A Lesson of International Accounting from Railroad Regulationin the United States in the Nineteenth Century

Hidetoshi YamajiResearch Institute for Economics & Business Admin.

Kobe University

Content

Chapter One American Railroad Regulation in the Nineteenth Century and Emergence of

Modern Accounting Information Disclosure

I Preface

II Railroad Regulation in the State of Illinois in relation to the Granger Movement

II-1. Introduction

II-2. Conditions of the States in the Mid-West

II-3. Analysis of Railroad Regulation in the State of Illinois

III Railroad Regulation in the State of Massachusetts

III-1. Introduction

III-2. Conditions of the State of Massachusetts

III-3. Analysis of Railroad Regulation in the State of Massachusetts

IV Conclusion

Commission System and Accounting Information Disclosure

Chapter Two Accounting Information Disclosure of Multinational Enterprises in Contemporary

Times —in relation to Earlier Reports of the United Nation—

I Introduction

II Emergence of Accounting Information Disclosure of Multinational Enterprises

III Development of Accounting Information Disclosure of Multinational Enterprises

IV Turn of Accounting Information Disclosure of Multinational Enterprises

V Some Emerging Issues Conclusion

Chapter Three General Conclusion

I Adaptation of Accounting Information Disclosure to Problem of Multinational Corporations

II Adoption of Commission System by the United Nations

Chapter OneAmerican Railroad Regulation in the Nineteenth Century

and Emergence of Modern Accounting Information Disclosure

I Preface

I-1. IntroductionThe purpose of this paper is to provide an analysis of the relation between the railroad regulations

in the 19th century in the Unites States and the emergence of modern accounting information

disclosure. This analysis would be the base for searching the social foundations of modern accounting

information disclosure conducted in mass democratic society by the big enterprises. Concretely the

two ways of railroad regulation will be recognized in the variety of states' railroad regulations. The

one is the way in which the accounting information disclosure was adopted and the other is the way in

which it was invalid and the direct railroad business regulation by the state was employed. Moreover

the reason why there emerged such differences in railroad regulation is attributed to the differences in

the social and economic structure among states.

The railroad appeared in the 1830s was a catalyst for the social and economic development of the

United States in the nineteenth century. The many securities issued by the railroad corporations

established modern securities markets and communication and transportation systems were developed

along with railroads. As R. W. Fogel pointed out(1), it might have been followed at least a different

course of development of the steel industry, if there was no demand for the steel rails by the railroads.

With regard to the agriculture treated in the section II, this was also the case. The existence of the

railroads enabled to bring together agricultural products, in particular, wheat harvested in the inland

areas to the ports of the Pacific Ocean and to export them to Europe. In other words, the development

of railroads to the west in the United States was accompanied by the advancement to the west of

agricultural frontier so that the mid-western states became progressively the granary not only of the

United States but also of Europe.

The American railroad corporations in the 19th century adopted some kinds of business strategies

in the above-mentioned socio-economic conditions for accumulating their own capitals. On the other

hand, however, the bases of living for the farmers, merchants and mediate and small producers were

considerably influenced by business strategies selected by the relatively large railroad corporations.

This excessive influence caused the necessity of railroad regulations(2). In addition, the accounting

information disclosure was necessitated in certain conditions. Particularly it was adopted and became

important policy only in some states of the earlier period.

Section II will offer the case study in which the accounting information disclosure was adopted as a

means of regulating railroad corporations in failure and direct business regulation by state was

employed instead. Section III will provide the case study in which the accounting information

disclosure was a valid means. The former study was on the case of the state of Illinois and of some

Mid-Western states. The latter analysis was conducted on the state of Massachusetts and some Eastern

states. Section IV points out the elements of socio-economic foundations for emerging accounting

information disclosure.

II Railroad Regulation in the State of Illinois in relation to the Granger Movement

II-1. Introduction(3)

The United States in the nineteenth century was an agricultural country and was in reality

characterized as a granary of Europe which was, in turn, the center of the world economy. For the

inclusion of the American agriculture into the world economy, the establishment of the world-wide

transportation system which brought together farmers' products from inland areas to the shipping

ports of the East Coast which sent them off to Europe, was a physical precondition. That is, the

demand for gathering the grains to the East Coast stimulated the development of the transportation

system within America.

Steam boats running on rivers were the first means of inland transportation. Many canals were

constructed which connected one river to another river or rivers, and to the Great Lakes. Most famous

was the Erie Canal constructed in 1825. This was a kind of main artery which connected inland Mid-

Western areas to the East Coast. For the South, active transportation on the Mississippi River made

New Orleans prosperous.

After a while, railroad transportation came to play an important role as a substitute of the river

transportation for transporting grains. Railroad transportation originally functioned as a

supplementary system to the river and lake transportation, for example, in the case that the Great

Lakes froze in winter. But railroads progressively substituted for steam boats because of their speed

and were the first step for connecting it agriculture to railroads.

Although, earlier we emphasized the relationship between the railroads and agriculture, railroads

were at least in the early years, constructed by the capital contributed not by farmers but by capitalists

and merchants of the east coast area. The merchants of the east coast intended to earn profits from

connecting canals to their own cities, that is, the inland Mid-Western states to the east coast by

constructing railroads. But the direct and indirect aid from farmers became indispensable for

constructing the railroad in the Mid-Western states, only since the latter half of the nineteenth century.

In this area, railroads had the double function of bringing the industrial products and necessities of life

produced in the east cities to the Mid-Western area, and of sending the grains harvested in the latter

area to the former area. In the American domestic economy, the extension of railroads to western

states corresponds to the penetration into the farmers dotted in some frontiers of capitalistic

production system.

Fundamentally and economically the railroads were indispensable for the living of the farmers who

lived in the inland Mid-Western areas. But actually the relationship between railroad corporations and

farmers was not cooperative. It would be better to say that the history of the relationship between

these two organizations in the latter half of the nineteenth century was one of conflict. For railroad

corporations needed to accumulate the capital for the purpose of winning in the capitalistic

competition among railroad corporations. In consequence, they decided naturally to adopt the

management strategies which pressed the insufficiently organized and weak farmers, and small

producers and merchants. Reacting to the immoderate management of railroad corporations, farmers

began to organize themselves in broader areas and to develop an anti-railroad movement beginning in

the 1870s. In the following, we mainly analyze the living and economic conditions of the Mid-

Western farmers and take their relation with railroad corporations into consideration. This analysis is

helpful in finding the social and economic changes among farmers, local governments and railroad

corporations. Moreover, it should contribute to the comparative analysis of the case of the east coast

and its socio-economic foundation for the emerging modern accounting information disclosure in the

middle and the latter half of the 19th century in the United States.

II-2. Conditions of the States in the Mid-West

The most important and the broadest factor which stimulated the farmers to organize themselves

was the countermeasure against the pressure of large railroad corporations. But in this subsection we

should describe their living conditions in detail, in particular, their discontentment and dissatisfaction

in referring to the paper written by E.W.Bemis(4) at the end of the nineteenth century.

First we should point out that the farmers were unsatisfied with the low prices of agricultural

products in two aspects. One aspect was that the seasonal fluctuations in the prices of farm products

unfavorably affected the farmers. The other aspect was that the prices of grains decreased in the long

run. For judging whether the discontent of the farmers were the case or not, some data should be

offered in this context. Table I(5) shows the fluctuation in the price of spring wheat at the Chicago

Grain Exchange, which did not completely correspond to the proper period but may indicate the price

tendency. Figure I(6) provides the data which indicates the decreasing trends in the prices of farm

products. (The long term average price of ten staples in American wholesale markets were added as a

reference).

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Table I and Figure I about here

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From the data of Table I, we can say that the seasonal price of grain was considerably stable. This

was also the case for Corn and Oats in the same period. Bemis also concluded that the dissatisfaction

of the farmers in the period might be groundless by saying that ;

The figures tell their own story. They not only show at there is no fall in prices at harvest

when we should most expect it, but they reveal a remarkable evenness of price between all

the months over a series of years(7).

Therefore, It can not be proven that farmers sold at an unreasonably low price fixed by the pressure of

speculation in the harvest season.

Figure I shows clearly the long term decreasing trends of prices of agricultural products. Bemis was

not, however, in sympathy with farmers in the decreasing price tendencies of their produced goods

because there was no relative change in prices. The long term average prices of industrially produced

goods (iron, wool, oil, salt etc.) were also falling. Bemis thought that the economic conditions facing

farmers did not relatively change.

As far as we are depending upon the data offered by Bemis, farmers were not always unfavorably

influenced by the changes both in relative and in absolute prices of agricultural products. If so, the

dissatisfactions held by the farmers in the Mid-Western areas, were they at least partially a kind of

illusion ? We must pay attention to the fact that the price data inserted by Bamis was the one collected

at the Chicago Exchange although we can not concretely present the contra-data against Bemis's data.

The prices shown in Table I and Figure I were not prices at which the farmers sold their harvested

grains to brokers and were not the ones which the farmers entirely accepted. This fact has two

meanings. The one is that there were some differences between the prices at which farmers sold their

grains to brokers and the prices at which brokers sold them at the Exchange. The other is that these

prices should be related to the railroad and warehouse fees. Then we must refer to Table II (8)which

indicates that the fees at which farmers in the Mid-Western and the Southern areas sent their grains to

Chicago by train were relatively higher than the fees which dominated in the east coast areas. The

reason why the fees of transportation were relatively high should in reality be attributed not to

physical conditions but to the economically monopolistic positions held by the mid-western

railroad corporations and warehouse lenders. Naturally they charged high fees to the insufficiently

organized farmers(9). Consequently we must consider it unreasonably costly for farmers to send their

grains to the large exchanges located in big cities. Then there emerged a second and particularly

discontentment among farmers. That is, farmers were dissatisfied with the rapid accumulation of

properties by the railroad managers and warehouse lenders by using unfair rates systems which had

harmful effects on them. In considering both the changes in grain prices and the rate policies adopted

by the railroad and warehouse managers, we must conclude that the dissatisfaction held by the

farmers in the Mid-Western and the Southern areas became real ones by the strengthened influence of

two factors even if the prices of industrial products were falling along with the agricultural ones in the

long term.

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Table II about here

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The third factor was related to the insufficiency of the social capital in the rural areas compared

with urban areas. In particular, the incomplete facilities of schools delayed the spread and

improvement of agricultural technology for increasing productivity. This was the case especially in

the South(10).

The fourth factor was relatively high interests at which farmers borrowed(11). There was also the

taxation system which imposed unfair taxes on farmers. For example, the securities held by urban

people could be concealed more easily than the cattle held by farmers when assessing the tax values(12).

