1927 the company made a trading loss of £507,000,£507,000 in 1927 would be worth approximately £ as of . but money was again drawn from the reserves to make it appear that the company had made a profit of £478,000.£478,000 in 1927 would be worth approximately £ as of . 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. At the time the ruse was discovered the company had a trading deficit of £300,000 a year,£300,000 in 1929 would be worth approximately £ as of . the reserves were completely exhausted, and the company owed £10 million.£10,000,000 in 1929 would be worth approximately £ as of .
on 20 July 1931 before Mr Justice Wright
, with Sir William Jowitt
, D.N. Pritt
and Eustace Fulton for the prosecution, Sir John Simon
, J.E. Singleton and Wilfred Lewis for Lord Kylsant and Sir Patrick Hastings
, Stuart Bevan
, Frederick Tucker
and C.J. Conway for John Moreland. The indictment contained 3 counts. On count 1 Kylsant was charged with issuing a document, namely the annual report for 1926 with intent to deceive the shareholders about the true state of the company, Morland was charged with aiding and abetting this offence. Count 2 was an identical count relating to the annual report for 1927 against both defendants and on count 3 Kylsant alone was charged with issuing a document—the debenture stock prospectus of 1928 with intent to induce people to advance property to the company. All counts were contrary to section 84 of the Larceny Act 1861
. Both defendants pleaded not guilty to all counts.
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. 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." Both Kylsant and Moreland were acquitted of counts 1 and 2, but Kylsant was found guilty on count 3 and was sentenced to 12 months in prison.
Kylsart appealed his conviction on count 3 and was bailed pending the appeal. The appeal was heard in November 1931 where the Court of Appeal
upheld the conviction; ruling that although the statements within the prospectus were all true, the document as a whole was false because of what it concealed, omitted or implied.
made it clear that failing to disclose the use of this process was unacceptable, and undermined the "true and fair view" companies were required to give in their financial statements.
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. 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". The case "fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds", and has been linked to reduced public trust of big businesses.
Following his release in 1932, Kylsant stayed mainly out of the public eye despite a brief return in 1933.
Royal Mail Steam Packet Company
The Royal Mail Steam Packet Company was a British shipping company founded in London in 1839 by Scot James Macqueen. After good and bad times it became the largest shipping group in the world in 1927 when it took over the White Star Line....
, Lord Kylsant
Owen Philipps, 1st Baron Kylsant
Owen Cosby Philipps, 1st Baron Kylsant was a British businessman and politician, later jailed for producing a document with intent to deceive.-Background:...
, had falsified a trading prospectus with the aid of the company accountant to make it look as if the company was profitable and to entice potential investors. Following an independent audit instigated by HM Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
, Kylsant and John Moreland, the company auditor, were arrested and charged with falsifying both the trading prospectus and company records and accounts. Although they were acquitted of falsifying records and accounts, Kylsant was found guilty of falsifying the trading prospectus and sentenced to twelve months in prison. The company was then liquidated, and reconstituted as The Royal Mail Lines Ltd with the backing of the British government.
As well as its immediate impact, the case instigated massive changes in the way companies were audited
Financial audit
A financial audit, or more accurately, an audit of financial statements, is the verification of the financial statements of a legal entity, with a view to express an audit opinion...
. 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". The case "fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds", 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
Reserve (Accounting)
In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting...
.
Background
The Royal Mail Steam Packet CompanyRoyal Mail Steam Packet Company
The Royal Mail Steam Packet Company was a British shipping company founded in London in 1839 by Scot James Macqueen. After good and bad times it became the largest shipping group in the world in 1927 when it took over the White Star Line....
was a British shipping company founded in London in 1839 by James MacQueen. It became the largest shipping group in the world when it took over the White Star Line
White Star Line
The Oceanic Steam Navigation Company or White Star Line of Boston Packets, more commonly known as the White Star Line, was a prominent British shipping company, today most famous for its ill-fated vessel, the RMS Titanic, and the World War I loss of Titanics sister ship Britannic...