Moreover farmers had more serious damages than residents in cities when encountering natural and

unexpected accidents since they had few savings(13).

Judging from earlier surveys with regard to discontentment among farmers, it becomes clear that

there was one common characteristic among them. It is the fact that all discontentment factors were

related to the urbanization and to becoming more capitalistic. Farmers in that period felt that they did

not enjoy the benefits accrued from the capitalistic production system which benefited urban residents.

They had also the feeling that they were exploited by banks and railroad corporation main offices

which were located in urban cities and which were centers of capitalistic and commercialized

economy. It seems that these feelings fostered discontent among farmers. Surprisingly enough they

looked enviously even at the labor class which began to develop a labor movement and to throw

discontent into the capitalistic production system. Farmers were dissatisfied with the situation in

which capitalists and labor were respectively organized in cities for seeking their own purposes while

they were organized too insufficiently to show off their existence(14).

The discontent of farmers stimulated and prompted American farmers' movements since the 1870s.

Needless to say, the discontentment factors provided the content of farmers' movements ; concretely:

the spread of agricultural education to improve productivity, the direct purchasing of necessities of

living and farming implements by themselves to avoid their exploitation by urban merchants, the

requirement by local governments of railroad regulations, and the establishment of farmers'

organizations for pursuing their purposes. These discontents gave birth to the Granger Movement. The

living conditions and farmers' movements in the mid-western areas would have provided after all the

method of railroad regulation which was helpful for explaining the emergence and validity in modern

mass-democratic society for accounting information disclosure.

II-3. Analysis of Railroad Regulation in the State of Illinois(15)

Although it was usually said that the Granger Movement was the first large scale farmers'

movement in American history, it was not the first American farmers' movement. From the viewpoint

of farmers' organizations, the earliest farmers' organization was established after the War of

Independence. After that, some organizations appeared and disappeared both at the state level and at

the federal level. In the early years, influential farmers convened to discuss the problem of

improving agricultural technologies for raising productivity. Such endeavors helped established the

Federal Bureau of Agriculture in 1862. Also, all early farmers' organizations were not voluntarily

organized and were not organized from the bottom by individual farmers.

There emerged a voluntary and early organization in the 1830s in which farmers participated and

which intended to defend members' economic interests in watching contemporary economic

conditions. That was the New England Association of Farmers, Mechanics and Other Workingmen.

According to the comment of J.R.Commons,(16)

This association, though at first rather an industrial than a political organization, eventually

advocated a mechanics' lien law, reform in the militia system, simplification of the laws,

extension of the suffrage, reform in the land tenure laws, in the system of taxation, and in

banks and other incorporated monopolies, abolition of imprisonment for debt, protection of

labour instead of capital, factory legislation, especially in the interest of women and children,

a better system of education, in particular, provision for the education of children in factory

districts, and shorter hours of labour.

The high ideals suggested the high consciousness of the members. The main constituent of the

organization was, however, not farmers but labor. Substantially farmers were not active members and

were taken advantage of by labor(17)(18). This organization of which assertion enables us to recognize

the serious critical mind was not a pioneer of farmers organization. Nonetheless it suggests the

extension of the darkness produced by capitalistic production system.

The true pioneers must be small farmers' societies and clubs which were independently dotted

throughout at least twenty states. They extended throughout New York, Vermont, Oregon, Washington,

California and so on from the 1850s to the 1860s. In the meetings of these societies, the regulation of

railroad corporations did not yet come out to the surface for discussion. The main theme was

exclusively concerned with the federal congress or state assembly. After that, the theme gradually

changed to the railroads which developed degressively only in the period of the Civil War but

continued to press farmers to accept unreasonable rates.

When he was aware of the living conditions and wanted to improve them, O.H.Kelley organized in

1867 at the state of Minnesota a farmer organization named the Patron of Husbandry which

consisted of suborganizations, that is, Granges. The membership of the Grange was limited to men

more than eighteen years old and women more than sixteen years old who were engaged in

agriculture. Each group, which was composed of at least nine men and four women, was authorized as

a Grange. According to the saying of Kelley the original purpose for this organization was the social

and cultural progress of farmers' living similar to the one for above-mentioned societies and clubs(19).

It intended to promote the spread and propagation of progressive agricultural technology(20). For

clarifying the earlier characteristic of the Granger Movement, some words of Kelley should be cited

as follows:(21)

Among the objects in view may be mentioned a cordial and social fraternity of the farmers all

over the country. Encourage them to read and think; to plant fruit and flowers, ---- beautify their

homes; evaluate them; make them progressive.

These purposes were petit-bourgeois and consequently suggested only a closed and self-sufficient

orientation among farmers although the objectives largely appealed to farmers all over the states.

But at this earlier time, from the Granger Movement we can not recognize the attention that farmers

paid to general economic conditions and to other social classes and organizations.

The earlier Granger Movement did not pretend to revolutionize the social structure producing the

discontent of farmers. They were discontent only with being differentiated and being ignored by other

social classes after first affirming their basic socio-economic foundations --- or it would be better to

say --- without considering their basic socio-economic foundations. Then the means of improvement

suggested in the earlier Movement was reciprocal, calming the feelings of farmers. Although these

peculiarities were continuously held among farmers, the farmers' movement became more aggressive

after the 1870s(22).

Farmers came to be discontent with the earlier movement so that the policy and principle of the

movement was forced to be revised. Then the Granges turned their attention to the outside social

classes. They started collecting and communicating rapidly the information concerning prices,

volumes of demand and supply, market conditions and transportation of grains in addition to setting

the facilities and extending co-operative purchasing. Thus, farmers began to take advantage of the

information which was produced by the interactions of the outside social classes other than farmers.

In consequence, this also meant that farmers began to take part in or to have something to do with the

outside social classes.

The principle of the movement was developed to result in two watch words which reflected the new

purposes of the movement; " cooperation " and " down with monopolies ". After that, the movement

was developed along the new principle which was authorized in 1871 at a general meeting. How

strongly this new principle captured the hearts of farmers than the old one did can be verified by the

increase in the number of Granges. Table III, IV and V provide the evidence for proof. These tables

tell us that the peak in which the Granges increased in number and accordingly in aggressiveness and

activeness can be recognized in the first half of the 1870s. The movement extended from Minnesota,

Iowa, Illinois and Indiana through Missouri and Ohio to New York, Tennessee, Massachusetts, Kansas,

Kentucky, Vermont, Georgia and South Carolina(23).

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Table III, IV and V about here

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Next, we should analyze some concrete effects brought about by the Granger Movement. First of

all, we must look at the Granger legislation in some states. Strictly speaking, the Grange itself was

only a reciprocal organization prohibited to attend to political activities. But we can not deny that it

functioned as a substantial base for farmers' political and legislative activities. In the process of the

movement, farmers pressed their local governments to legislate some laws to protect their own

interests. This was " the Granger Legislation ". Some laws by the Granger Legislation were brought to

court for trial by railroad corporations and states. These were afterwards called " the Granger Cases ."

The state of Illinois was identified with the Granger Cases. But they spread over some states, in

particular, over the states in the Mid-Western areas.

The Constitution of the state of Illinois was amended in 1870(24). It was not only the power of the

Granger Movement but also another power of farmers' association that forced the Illinois state

government to amend the Constitution which newly contained the railroad and warehouse

regulations(25). Since the beginning of the 1860s, laws regulating railroads were many times presented

to the state assembly of the state of Illinois. In these attempts the Act concerning Railroad Rates was

passed through the Assembly in 1869. This Act prohibited rate setting based on the notorious pro rate

principle. But the prohibition was invalid because the Act presented no concrete alternative principle.

On the other hand, it grew the demand for regulating railroads of farmers organized as society and

club. Before long the fourth constitutional convention was held at Springfield in December, 1869.

This convention was adjourned for a while. In this adjournment, the public opinion demanding the

railroad regulation rose in tension. For example, the informal talk of a farmer, H.C.Wheeler was

referred to in an article of the Prairie Farmer, a journal which was popular among farmers of Illinois:

....the farmers of the great North-west concentrate their efforts, power, and means, as the

great transportation companies have done theirs.... And, to this end, I suggest a convention

of those opposed to the present tendency to monopoly and extortionate charges by our

transportation companies, to meet at Bloomington, Illinois, on the 20th day of April

next. ....Farmers, now is the time for action(26).

Such a trend was supported by newspapers and extended to farmers in the north and mid-western

areas.

In the beginning of the conventional session the representatives, however, opposed regulating the

railroad companies, in particular, regulating the transportation rates by the state in spite of the farmers'

aggressive opinions. For example, R.P.Hanna who was a representative said as follows:(27)

Build competing lines, hold out liberal inducements for capitalists to come from every

portion of the country and invest their capital and compete with them. When you have done

this, the problem is solved and the true and only relief furnished.

Judging from the mention of R.P.Hanna, representatives were distressed about unreasonable

rates of transportation but they generally thought that there was no means for regulating railroads

practicable for the state government. At last, farmers' opinion supported by the farmers' movement,

however, pressed a representative of Bloomington, R.Benjamin, who was also a famous researcher of

Constitution, to make a expression that the state government was able to have a right to regulate the

railroad fees. Since railroad corporations had been established for the public good, and had been given

the power of public domain, they were under the control of the legislature. R.Benjamin asserted

that;(28)

there are and can be no vested rights of governmental power in any individual or

corporation, except those conferred by the constitution,

This opinion was agreed to spontaneously by many representatives to add to the new Constitution the

sections ( from Section 9 to Section 15 ) concerning the railroad rate regulations. The following two

sections were cited as a reference ;(29)

Section 12. Railways...are hereby declared public highways, and shall be free to all persons

for the transportation of their persons and property thereon, under such regulations as may

be prescribed by law. And the General Assembly shall, from time to time, pass laws

establishing reasonable maximum rates of charges for the transportation of passengers and

freight on the different railroads in this state.

Section 15. The general Assembly shall pass laws to correct abuses and to prevent unjust

discrimination and extortion in the rates of freight and passenger tariffs on the different

railroads in this state, and enforce such laws by adequAte penalties, to the extent, if

necessary for that purpose, of forfeiture of their property and franchises.

The amendment to the Constitution in 1870 was decided by direct voting of the electorate. The

Constitution as a whole was approved by 134,227 against 35,443. The Sections with regard to railroad

regulation were voted independently and passed by 144,750 against 23,525. The Sections concerning

the warehouse regulation were also passed by 143,532 against 22,702. In this connection Table VI(30)

shows the contemporary population structure by occupation in the state of Illinois. Cook County, in

which was located Chicago, was by far the area of Illinois first in industrial production output and

consequently a leader in modernization. In other words, only Cook County had progressed in

featuring railroad industry while the other counties had a production structure mainly characterized by

agriculture. In 1870 the industrial output of Cook County totaled 92 million dollars, contrasted to the

output of 8 million dollars recorded in the secondly industrialized Peoria County. These polarizations

both in population structure by occupation and production structure surely contributed to the passage

of the new Constitution in Illinois(31).

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Table VI about here

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In 1871 some laws regulating railroads and warehouses were enacted based on the new

Constitution in the state assembly by members of the assembly who were elected by the Grange

farmers. At this time the Board of Railroad and Warehouse Commissioners was established.

Subsequently we analyze the content and its development of railroad regulations in the state of Illinois

by referring to the earlier annual reports issued by the Board(32).

The law passed in 1871 was the Act Establishing a Reasonable Maximum of Charge for the

Transportation of Passengers. The law obliged railroad corporations to file to the Board the annual

report which disclosed their annual revenues. The Board adopted the policy to recommend a

maximum rate respectively to each railroad which was classified to four (A,B,C and D) ranks

according to the revenue information. The filing system of annual report to the Board was a main

means of railroad regulation in the state of Illinois from the earliest period. From the following

sentence cited from the first annual report of the Board, we can imagine how strongly the Board

expected the success of regulation by the filing system ;(33)

If this Board should succeed in nothing else than in furnishing the public with accurate

and reliable information as to the operation of the large moneyed power embodied in the

railroad interests, so as to indicate reasonable means of protection against its encroachments,

it will have performed a very important and useful function of a considerate government.

On August 1, 1871 railroad corporations filed to the Board their first annual reports which were

incomplete and were forced to be modified, although the Board required only a very simple format of

an annual report. The incompleteness could be explained by some factors. Railroad corporations

adopted different accounting systems each other. They did not record any information concerning

original subscribers of stock, original contributors of capital and amounts of cash contributed because

of their many time transmutations.

When implementing the filing system for railroad regulation, the most important issue was a fact

that there was no accounting information regarding the income earned within the state of Illinois

because railroad corporations usually conducted business with an interstate charter. On the other hand,

this information was indispensable for the Board to decide the rate ranking. The Board was confident

that it could considerably collect the necessary information by continuous suggestion and education to

railroads. According to the filed accounting information, it became clear that railroad corporations in

Illinois almost had charged unreasonably high rates to passengers and had continued adopting

differentiating rates. We must our attention to the fact that the Board disclosed gathered information

and rate ranking of each railroad in newspapers. Based on the information, private individuals who

were discontent over the rates charged could sue the railroads concerned for refunding of rates. Such a

system and the procedures surrounded railroad regulation in Illinois in the earliest period.

As you have already recognized, there was a big issue in the 1871 law. According to the law,

......the action to enforce penalties for its violation is given to the party aggrieved,

exclusively, and this Board does not seem to possess any authority to institute actions to

recover penalties for the violation of that law nor has it any control over actions

instituted by private individuals(34).

Needless to say, the issue was a conceptual limitation of "party aggrieved" to private individuals.

Naturally each private individual had less power than large railroad corporations so that an individual

could not easily sue them for recovering penalties. Thus, the early filing system was in reality invalid

for establishing a maximum fair rate.

Learning a lesson from this failure of regulation, a new and more rigid law for railroad regulation

was passed in 1873. According to the new law, the Board had a right to fix rates and to become a

party aggrieved. Some suit cases were reported in the fourth annual report of the Board issued in

1874(35). That is, the Board came to have a right to directly control railroad businesses. Of course, the

filing system was continuously used in combination with the direct control of business.

After that, railroad regulation in Illinois entered a new stage. The decisions whether laws regulating

railroads and warehouses were constitutional or not in referring to the American Federal

Constitution were brought to court by the railroad corporations and warehouse companies. As we

have already mentioned, a series of such cases were called the Granger Cases. The typical case was

Mann vs. Illinois in 1876(36). The issue of the case was whether the law passed in 1873 was

constitutional or not in referring to the American Federal Constitution. The Supreme Court approved

its constitutionality(37).

It would be very difficult for us to decide whether railroad regulation in the state of Illinois was

successful or not. But we must add that a historian evaluated the strong railroad regulation in Illinois

as a limited success. An another researcher affirmatively evaluated the results of regulation in Illinois.

At any rate, by the 1880s railroad regulation was well under way in the state of Illinois(38).

Turning our attention to the aspect of business conditions of railroad corporations in Illinois, we

analyze particularly the Illinois Central Railroad. Why they did not accept an indirect regulation, a

filing system or information disclosure system ? As a consequence, why did they ultimately go to the

point of accepting direct control of business ?

The Illinois Central Railroad was chartered in 1850 and was expanded by the donation of lands

from the government to become the largest railroad corporation in Illinois. Sometimes this

corporation had the rumor that it could be misapprehended as a real estate company. It was financed

not, by issuing stocks, but by issuing bonds on mortgage of endowed lands. It was told that the

corporation's stock was used to be delivered only as premiums on subscribers of bond. The total

amount of the bond issued was 9 million dollars in contrast to three hundred thousand dollars in the

amount of outstanding stock. In addition, the considerable part of the stock of this railroad was issued

in the English capital market.

Turning our interests to the aspect of management of the Illinois Central Railroad, the proper

development as a corporation of this railroad was disturbed by economic depression, poor harvest and

the Civil War from 1857 to 1870. In addition, the managers of this corporation continued to be

annoyed by foreign intervention -- as we have already mentioned, the stock was almost issued in

England -- so that they could not help adopting more conservative management policies than the ones

adopted if the capital had been contributed by the people living along the railroad line or at least

American people. In consequence, it did not implement the active management strategies adopted by

other competitive railroad corporations so that it often lost passengers and customers. It obtained only

temporary success which in turn, visited it as a loss afterwards(39). Moreover, it could not afford to

accept the requirements presented by the public, in particular, farmers.

We have analyzed the socio-economic conditions at the end of the 1860s and in the first half of the

1870s in which railroad regulation appeared, the changes in means of regulation and the management

conditions of railroad corporations in the state of Illinois. The state had double polarizations both in

population structure by occupation and in industrial production structure and consequently had a

temporary but considerably aggressive farmers' movement requiring anti-railroad and anti-

monopolistic policies. Under such circumstances, the discontent of farmers directly resulted in the

direct control of railroad business in which were fixed railroad rates by the government. In regard to

the indirect regulation method of accounting information disclosure, it was invalid because the

railroad corporations being regulated were forced to adopt unstable and profit oriented management

policies ignoring farmers' demand by foreign intervention and competitive pressure.

The trend of railroad regulations like Illinois expanded over Iowa, Wisconsin, Minnesota and the

states in the Mid-Western areas. Subsequently we should look at the development of direct fixation of

ratea by government in the state of Wisconsin. The assembly of Wisconsin passed the Potter Law

which was evaluated at that time as one of the strongest laws in Granger legislation. The analysis of

the development of railroad regulation in Wisconsin would be helpful as a supplementary analysis to

the state of Illinois.

According to the first annual report of the railroad Commissioners of the State of Wisconsin(40), the

Potter Law was the result of the efforts made by the producing population who were awakened to the

realities of unfair behaviors and of unreasonable rates taken for a long time by railroad corporations in

Wisconsin. This resulted in the Potter Law regulation for rate setting as a reaction to railroad's unfair

behaviors. For example, the legislature had rights to establish reasonable rates by setting maximum

total incomes or maximum earnings and to establish the maximum amount of investment in new

railroad lines. As a result, this law was particularly burdensome for the new railroad lines.

Furthermore, the regulation was not flexibly adapted so there emerged some bad influences. The

annual report of the Commissioners in 1874 had already suggested that investments in new lines were

little by little decreasing in length(41). Such a tendency increased in tension and afterwards railroad

corporations in Wisconsin stopped paying dividends. What was worse, general investment behavior in

Wisconsin became inactive, which led to the depression in the Wisconsin economy. The strong

railroad regulation in Wisconsin reflected in the Potter Law was unsuccessful, in provoking the

economic depression in the whole state. The Eighth Annual Report of the Commission of Wisconsin

issued in 1881 indicated that only five railroad corporations among at least thirty corporations

reported their dividends(42). The changes in miles of new railroads in Wisconsin were shown as Table

VII which was cited from the Fifth Annual Report of the Commission of Wisconsin issued in 1878(43).

--------------------------

Table VII about here

-------------------------

In this section, we analyze railroad regulation in the Mid-Western areas, in particular, in the state of

Illinois which was instigated by the Granger Movement. In the development of regulation, the means

of regulation using accounting information disclosure was invalid and the direct control of business

establishing reasonable rates was adopted in some states. Such a type of regulation obtained limited

success in Illinois but failed in many Mid-Western states typically exemplified by the development in

Wisconsin(44). Many states abolished the Granger legislations and some states relaxed their railroad

regulations. The state of Wisconsin changed its means of regulation from the direct control of

business to indirect regulation using accounting information disclosure(45).

On the other hand, the Granger Movement itself became inactive since the latter half of the 1870s

as it had achieved good results of passing Granger legislation in many states in the first half of the

1870s. The discontent and demand of farmers were changing in appearance from the Granger

Movement, the Greenback Movement to the Populist Movement(46). Finally we should add that the

Granger itself continued to function as a reciprocal organization for farmers.

III Railroad Regulation in the State of Massachusetts

III-1. Introduction There seems to be two types of railroad regulation in the Unites States occurring in the latter half of

the nineteenth century. Regulatory subject was uniquely the state which established railroad

commission or board of railroad commissioners. The data concerning the year when railroad

commissions were established in each state were offered in Table VIII(47). Although there were time

differences among states, each had a commission for regulating railroads.

We can classify two types of means employed by states in railroad regulation. The one was, as we

have already seen, direct control of business through establishing fixed rates. And the other was

indirectly by requiring only accounting information disclosure. The ratio of direct regulation to

indirect regulation could be informed from Table IX(48). We selected the state of Illinois as a typical

example of the former and the state of Massachusetts as typical of the latter. In the previous studies,

however, these two types of railroad regulation were not equally evaluated. Many historians attached

more importance to the direct control of business than to information disclosure. Previously it was

understood that the regulation of large corporations first required by farmers was conducted by the

state using the direct control of business which was succeeded by the Interstate Commerce

Commission and step by step strengthened by the Sherman Antitrust Act and the Hepburn Antitrust

Act. It means that the direct control of business continues to be dominant in the area of corporate

regulation in general. In reflecting such a general understanding, for example, R.V.Fletcher did not

evaluate the indirect regulation(49). H.U.Faulkner also said that (50);

(commissions of experts) were of two kinds: the strong commission, as in Illinois, with

power to regulate rates and enforce the law; and the weaker commission, as in

Massachusetts, with powers merely advisory and the duty to make reports to the

legislature.