in 1927. Lord Kylsant
Owen Philipps, 1st Baron Kylsant
Owen Cosby Philipps, 1st Baron Kylsant was a British businessman and politician, later jailed for producing a document with intent to deceive.-Background:...
had been chairman of the company since 1902. He had expanded the company rapidly: aside from the White Star Line, he bought the Pacific Steam Navigation Company
Pacific Steam Navigation Company
The Pacific Steam Navigation Company was a commercial shipping company that operated in the Pacific coast of South America, and was the first to use steam ships for commercial traffic in the Pacific Ocean.-History:...
in 1910 for £1.5 million,£1,500,000 in 1910 would be worth approximately £ as of . the Union-Castle Line
Union-Castle Line
The Union-Castle Line was a prominent British shipping line that operated a fleet of passenger liners and cargo ships between Europe and Africa from 1900 to 1977. It was formed from the merger of the Union Line and Castle Shipping Line...
in 1912, and assumed control of the Harland and Wolff
Harland and Wolff
Harland and Wolff Heavy Industries is a Northern Irish heavy industrial company, specialising in shipbuilding and offshore construction, located in Belfast, Northern Ireland....
shipyards in 1924.
The company had prospered during the First World War as the government paid to requisition its ships as military supply vessels and troop transports. The company had saved the profits, predicting that it would need them to cover income tax
Income tax
An income tax is a tax levied on the income of individuals or businesses . Various income tax systems exist, with varying degrees of tax incidence. Income taxation can be progressive, proportional, or regressive. When the tax is levied on the income of companies, it is often called a corporate...
and excess profits tax
Excess profits tax
In the United States, an excess profits tax is a tax, some say excise tax, on any profit above a certain amount. A predominantly wartime fiscal instrument, the tax was designed primarily to capture wartime profits that exceeded normal peacetime profits....
. After these taxes had been paid there was approximately £1 million left,£1,000,000 in 1919 would be worth approximately £ as of . which they again saved, hoping to use this to cover any financial difficulties that might arise. The reserves were again boosted with government money paid under the Trade Facilities Act 1921, but between 1921 and 1925 the profits of the company rapidly dropped and, beginning from 1926, the directors supplemented the company income by taking money from the reserves
Reserve (Accounting)
In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting...
.
In 1929 the company asked HM Treasury
HM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
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,£439,000 in 1926 would be worth approximately £ as of . but had drawn £750,000£750,000 in 1926 would be worth approximately £ as of . out of the reserves and falsified accounts to make it appear that the money came from trading. In 1927 the company made a trading loss of £507,000,£507,000 in 1927 would be worth approximately £ as of . but money was again drawn from the reserves to make it appear that the company had made a profit of £478,000.£478,000 in 1927 would be worth approximately £ as of . 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. At the time the ruse was discovered the company had a trading deficit of £300,000 a year,£300,000 in 1929 would be worth approximately £ as of . the reserves were completely exhausted, and the company owed £10 million.£10,000,000 in 1929 would be worth approximately £ as of .
Trial
The trial began at the Old BaileyOld Bailey
The Central Criminal Court in England and Wales, commonly known as the Old Bailey from the street in which it stands, is a court building in central London, one of a number of buildings housing the Crown Court...
on 20 July 1931 before Mr Justice Wright
Robert Wright, Baron Wright
Robert Alderson Wright, Baron Wright, GCMG, PC was a British judge.On 11 April 1932, he was appointed Lord of Appeal in Ordinary and was created additionally a life peer with the title Baron Wright, of Durley in the County of Wiltshire, however resgined as Lord of Appeal already in 1935...
, with Sir William Jowitt
William Jowitt, 1st Earl Jowitt
William Allen Jowitt, 1st Earl Jowitt PC, KC , was a British Labour politician and lawyer, who served as Lord High Chancellor of Great Britain under Clement Attlee from 1945 to 1951.-Background and education:...