These two researchers have a common characteristic of treating the function of information disclosure

lightly although Faulkner used such wording as " it may be said that the latter type in the long run

often proved to be the most successful"(50). But we want to re-evaluate properly the regulating function

of information disclosure in a mass democratic society to evaluate the accounting information

disclosure from the new socio-economic viewpoint. Then we can recognize the utilization of

accounting information disclosure by regulatory agencies of local and federal governments in the

development of regulating large organizations from the latter half of the nineteenth century to the

beginning of the twentieth century in addition to employing direct control of business. The ultimate

purpose of this chapter is to clarify the socio-economic foundations of modern accounting information

disclosure by studying the concrete reasons why two different types of regulation appeared in

different states having different social structures and different industrial structures. In this section

we try to analyze the socio-economic conditions and the development of railroad regulation in the

state of Massachusetts in contrast to the ones in the state of Illinois. Before this analysis the survey on

the development of the railroad and its surrounding interests in Massachusetts will be offered in the

next subsection (III-2.).

III-2. Conditions of the State of Massachusetts(51)

First of all, we must evaluate the significance of railroad construction in the state of Massachusetts

of the nineteenth century in the light of the development of railroads in the United States. Generally,

the early period of constructing railroads in the United States was divided into four stages. In the first

stage, short line railroads were constructed as supplementary transportation to river transportation

mainly in the East Coast states. This stage would correspond to the period extending from 1827 in

which was chartered the Baltimore and Ohio Railroad to the 1830s. Since then, railroad construction

began in Massachusetts. The second stage corresponded to the period extending from the 1840s to the

1850s, in which railroad industry was established as the center of economy and in which it was

completed the construction of four trunk line railroads. A large amount of capital also began to flow

from England in this period(52). The third stage included the period in which large railroad

corporations wove the mesh of railroad transportation all over the states. This period falls from the

1860s to the first half of the 1870s. The fourth stage comes under the period beginning from the latter

half of the 1870s when investment bankers entered into railroad industry by reorganizing stagnant

railroad corporations. It was a sign of monopolization which would blow up in and affect all

industries at the turn of the century.

The first stage was the stage in which railroads were employed as supplementary to steam boats

and were unanimously built and financed by the merchants and the bankers of large cities in the east

coast or by the aid of local governments in an attempt to join their own cities and trunk canals. The

ultimate end was to join them to the Mid-Western granaries. The Mohauk and Hudson Railroad and

some railroads in Massachusetts were constructed under such intention. How some large cities in the

east coast were eager to obtain the leading and central position in the mesh of railroad transportation

would be exemplified by the competition between the Mohauk and Hudson Railroad and the one in

Troy(53).

The second stage was the one of completion of trunk lines which extended from the east coast

through the Appalachians to Lake Erie, that is, to the Mid-West. The New York Central Railroad had

the first trunk line. It was established in 1853 by merger but its antecedents were jointly connected to

each other to become a trunk line. In the 1850s, the Pennsylvania Railroad, the Erie Railroad and the

Baltimore and Ohio Railroad in succession completed trunk lines. In this period, capital came from

England to be invested in the expansion of trunk lines. For example, the Pennsylvania Railroad

promptly decided to introducecapital from England for expanding its lines(54).

The 1860s was the third stage. Railroad construction was stimulated by the famous executives with

which the railroad corporations were identified after years. For example, C.Vanderbilt of the New

York Central and J.Gould of the Erie have even now stable positions in American business history.

They accumulated their properties commonly by manipulating the stock of their corporations

and they deserved being criticized by the public. The managements and promoters in this period,

however, had such common characteristics. In fact this period is even now called the " Gilded Age."

Thus farmers became discontent at watching exactly the behavior of these managements.

The management style and the competition of constructing railroads in the third stage had relatively

shorter lives. In the fourth stage, investment bankers including J.P.Morgan showed off their financial

power by reorganizing railroad corporations that had gone bankrupt in the 1870s' depression. After

that, they began to play an important role in the merger movement at the turn of the century on the

base of financial powers accumulated in the process of railroad reorganizations.

The first three stages of railroad development is the subject of my analysis concerning railroad

development in Massachusetts. At this point it seems proper to offer the data with regard to railroad

miles constructed in the northern areas of the United States (see Figure II(55)).

-------------------------

Figure II about here

-------------------------

Judging from Figure II, the miles of railroad in the New England states remained on a stable level at

least since the 1860s. It means the cease of intensive railroad construction in the New England. The

New England states include Main, New Hampshire, Vermont, Massachusetts, Rhode Island and

Connecticut

Now we turn our attention to the trend of interest groups surrounding railroad industry in

Massachusetts(56). They had a leading position among the East Thirteen states after Independence.

Although since the first issue of the Census statistics in 1790 the total population of the United States

increased in percent to 150% by 1820, the one in the Massachusetts increased only 30%. It seems that

the states to the west of the East Thirteen states including Kentucky, Tennessee, Ohio, Louisiana,

Indiana, Missouri, Illinois, Alabama and so on, made progress rapidly while Massachusetts remained

stable in progress.

Boston which is the most populous city in Massachusetts prospered as a center of domestic and

international trade. It gathered products from New England, India, China, and the East and the West

islands of India, and shipped them not only to American domestic markets but also to remote

European markets. This was the case for some another cities in Massachusetts so that they could

accumulated considerable capital to contribute to the subsequent industrial revolution and

economic development in this area.

This prosperity from international trade enjoyed by some cities in Massachusetts was attributed to

their geographic superiority. Entering into the nineteenth century, New York became a menace to

Boston because the former, facing the Hudson River, was superior to the latter in geographic position

for connecting domestic trade to international trade. Additionally the state of New York completed the

Erie Canal in 1825 under the direction of D.W.Clinton. By this canal New York held an unshakable

position in connecting the Pacific Ocean and Lake Erie, that is, between international trade and

domestic trade. In considering the economic affairs surrounding Massachusetts, we can easily imagine

that social and local economic-interest groups commonly recognized the importance of improving

inner-state transportation and of expanding it to the West(57).

Turning to the economic and industrial conditions within Massachusetts, merchants were

gradually missing their opportunities of investments in competing with the ones in New York. The

accrued extra capital, however, fostered the cotton industry in this area. For example, the Boston

M.Company established in 1813 in the East of Massachusetts succeeded in the cotton industry and

recorded a seventeen percent dividend in 1817. Thus Boston was enlivened again by the development

of the cotton industry.

Agriculture in Massachusetts at this time was also prosperous in Worcester and the Worcester

Agricultural Society was organized in 1825. This area became active in the cotton industry, beginning

in the 1830s.

The coexistence of the cotton industry, of the agriculture and of the demand for farming

implements brought birth to the steel industry in Massachusetts. As a reference we should cite from

the McLane Report the data concerning the cotton and the steel industries in Massachusetts in this

period(58) .

-----------------------

Table X about here

-----------------------

Massachusetts was at last re-established as one of the biggest industrial districts in the United States

when it changed its economic structure from the international commercial trade to the production

industry. Consequently, Massachusetts was characterized as one of the foremost states in regard to the

American Industrial Revolution and continues to be analyzed until now by many researchers. As a

researcher gave importance to the cotton industry(59), so another researcher paid attention to the steel

industry(60). But the existence of agriculture should never be neglected. With their economic power the

merchants and bankers in Boston still had a large influence. It should be taken into consideration the

distribution of industry by the region shown in Table X. We should confirm here one important

characteristic concerning the economic structure of Massachusetts. Massachusetts had first an

experience of modern industrialization in the United States and had also first an experience of having

the socio-economic structure typically recognized in the highly developed capitalistic economic

society. There emerged many organized interest groups which included not only the traditional

farmers and merchants but also the professional people who accrued from the capitalistic production

system. The regional conflict had already been recognized since the 1830s. Then we must conclude

that the state of Massachusetts had already produced the prototype of the modernized socio-economic

structure which would become dominant by the industrial monopolization movement in the United

States as a whole at the turn of the century and in which the managements of relatively large

corporations actively adopted management policies in considering into accounts and reacting to the

demands and requirements proposed by many different organized interest groups.

III-3. Analysis of Railroad Regulation in the State of Massachusetts

The analysis concerning the development of railroad regulation in the state of Massachusetts will

be offered in this subsection. Since the 1820s, the railroad construction from Boston to Albany in the

state of New York was earnestly studied in Massachusetts. The main issue of railroad construction

was a financial problem. That is, which should contribute the funds, the state government or the

private sector ? If the state government would finance the railroad construction, it meant that the state

people as taxpayers substantially had to pay the costs which were involved in the construction. Thus,

the necessity of the railroad was discussed in terms of the interests surrounding the railroad. We must

pay attention to the fact that the discussion was conducted in the form of town meetings which were,

of course, the democratic tradition of Massachusetts(61). As a result, the Boston and Worcester

Railroad was chartered for constructing a railroad from Boston to Worcester located in the middle of

the way to Albany(62). But many local governments in the state of Massachusetts did not financially

support the railroad construction including the Boston and Worcester Railroad(63), even though

state governments in the United States generally and substantially financed the large social

infrastructures in this period. This fact meant that the general public in Massachusetts had not yet

evaluated the usefulness of railroads(64). Although refusing to finance railroad construction, the state

government had a right to charter it because the establishment of the corporation was based on the

charter system(65). Then the real issue was what kind of power the state should give in the charter to

corporations which would undertake railroad construction. The wording of the charter saved face for

the regulators and anti-monopolists who feared the monopolization of railroads , but the substance

gave to the private investors, that is, stockholders, nearly everything they desired(66). S.Salsbury

said that;

The legislature, however, insisted that the railroad should keep no secrets. To this end the

directors were to report annually to the General Court the company's receipts, expenditures,

and operations. As if this were not enough, the charter added that the corporation's books "

shall at all times be open to the inspection of any Communities of the Legislature." Stiff

penalties would result from failure to so comply(67).

In Massachusetts at this time, it had already become an important issue to adjust the differences of

interests concerning railroad among several varied interest groups which consisted of banking, real

estate holding, wholesale, retail, merchandising, investing, manufacturing and so on(68). We can cite

the following sentences from S.Salsbury again;

(The history of railroads in this period in Massachusetts was) ...the history of how these

powerful groups exerted pressures to force the railway managements to serve particular

interests(69),

and also was the history of adjusting conflicting interests. But after all the Boston and Worcester

Railroad was welcomed at its opening in April of 1834 because the success of the Baltimore and Ohio

Railroad had already been confirmed(70).

We focus on the conflicting interests and its adjustment process of railroads in Massachusetts in the

rest of this subsection.