, D.N. Pritt
Denis Nowell Pritt
Denis Nowell Pritt , usually known as D.N. Pritt, was a British barrister and Labour Party politician. Born in Harlesden, Middlesex, he was educated at Winchester College and London University....
and Eustace Fulton for the prosecution, Sir John Simon
John Simon, 1st Viscount Simon
John Allsebrook Simon, 1st Viscount Simon GCSI GCVO OBE PC was a British politician who held senior Cabinet posts from the beginning of the First World War to the end of the Second. He is one of only three people to have served as Home Secretary, Foreign Secretary and Chancellor of the Exchequer,...
, J.E. Singleton and Wilfred Lewis for Lord Kylsant and Sir Patrick Hastings
Patrick Hastings
Sir Patrick Gardiner Hastings KC was a British barrister and politician noted for his long and highly successful career as a barrister and his short stint as Attorney General. He was educated at Charterhouse School until 1896, when his family moved to continental Europe...
, Stuart Bevan
Stuart Bevan
Stuart James Bevan was a British barrister and Conservative politician.Bevan was educated at St Paul's School and Trinity College, Cambridge, was called to the Bar at Middle Temple in 1895, and took silk in 1919. He was made a Bencher of his Inn, and in 1932 became Recorder for Bristol...
, Frederick Tucker
Frederick Tucker, Baron Tucker
Frederick James Tucker, Baron Tucker PC was a British judge.Tucker was called to the Bar in 1914, was Recorder of Southampton in 1936-37, was Justice of High Court of Justice, King's Bench Division between 1937 to 1945...
and C.J. Conway for John Moreland. The indictment contained 3 counts. On count 1 Kylsant was charged with issuing a document, namely the annual report for 1926 with intent to deceive the shareholders about the true state of the company, Morland was charged with aiding and abetting this offence. Count 2 was an identical count relating to the annual report for 1927 against both defendants and on count 3 Kylsant alone was charged with issuing a document—the debenture stock prospectus of 1928 with intent to induce people to advance property to the company. All counts were contrary to section 84 of the Larceny Act 1861
Larceny Act 1861
The Larceny Act 1861 was an Act of the Parliament of the United Kingdom of Great Britain and Ireland . It consolidated provisions related to larceny and similar offences from a number of earlier statutes into a single Act...
. Both defendants pleaded not guilty to all counts.
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. 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." Both Kylsant and Moreland were acquitted of counts 1 and 2, but Kylsant was found guilty on count 3 and was sentenced to 12 months in prison.
Kylsart appealed his conviction on count 3 and was bailed pending the appeal. The appeal was heard in November 1931 where the Court of Appeal
Court of Appeal of England and Wales
The Court of Appeal of England and Wales is the second most senior court in the English legal system, with only the Supreme Court of the United Kingdom above it...
upheld the conviction; ruling that although the statements within the prospectus were all true, the document as a whole was false because of what it concealed, omitted or implied.
Aftermath
Following Kylsant's conviction the company was liquidated, and reconstituted as The Royal Mail Lines Ltd with the backing of the British government. The case led to several changes in the way companies were audited. Because many accountants shared Plender's view that secret reserve accounting was a regular and respectable practice, and because the pair had not been found guilty of publishing false information as a result of this, the professional response was disjointed and half-hearted. There were major changes, however: although the practice of secret reserve accounting remained acceptable, companies disclosed their use of this in their audit reports. The Companies Act 1947Companies Act 1947
The Companies Act 1947 was a United Kingdom Act of Parliament, that updated UK company law after the Companies Act 1929. It was soon recodified in the Companies Act 1948....
made it clear that failing to disclose the use of this process was unacceptable, and undermined the "true and fair view" companies were required to give in their financial statements.
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. 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". The case "fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds", and has been linked to reduced public trust of big businesses.
Following his release in 1932, Kylsant stayed mainly out of the public eye despite a brief return in 1933.