The managements of the Boston and Worcester Railroad were oriented to local interests so that the

board of directors intensively discussed the rate setting policy. In the 1830s, directors D.Denny and

D.Henshow, insisted that low rates were beneficial both for the public and for the railroad itself in the

long run(71). On the other hand, N.Hale supported by the interests of banks, favored raising the rates.

This conflict ended in a temporary policy of raising rates. But the rates were cut down when the

earnings of the railroad increased in 1839(72). These facts tell us that the management of the railroad

was conducted in consideration of the interest groups involved.

By the way, the Western Railroad was also chartered for extending its railroad to Albany in March

of 1833 after the charter of the Boston and Worcester Railroad. Now we must look at financing of this

new railroad. The board of directors of the railroad needed very badly the financial support from the

state government. Then directors G.Bliss,Jr and J.Willard asserted the establishment of the State Bank

of Massachusetts by the charter which assured the purchase of the stock of the Western Railroad by

the bank. But this assertion was opposed by democrats. Thereafter, the railroad began to obtain the

support of the public and it succeeded to earn the support of two counties, Franklin and Hampshire

because it had succeeded in obtaining the agreement of the journals, Courier and Mercury. After that,

the plan of establishing the state bank itself was revoked by democrats but still the railroad was

successful in obtaining financial support from the state in the sense that the state came to purchase one

third of the stock issued by the Western Railroad(73). On account of this fact, the railroad included the

state as stockholders in its interest groups.

There appeared a conflict among real estate holders because the prices of the real estate fluctuated

depending upon the location of railroad stations. The town of Worcester held mass meetings for

opposing and protesting the one sided decision of stations' location by the Western Railroad and for

communicating the public's demands to the railroad(74). On the other hand, the Western Railroad issued

the bulletin " Address to the People " for appeasing the public(75). This could be considered as a kind

of disclosure policy taken voluntarily by the corporation.

Next we discuss another conflict concerning the rate setting policy among directors of the Western

railroad in the 1840s. When he asserted that the railroad could be managed on the same low rate basis

as the steam boats, E.H.Derby wanted to hold actual control power over the corporation by winning

the support of the public. W.Jackson naturally opposed the opinion of Derby because of its

impossibility. The interesting point was the means by which Derby gradually obtained the support of

the public. He explained to the public that the railroad could conduct business on the same rate basis

as the Erie Canal through some articles in journals and some addresses by using statistical simulations.

The statistical data contained the net income calculated from the total revenue and expenditures of

labor cost, maintenance cost and so on accrued on the condition that the transportation facilities of the

Western Railroad were fully and completely operated(76). This discussion ended up to the compromise

that the low rate was adopted concerning the passenger and the high rate was supported in the case of

freight(77). The discussion regarding rate setting exactly indicates the monopolization of railroad

industry in Massachusetts according to a railroad fee theory(78).

The fact that the information disclosure regarding railroad corporations became worthy of notice,

in other words, the fact that the public always watched the behaviors of railroads, pressed the state

assembly to pass the law regulating the accounting procedures of railroad corporations in 1846 before

the establishment of the Board of Railroad Commissioners. It seems that this law gave influence to the

subsequent accounting information disclosure of railroad corporations in Massachusetts(79).

We tried to describe the circumstances surrounding railroads and the behavior of management in

the first half of the nineteenth century in Massachusetts by referring to the cases of the Boston and

Worcester Railroad and the Western Railroad as historical instances. This analysis should clarify that

it was necessary for the railroad corporations in Massachusetts to conduct management behavior in

consideration of several opposing interest groups -- the public as a whole -- into account. For example,

information disclosures were employed to appease and to persuade the public. This meant that the

railroads began to have monopolistic powers and to allow a margin for adopting modernized

democratic management policy. We can supplement this assertion by showing the stable and

increasing propensity of dividends for the two railroad corporations ( see Table XI(80)). The public of

Massachusetts criticized and watched railroads only after they affirmed the existence of the railroads.

The conservative opposition to railroads in a sense on the side of the public was exactly reflected in

the gradual increase in the number of passengers. Table XI can also offer data with regard to two

railroads' passengers. Thus the situation in Massachusetts contrasts remarkably with the one in

Illinois.

------------------------

Table XI about here

------------------------

In following the way of monopolization, railroads gradually extended(81). The Boston and Worcester

Railroad and the Western Railroad merged into the Boston and Albany Railroad. This merger was

accelerated by competition from the New York Central Railroad(82). And in 1869 the Board of

Railroad Commissioners was established in bringing with only the information disclosure

requirement(83). Then we should analyze, first of all, the content of the requirement by referring to the

First Annual Report issued by the Board(84).

The most important function to be conducted by the Board was to inspect both the management

ways and conditions and the obedience to their own charters and to the laws in Massachusetts of

railroad corporations by referring to the annual reports filed by railroads for the purpose of evaluating

railroads within the state in terms of the public's safety and convenience. So the Board had a right to

visit for inspection any railroad within the state when necessary. The duties and rights of the Board

were provided by Section 3 in Chapter 408 of the law passed in 1869. According to the law,(85)

Commissioners shall inform such railroad corporation of the improvements and charges

which they adjudge to be proper and a report of the proceedings shall be included in the

annual report of the commissioners to the legislature.

In other words, the Board was invested only with the duty and right to counsel improvements and

to report them to the legislature when railroads violated their charters or laws. The legislature

disclosed the facts. Naturally the Board itself was at the beginning bewildered by its limited powers.

For example, when the Board was consulted in the case of the Boston and Lowell Railroad's refusal to

offer transportation service to a certain customer, it could not bring the railroad to court by itself

because of its limited rights. With regard to this case, the Board expressed its regret in the First

Annual Report(86).

Then we would like to know whether the way of regulation adopted by the Board in Massachusetts

was successful or not. It is generally understood that the Board was established only to assure the

publicity of the railroads because of holding no power to directly control railroads. So the Board was

treated lightly and was itself annoyed. As we have already pointed out, some historians did not

evaluate the Board and its regulating power. The descriptions drawn by A.T.Hadley and F.C.Clark(87)

is, however, useful for answering this question from another viewpoint. They insisted on its

successfulness. As far as we agree with the opinion of Hadley, we must indicate originally some data

supporting its successfulness. Concretely, the passenger rates both in Illinois and Massachusetts are

offered as Table XII(88). According to Table XII, the decrease in price for passenger rates was

observable in both states.

-------------------------

Table XII about here

-------------------------

If we can say that the railroad regulation system, that is, regulation by (accounting) information

disclosure in Massachusetts was at least partly successful, we must next sum up the reasons. As a

matter of fact, the reasons are expected to suggest also the socio-economic foundations for modern

accounting information disclosure typically observable in a modern capitalistic economy.

The first reason is that the railroad corporations in Massachusetts were sensitive to public opinion.

The persons holding property rights, including the stock reflecting equity and managers managing

them, had to regard for others to protect their property rights because the concept of property right

itself was relatively new one and consequently was not defended by long term conventions. In

particular, the large monopolistic railroad corporations were apt to be criticized and to be watched by

the public because they earned considerable profits and in turn they actively adopted a management

policy for keeping the public in good humor. On the other hand, it can be understood that the Board in

Massachusetts expertly read the tendency of the railroads. The Board, for example, educated public

opinion so that the public voluntarily demanded improvements to railroads. By depending on this

policy the Board could force the railroads to install safety devices and to run the trains beneficially for

local industries in addition to setting reasonable rates which were intended. These functions seem to

be inherent in information disclosure systems. The publicity had substantial power over requiring

respect and obedience from the railroads(89).

The second reason is that the interests both of railroads and the public in the long run came to an

agreement. If the management of large railroad corporations had intended only to make their

dividends as large as possible, it would have been possible by oppressing the local transportation

companies. But if they had done so, they would have lost connection with local transportation services

and would have had to invest huge funds into local services. Needless to say, such a policy was very

dangerous for the railroads themselves. Then for railroads there was a necessity to keep harmony with

the local transportation companies. By forcing the railroads to disclose their management and

accounting information, the Board could prevent the oppression of the public's interests caused by

possible the railroads' short-profit maximizing behavior. On the one hand, the function of information

disclosure allowing the public to watch the management behavior of large corporations and on the

other hand, the existence of monopolization of the railroad industry, both were prerequisites to the

prevention of immoderate management of railroad corporations. Although the Board of Massachusetts

also employed this function of information disclosure, it did not appear to be sufficiently evaluated for

its results(90).

The third reason is that the railroad industry in Massachusetts had a relatively long history and

consequently had entered into stable business conditions. We have repeatedly mentioned, there existed

no active competition and no aggressive management behavior(91). As free competition was valid for

expanding rapidly the railroad mesh at the sacrifice of the public's interests, so the monopolization of

railroad industry was a prerequisite to a high quality transportation system and management system to

railroads. Generally the monopolization or oligopolization seems to be an economic prerequisite to

the social structure in which the public can inspect the management behavior of big businesses by

using management and accounting information disclosure and can also demand their improvements

and big businesses can, in turn, take moderate management policies in reacting to public opinion. Of

course, such a social structure was for the first time realized in smaller size in the state of

Massachusetts, than in the United States as a whole at the turn of the century. We can not also ignore

the coexistence of several organized interest groups, that is, the organized public as a whole.

The fourth reason is that there was an ideal and an institutional tradition with regard to democracy

which was typically reflected in the town (or mass) meeting in Boston. The tradition gave active

influence to the public's function of watching big corporations.

The state of Massachusetts succeeded in railroad regulation by using only information disclosure in

the above mentioned four reasons, which brought about two derivative effects. The one was that there

was no support among the members of the Board for nationalization of railroad. The other was that

some states gradually adopted railroad regulation by information disclosure accompanying

improvements of some accounting techniques and rules, especially after the Granger Movement was

finished about 1878(92). Such states naturally experienced the changes in their socio-economic

structure into a modernized one like Massachusetts. The real case of Wisconsin has been already

offered in the previous section. Before long, the Interstate Commerce Commission would adopt the

accounting information disclosure as a measure of big business regulation at the Federal Government

level.

IV Conclusion

In this chapter, we have analyzed the development of railroad regulations both in the mid-western

states and in the East Coast states for finding the socio-economic foundations of the modern

accounting information disclosure typically conducted by modern big business. Thus we would like to

sum up some analytical results as conclusions, although we should recognize that the limited number

of sample states may result in a limited conclusion. The period treated in Section III was older than

the one in Section II. The peculiarity of the state of Massachusetts determined that the modernized

socio-economic structure in which the several organized interest groups watched the railroads, caused

the railroads, in turn, to adopt moderate management policy for appeasing them. At the beginning, the

people in Massachusetts doubted the necessity of a railroad but after that they began to criticize the

railroad after accepting its existence. The democratic tradition continued to remain in Massachusetts

and such a socio-economic structure enabled the Board of the Railroad Commissioners established in

1869 to succeed in regulating railroads by utilizing only accounting information disclosure. At this

point we must attend to the fact that resolution of the economic problem by accounting information

disclosure could never become the essential resolution to the economic problems in this period

accrued from the capitalistic production system which was gradually penetrating into the United

States as a whole. The resolution of economic problems by accounting information disclosure is only

a temporary resolution on the condition that the capitalistic production system was extending, that is,

monopolization was expanding.

The polarization of the economic interest groups resulted in the strong and direct control of

business of railroad corporations by the state legislatures in mid-western states. In such circumstances

there emerged the polarized conflict between farmers and railroads so that farmers required strong

regulations over railroads. It seems, however, that farmers were essentially conservative in nature.

The strong regulations became invalid after they prevented sound economic development in some

certain states. In Mid-Western states, several interest groups were gradually organized within a state

and after that these organizations extended beyond the boundary of states to become nationa wide.

This was the case even for farmers. All the interest groups, including farmers were incorporated into

the reproduction system of big business enterprises.

We dare to say that the socio-economic structure established in Massachusetts in the middle of the

nineteenth century was in similitude formed at the turn of the century in the United States as a whole

as a result of appearance of modern big business system or modern industrial monopolization. In

regard to the accounting information disclosure, new big businesses, for example U.S.Steel, other than

railroad corporations also began to adopt it to reconcile the anti-monopolistic movement developed

actively at the turn of the century. We can also find in the Progressive Movement the real case of

emerging democratic ideology like a town meeting tradition in Massachusetts. The analysis of these

phenomena will be conducted in the next chapter.

Notes(1) The effects that were brought about by the development of railroad industry in the United States were

differently evaluated among economic historians including W.W.Rostow and R.W.Fogel.

(2) Syoujirou Ishii, Amerika Tetsudou Ron, Cyuoukeizai-sya, 1974, p.67.

(3) The references of this subsection are as follows; A.Fishlow, American Railroad and the Transportation of the

Ante-Bellum Economy, Massachu- setts, Harvard University Press, 1965. P.H.Cootner, " The Role of the

Railroads in United States Economic Growth," The Journal of Economic History, Vol.23, No.4, ( December,

1963). Suzuki,Keisuke and kouji Nakanishi, " Amerika Shihonsyugi no Hatten to Tetsudougyou --

Nanbokusensou Izennojiki wo Cyuusinni --,(1)(2)(3) " Syakaikagaku Kenkyu, Vol.22, No.4( March, 1971 ),

Vol.22, No.5.6 ( March, 1971 ), Vol.22, No.2 (November, 1971).

(4) E.W.Bemis, " The Discontent of the Farmer," The Journal of Political Economy, Vol.I, (March,1983).(5)

Ibid., p.202.

(6) T.B.Veblen, " Price of Wheat Since 1867," The Journal of Political Economy, Vol.I, ( DEcember,1892).

(7) E.W.Bemis, op.cit., p.204.

(8) F.A.Schannon, The Farmer's Last Frontiers, New York, Holt Rinehart and Winston, 1961, pp.296-297.

(9) For example, railroads charged an unreasonably high rate to weak and uninfluential farmers while they

issued free pass tikets to influential politicians and attorneys and paid rebates to major grain companies.

Furthermore, they charged higher rates in the non-competitive area than in the competitive area even on the

same railroad line. These oppressive railroad actions were caused by arbitrary rate setting policy easily

manipulated by railroads. W.Z.Ripley, Railroads; Rates and Regulation, New York, Longmans, Green, and

Co., 1913, Chapter VI, "Personal Discrimination," Chapter VII, "Local Discrimination,". Kenji Ozawa,

"19seiki Kouhan no Amerikani okeru Noumin Undou no Tenkai (2)," Nougyou Sougou Kenkyu, Vol.29,

No.3 ( July, 1975), p.65.

(10)E.W.Bemis, op.cit., pp.195-198.

(11)Ibid.,pp.193-194.

(12)Ibid.,p.199.

(13)Ibid.,pp.198-199.(14)Ibid.,pp.199-200.(15)The references in this subsection were as follows; C.C.Taylor,

The Farmers' Movement, 1620-1920, New York, American Book Comapny, 1953. F.A.Shannon, The

Farmer's Last Frontier, 1961. S.J.Back, The Granger Movement, Lincoln, University of Nebraska Press,

Originally published in 1913. Kenji Ozawa, " 19seiki Kouhan no Amerikani okeru Noumin Undou no

Tenkai (1)(2)(3)(4)," Nougyou Sougou Kenkyu, Vol.28, No.2 ( April, 1974), Vol.29, No.3 ( July, 1975),

Vol.30, No.4 ( October, 1976), Vol.32, No.3 ( October, 1978).

(16)C.C.Taylor, op.cit., p.78.

(17)Ibid., p.79.

(18)Ibid., p.79.

(19)Kenji Ozawa (2), op.cit., p.49.

(20)Ibid., pp.49-50.(21)C.C.Taylor, op.cit., p.117.

(22)The conservative and petit-bourgeois nature of farmers does not seem to be directly reflected in the Granger

Movement. But the nature of farmers should be closely related to the reasons why farmers could not

actively revolve the social structure and why they could not help being incorporated in the capitalistic

production system at the turn of the century in spite of the fact that they substantially and continuously

had organized the Granger Movement, the Greenback Movement and the Populist Movement.

(23)The following three tables have different sources so that their numerical data are slightly different from

each other. We can, however, roughly know the changes both in the number of Granges and in the number

of their members. Table III and Table IV were cited from, Kenji Ozawa, op.cit., (2), pp.51-52. Table V was

calculated by the writer based on the data of, C.C.Taylor, op.cit., pp.135-137.

(24)The discussion developed below was based on the following references; S.J.Back, The Granger

Movement, Chapters IV,V,VI. H.G.Brownson, History of the Illinois Central Railroad to 1870, Illinois,

University of Illinois, (reprinted in 1967). J.Cornelius, A History of Constitution Making in Illinois,

Illinois, University of Illinois, 1969.

(25)In the state of Illinois, there existed the Illinois State Farmers' Association other than the Granger. They

developed farmers' movements at the same time. C.C.Taylor, op.cit., p.103.

(26)S.J.Back, op.cit., p.128.

(27)J.Cornelius, op.cit., p.58.

(28)Ibid., p.59.

(29)S.J.Back, op.cit., pp.129-130.

(30)The writer made this table based on the 9th Census of the United States.

(31)J.Cornelius, op.cit., p.43.

(32)In particular, the content of railroad regulation in Illinois was written in detail in the First Annual Report

of the Railroad and Warehouse Commission of the State of Illinois, 1872.

(33)Ibid., p.4.

(34)Ibid., p.5.(35)The Fourth Annual Report of the Railroad and Warehouse Commission of the State of Illinois,

1874.

(36)The detail of this case could be offered in the following book; Amerika Gakkai translates and edits, Genten

Amerikasi, Yuwanami Syoten, 1979, Vol.4, " Mann vs.Illinois, 1876, ".

(37)Ibid., p.152.

(38)R.P.Howard, Illinois: a History of the Prairie State, Michigan, William B. Erdamans Pu. Company, 1972,

p.364. The Tenth Annual Report of the Railroad and Warehouse Commission of Illinois, 1881, pp.20-21.

Frederick C.Clark, " State Railroad Commissions, How They May Be Made Effective," Publications of the

American Economic Association, Vol.VI, American Economic Association, 1891.

(39)H.G.Rroenson, op.cit., p.73.

(40)The First Annual Report of the Railroad Commissioner of the State of Wisconsin, 1874.

(41)Ibid., p.94.

(42)The Eighth Annual Report of the Rairoad Commissioner of the State of Wisconsin, 1881, p.xxiv.

(43)The Fifth Annual Report of the Railroad Commissioner of the State of Wisconsin, 1878,p.iv. We must

consider into account the fact that the United States as a whole suffered from an economic depression from

1873 to 1878. Nonetheless, it is surprising that Wisconsin decreased in newly constructed railroads, in miles

from about 80% to 90%, which was considerably below the average of decrease in the United States as a

whole.

(44)A.T.Hadley, Railroad Transportation, Its History and Its Laws, New York, G.P.Putnam's Sons, 1903,

pp.135-136.

(45)Ibid., p.135.

(46)A.Rochester, The Populist Movement in the United States.

(47)Hideyoshi Satou, " Amerika no Kinyuushihon Seiritsukini okeru Syuni yoru Tetsudou Jigyou Kisei no Hou

Kouzou," Waseda Hougaku Zasshi, Vol.20, 1969. p.177.

(48)Ibid., p.178. The regulation should be within states when we consider that the Interstate Commerce

Commission had already established.

(49)Ibid., pp.184-185.

(50)H.U.Faulkner, American Economic History,

(51)The discussion developed below was based on the following books and papers ; J.Moody, The Railroad

Builders, New Haven, Yale University Press, 1920. A.F.Harlow, The Road of the Century, New York,

Creative Age Press, Inc., 1947. Suzuki, Keisuke and Kouji Nakanishi, " Amerika Shihonsyugi no Hatten to

Tetsudougyou -- Nanbokusensou Izennojiki wo Cyuusinni --,(1)(2)(3) " op.cit..

(52)Jirou Ozawa, " Amerika no Tetsudou Kensetsu to Igirisu Shihon," Syakai Keizai Shigaku, Vol.38, No.5

( January, 1973 ).

(53)Takashi Mori, " New York Central Railroad Kaisya no Seiritsu," Keizaigaku Kenkyu, Vol.29, No.3 (August,

1979), Section IV.

(54)Takashi Mori, " Pennsylvania Railroad niokeru Shihon Chikuseki no Tenkai," Keizaigaku Kenkyu, Vol.17,

No.4 (December, 1967).

(55)Suzuki Keisuke and Kouji Nakanishi, op.cit., (2), p.54.

(56)The discussion developed below was based on the following books; S.Salsbury, The State, the Investor, and

the Railroad; The Boston & Albany, 1825-1867, Massachusetts, Harvard University Press, 1967. Tadakatsu

Inoue, Amerika Keieishi, The Research Institute for Economics and Business Administration, 1961, pp.57-

98.

(57)S.Salsbury, op.cit., Chapter I.

(58)The data was reproduced based on the original data in; Toshirou Kusui, Amerika Shihonsyugi to Sangyou

Kakumei, Koubundou, 1970, pp.463-497.

(59)Ibid..

(60)Keisuke Nagata, Amerika Tekkougyou Hattatsushi Josetsu, Nippon Hyouronsya, 1979.

(61)S.Salsbury, op.cit., Chapters I,II.

(62)The public campaign in the journal, Daily Advertiser, conducted by editor N.Hale gave much influence to

the establishment of the railroad. C.J.Kennedy, " The Early Business History of Four Massachusetts

Railroads," Bulletin of the Business Historical Society, Vol.XXV, No.1 (March,1951).

(63)The Boston and Lowell Railroad and the Boston and Providence Railroad were also included.

(64)S.Salsbury, op.cit., pp.80-81.

(65)Kazuhiko Tamamura, " Amerikani okeru Tetsudou Kensetsu no Keizaiteki Haikei, Doushisya Syougaku,

Vol.20 No.3.4 (February,1969).

(66)S.Salsbury, op.cit., p.81. At that time, It was generally understood that railroads were treated in the same

way as highways. But the mangement of railroads was different from the running of trains and cars on it.

(67)Ibid., p.89.

(68)Ibid., Chapter V.

(69)Ibid., p.92. The sentence within parentheses was inserted by the writer.

(70)Ibid., p.132.

(71)Hiroshi Morikawa, Genkasyoukyaku Ron, Moriyamasyoten, 1978, pp.76-77.

(72)S.Salsbury, op.cit., p.125. As a reference, the rate between Boston and Worcestor from 1836 to 1839 was

4.51 cent per mile. From 1839 to 1840, it decreased to 3.38 cent. C.J.Kennedy, " The Early Business History

of Four Massachusetts Railroads -- IV," Bulletin of the Business Historical Society, Vol.XXV, No.4

(December, 1951), p.211.

(73)S.Salsbury, op.cit., p.143.

(74)Ibid., p.166.

(75)Ibid., p.146. The annual reports disclosed in detail information on the Western Railroad. Or Hiroshi

Morikawa, op. cit., pp.83-87.

(76)S.Salsbury, op.cit., pp.213-214. C.J.Kennedy, op.cit.,(IV), pp.222- 224.

(77)Yasuo Ikuta, Amerika Kokuminkeizai no Seisei to Tetsudou Kensetsu -- Amerika Tetsudou Keizai no

Seiritsu --, Senbundou, 1980, p.250.

(78)Ibid., p.252.

(79)Hiroshi Morikawa, op.cit., pp.93-102.

(80)S.Salsbury, op.cit., pp.213-214. The Data were rearranged based on original data.

(81)From the end of the 1840s to the 1850s there appeared managers who gave the first importance to profit

maximization of railroads while adopting information disclosure as a management policy. We can point

to G.Bliss,Jr. of the Western Railroad as an example. We do not insist that there always emerged

managements who took the interests of the public into consideration. On the contrary, we should say that

G.Bliss,Jr. was a kind of modern manager.

(82)S.Salsbury, op.cit., Chapter XIII.

(83)The following book and paper are useful for understanding the establishment of the Board in Massachusetts;

C.F.Adams, Jr., " The Railroad System," contained in, C.F.Adams, Jr., and H.Adams, Chapters of Erie, New

York, Augustus M.Kelly, 1967, originally published in 1871.

(84)The First Annual Report of the Board of Railroad Commissioners, Massachusetts, 1870.

(85)1869. 408 Section 3.

(86)The First Annual Report of the Board of Railroad Commissioners, Massachusetts, 1870.

(87)The following book and paper are helpful for deciding whether the railroad regulation in Massachusetts was

successful or not; A.T.Hadley, Railroad Transportation, Its History and Its Laws, op.cit.. F.C.Clark, " State

Railroad Commissions, and How They may be Made Effective, " op.cit..

(88)The Sixth Annual Report of the Railroad and Warehouse Commission of the State of Illinois, 1876, pp.446-

447. The Seventh Annual Report, Appendix, pp.70-71. The Eighth Annual Report, Appendix, pp.84-85. The

Tenth Annual Report, p.17. The Eleventh Annual Report of the Board of Railroad Commissioners of the

State of Massachusetts, 1880, p.12.

(89)A.T.Hadley, op.cit., p.137.

(90)Ibid., p.138.

(91)Ibid., pp.138-139.

(92)Ibid., p.137.

Chapter TwoAccounting Information Disclosure of Multinational Enterprises in

Contemporary Times

I Introduction

With business firms internationally developing and influencing each other, accounting practices in

business firms of many countries will also be reciprocally affected. In particular, multinational

enterprises and their accounting practices sometimes cause difficulties both in some aspects of

businesses and in some countries. Actually these difficulties need international adjustment and

rearrangement. In focusing on accounting problems regarding technique, some issues may be

promptly pointed out. For example, international integration and adjustment of accounting standards

and principles should be reached out for the purpose of internationally comparing financial statements

issued by firms of some different countries. Some unsolved accounting problems should be resolved

for evaluating as a whole the financial position and operating results of multinational firms which

have many foreign affiliated companies and operate in different currencies. Needless to say, we are

writing about difficulties in translating different currencies and internationally consolidating financial

statements. With regard to the political problem surrounding international accounting, international

competition among some developed capitalistic countries are carried out for obtaining leading

positions in regard to adjusting accounting principles. Furthermore, we can recognize the effect of the

North-South problem in related to the extent of accounting information disclosed by multinational

enterprises.

When we analyze international accounting, we should essentially take many issues into

consideration. But in this chapter we exclusively focus on the international accounting information

disclosure by depending on the statements and reports published by the United Nations. This

necessarily means that we will analyze some issues of the accounting information disclosure of

multinational enterprises colored by the North-South problem.

By the way, it should be better to pointed out here that the conclusion drawn from the analysis of

preceding chapter concerning the relation between American railroad regulation in the 19th century

and the emergence of modern accounting information disclosure, must be helpful for understanding

the important point at issue of the contemporary accounting information disclosure of multinational

enterprises colored by the North-South problem.

II Emergence of Accounting Information Disclosure of Multinational Enterprises

Firms which have accumulated considerable capital, plan to extend their business activities over

geographical and legal boarders. They become so large that they conduct simultaneously important

business in different countries, although at the beginning they operated mainly in their mother

countries. In such a case, however, the authority of management control is usually not commissioned

to and is not delegated among managers of different countries. If we can label "multinational

enterprises", firms of which business activities are internationally extended(1), the history of such firms

seems to be old in the United States(2). But it was in the 1960s that there emerged apparently big

businesses having active global organizations in relation to the rapidity of communication. And the

1960s was a period in which multinational firms were actively and favorably evaluated(3).

Entering into the 1970s, the negative aspects of multinational enterprises were paid attention to by

many developing countries which had previously accepted multinational enterprises(4). The reason

why they came under criticism was partly that in this period the multinational enterprises having

mother countries other than the United States -- including England, France, West Germany and Japan

-- were also established so intensively that their activities affected considerably the international

economy and partly that they became noticeable because of their excessive activities. As a reference

we offer the data concerning the amount of international direct investment(5).

-----------------------

Figure I about here

-----------------------

Next we should point out some problems which multinational enterprises would cause in

accepting(host) counties since the 1970s. These problems were emerging between American

multinational companies and Japan, between American companies and France, that is, between

developed capitalistic countries, and they were also emerging between multinational enterprises

which have developed countries as their mother countries and developing countries. According to the

Report issued by the United Nations in 1973 [1], developed countries recorded two thirds of the

balance of foreign direct investment ( based on assessed book value) while developing countries

recorded only one third of the balance. This means that foreign direct investment was being carried

out mainly among developed countries and that developing countries accepted only one half of

international direct investment(6). In this sense, the problem accrued from foreign direct investment

was faced primarily by developed capitalistic countries. But " .... the presence of foreign multinational

corporations in the developing countries is generally of greater relative significance, since their

economies account for much less than half of that of developed market economies.(7)" So some

problems caused by multinational enterprises became more closely related to the North-South

problem.

We can consider the problems of multinational firms from different and various viewpoints such as

politics, economy, ethics and so on. The focus of this paper, however, should be placed on economic

problems. These must be classified as follows(8)(9);

I) aspect of industrial structure

i. monopolization or oligopolization

ii. limitation of validity of industrial policy

iii. outflow of production elements out of accepting countries

iv. creation of excess productivity

II)aspect of market

i. formation of oligopolized market structure

ii. evasion of taxation by using transfer pricing

III)aspect of labor

i. worse industrial relations accrued from violation of labor market rules

ii. fluctuation in employment coming from sudden entrance and retreat

IV)another aspect

i. effect over short-term capital movement

ii. currency manipulation

iii. effect over international trade balance

It will be useful for understanding the nature of the problem concerning multinational enterprises to

refer to the transfer pricing problem as an example.

It is usually understood that multinational enterprises purchase raw materials in the country where

the prices of materials concerned are cheapest, assemble them in the country where the labor cost is

lowest and sell finished products in the country where the selling prices are highest in taking the

shipping costs into account. Furthermore, there are ordinarily different taxation system on business

activities in different countries and the extents of inflation are also different among countries. Of

course multinational enterprises must take all factors into account for world-wide profit maximization.

Consequently, they adopt transfer pricing policy in taking most advantage of these factors. By shifting

materials and finished goods around the world, they manipulate transfer prices for minimizing

corporate income tax payment.

On the other hand, accepting countries may not be able to recover funds through tax payment by

which they can fix and reproduce the damaged and amortized social capital caused by multinational

enterprises' production activities if transfer pricing policy is not interfered with even on the condition

that the economic activities of accepting countries take a turn for the better. Thus, accepting countries

naturally require the tax payment which offsets the costs which are involved in business activities of

multinational firms in accepting countries. In the 1970s we could recognize conflicts between

accepting countries and multinational firms. This is typically one of the problems concerning

multinational enterprises. In particular, developing countries having accepted multinational

firms, were seriously affected from such problems because of the large relative weight of

multinational enterprises in their economic activities(10).

Reacting to the above mentioned problems the Economic and Social Council of the United Nations

established on July 28, 1972, a committee which "study the role of multinational corporations and

their impact on the process of development, especially that of the developing countries, and also their

implications for international relation,(11)" , and which draws, based on the research, the significant

conclusions and makes proper recommendations which can be referred to in each government's policy

decision(12). It was formally called the United Nations Group of Eminent Persons to Study the Role of

Multinational Corporations on Development and on International Relations. With regard to the

accounting information disclosure of multinational corporations, the United Nations expressed for the

first time their position in the reports [1] and [2]. The report [1] was issued as the discussion material

for the Eminent Persons' Group by the Bureau of the United Nations on August 12, 1973. The report

[2] was published by the Eminent Persons' Group itself. We will analyze the opinion of the United

Nations concerning accounting information disclosure of multinational enterprises in the earliest

period by referring to these two reports in the remainder of this section.

The report [1] reviewed both the active aspect and negative aspect of multinational corporations

from the international viewpoint in spending in their first three chapters. We can know which aspects

the United Nations considered important from the following descriptions;

The positive Contributions of multinational corporations to the many facets of development

have been readily recognized. At the same time, the problems raised have become

increasingly visible(13).

Furthermore the report said that;

The generally favorable reception given to multinational corporations in the host countries

in the immediate postwar year .... has been tempered by skepticism and concern(14).

From the beginning, the United Nations paid their attention primarily to the negative aspect of

multinational corporations. The concrete content of the negative aspect might be similar to problems

we have listed in the earlier description. The report recommended the integrative approach for

resolving these problems by saying that ;

In the search for solutions separate item-by-item or issue-by-issue approaches are not likely

to be effective(15).

The appropriate strategy for action would therefore appear to be to concentrate on the setting up of an

appropriate machinery whereby many key issues can be dealt with flexibly and simultaneously(16).

Some definite means for resolving them were also presented in the report [1], which also suggested

the position of the United Nations toward multinational corporations. The nationalization and

acquisition of multinational enterprises by the accepting countries, the contribution of capital and

acquisition of management control by accepting countries and the establishment of an organization

examining foreign direct investment by accepting countries were discussed in the report [1] (17).

The guidelines in regard to international investment proposed by the International Chamber of

Commerce were also concurrently made public as a reaction from the side of multinational enterprise.

The Chamber proposed "local equity ownership, local participation in management, and promotion of

local personnel to posts of responsibility, as well as suggestions for government behavior(18)."

By comparing the emerging real intention of the United Nations and the proposition of the

Chamber, it seems that the United Nations were apt to take a position recommending the direct

control of business over multinational enterprise. Consequently the expected function of the Centre on

Transnational Corporations, establishment of which was proposed by the report [1], was substantially

understood as collecting information for assisting direct control of business of multinational

corporations by accepting countries(19).

What kind of report did the Eminent Persons' Group prepare for answering to the report [1] ? The

report [2] was the result of discussion among eminent persons. A certain member said that " the report

[1] considerably affected the discussion among eminent persons because the report [1] reflected the

opinion of the Bureau of the United Nations as a professional group "(20). So it was probable that the

report[2] of the Eminent Persons' Group acknowledged the negative tone of the report[1] which had

been analyzed in the earlier part of this section (21). Behind the negative tone of the report[1] in this

period, we should not neglect the fact that there was a radicalism of the North-South problem in the

United Nations because of an upsurge of nationalism among developing countries which had accepted

the multinational corporations(22).

According to the summary of professor Ryutarou Komiya who was a member of the Eminent

Persons' Group, the features of the report[2] were as follows;

i) When evaluating the investments and business activities of multinational corporations in

developing countries, the prerequisite of the report[2] was the value judgement that it was

desirable to reduce the economic gap between the North and the South, in particular, to

promptly develop developing countries(23).

ii) Recognizing that multinational corporations can contribute to the development of developing

countries by using their technology, management and marketing abilities, funds and so on, the

report explores the possibility of the program that these abilities and powers of multinational

firms should be mobilized to world-wide exploitation in assuring the reasonable benefits of

interest groups concerned(24).

iii) It was emphasized that the investment of multinational corporations was apt to be accompanied

with bud influences(25).

iv) It was recommended that accepting countries should regulate investment of multinational

corporations in several manners(26).

v) Accepting countries were also required to adopt some measures for regulating accepting

countries themselves.(27)

vi) It is recognized the idea that the distributional structure of the benefits accruing from

investment of multinational enterprises and from transfer of technology should be changed for

improving the benefit of developing countries which accept multinational firms by

strengthening their negotiating powers on the condition that at present the distribution of the

benefits be conducted for the benefit of multinational enterprises and consequently to the

disadvantage of developing countries(28).

vii) The report emphasizes the international cooperative activities for regulating multinational

corporations in substitute for respective activity of each nation with respecting national

sovereignty(29).

From these features, both the report [1] and [2] have a common plan to conduct international

cooperative activities for regulating multinational enterprises in outlining the negative aspect of their

business activities. Furthermore, these reports have the intention to control directly business of

international firms for the benefit of developing countries even if total economic efficiency would be

sacrificed. As one step for achieving this end, the Eminent Persons' Group recommended the

establishment of both the Commission on Transnational Corporations and the Centre on Transnational

Corporations for the purpose of discussing some issues and collecting information on transnational

corporations. But we must confirm here that establishing these two organizations is "a kind of

temporary action easy to be supported by many countries "(30) and that;

Immediate steps can be taken in the short run where a consensus is found to exist, and at the

same time a start can be made toward longer-run measures that will demand further

investigation and negotiation(31).

In other words, these organizations are expected to function supplementarily to essential

policy, that is, direct control of business activities of multinational corporations by developing

countries which are the majority in the United Nations. In consequence, it seems that the collection of

information -- the (accounting) information disclosure from the viewpoint of transnational

corporations -- should be supplementary means for assisting developing countries to control activities

of multinational firms for their own interests.

In this section we surveyed the position of the United Nations in the earliest period concerning

multinational enterprise, in particular, the characterization by the United Nations of information

disclosure of multinational enterprise. It was expected to function as a supplementary measure for

direct control of business activities of multinational corporations. But before long, the information

disclosure would become the main and unique policy that the United Nations could in reality employ

for regulating multinational firms. In the next section we analyze the changing process of the United

Nations' position regarding transnational corporations by referring to some reports issued subsequent

to the reports [1] [2].

III Development of Accounting Information Disclosure of Multinational Enterprises

The next task for the United Nations, subsequent to establishment of administrative organizations,

was drafting and formulating "the Standards for Conduct of Transnational Corporations". The

formulating process was made public in some reports[3] and were also commented on by many

researchers(32). At the same time, it was established the Group of Experts on International Standards of

Accounting and Reporting in 1976 for studying the accounting information disclosure of

multinational corporations. This organization published the report [7] accompanying with the

report[6] issued by the Commission on Transnational Corporations. The centre on Transnational

Corporations also published the reports[4] and [5] which were drafted for discussion by the Group of

Expert and the Commission. In this section we focus on surveying these four reports [4][5][6][7] to

know the changing position of the United Nations concerning the accounting information

disclosure of transnational corporations.

Before surveying the four reports, we must take into consideration the fact that for reacting to the

position of the United Nations, the OECD of which member countries are mother countries of

multinational corporations, quickly disclosed the guideline for behavior of multinational

corporations -- with the formal title, International Investment and Multinational Enterprises, 1976 --

which corresponded to the "the Standards for Conduct of Transnational Corporations" of the United

Nations. The guideline provided for the provision concerning the accounting information disclosure of

multinational corporations. We cited the provision in the following(33);

International Investment and Multinational Enterprises (OECD)Extract

Information Disclosure

Enterprises should, having due regard to their nature and relative size in the economic

context of their operations and to requirements of business confidentiality and to cost,

publish in a form suited to improve public understanding a sufficient body of factual

information on the structure, activities and policies of the enterprise as a whole, as a

supplement, in so far as necessary for this purpose, to information to be disclosed under

the national law of the individual countries in which they operate. To this end, they should

publish within reasonable time limits, on a regular basis, but at least annually, financial

statements, and other pertinent information relating to the enterprise as a whole,

comprising in particular:

i) the structure of the enterprise, shoeing the name and location of the parent company, its

main affiliates, its percentage ownership, direct and indirect, in these affiliates,

including shareholdings between them;

ii) the geographical areas where operations are carried out and the principal activities

carried on therein by the parent company and the main affiliates;

iii) the operating results and sales by geographical area and the sales in the major lines of

business for the enterprises a whole;

iv) significant new capital investment by geographical area and, as far as practicable, by

major lines of business for the enterprise as a whole;

V) a statement of the sources and uses of funds by the enterprise as a whole;

vi) the average number of employees in each geographical area;

vii) research and development expenditure for the enterprise as a whole;

viii) the policies followed in respect of intra-group pricing

ix) the accounting policies, including those on consolidation, observed in compiling the

published information. ( footnote ommitted)

In the sentences the OECD clearly expressed its position regarding the accounting information

disclosure of multinational corporations by saying that " ( accounting information disclosure should

be conducted) ...only for improving the comprehension of the public to multinational

corporations." The position of the OECD is definitely different from the one taken by the United

Nations. As the latter understood the accounting information disclosure of multinational corporations

as the supplementary means for directly controling business activities of multinational corporations

by developing countries, so the former considered the accounting information disclosure only as a

measure for improving the awareness of the public in the developing countries. In my opinion,

approaches taken by the two international organizations to the accounting information disclosure are

completely different from each other. But we make here, only confirmation that there are two different

approaches, in other words, two different ways of understanding with regard to the accounting

information disclosure. A complete discussion will be offered in the latter part of this paper. Needless

to say, however, my opinion has already been suggested in the previous chapter.

Returning our attention to the latter four reports of the United Nations, there have already emerged

the above-mentioned two approaches even in their descriptions. For example, the report[6] made the

statement that the information disclosure should contribute to the following three purposes(34). These

purposes were originally recognized as purposes of the Commission on Transnational Corporations

itself in 1975.

(a) To further understanding of the nature and the political, legal, economic and social

effects of the activities of transnational corporations in home countries and host

countries, and in international relations, particularly between developed and developing

countries;

(b) To secure effective international arrangements for the operation of transnational

corporations designed to promote their contribution to national developmental goals and

world economic growth while controlling and eliminating their negative effects;

(c) To strengthen the negotiating capability of host countries, in particular the developing

countries, in their dealing with transnational corporations.

These purposes of information disclosure appeared to be succeeded to report[7]. The purpose (a)

would be the result in which the United Nations sufficiently reflected the position of the OECD. In

contrast, purposes (b) and (c) were closely related to the interests and position of developing

countries.

The information content required by these reports [5][6][7] can be characterized as the greatest

common divisor of the international questionnaire concerning contemporary accounting

practices for multinational corporations(35).

The report [5] consists of three subreports. The first subreport includes a minimum list of

accounting items which should be disclosed by multinational corporations. This list is divided into

five parts (A-E) in which information items are described in detail. Part A includes some important

accounts of financial statements. Part B is related to disclosure of accounting policies, and Part C

treats the information of multinational corporations and of their subsidiaries. The segment report by

geographical areas and the segment report by industries are referred to in Part D and Part E is

concerned with some items in non-financial reporting. The titles of the five parts are as follows(36);

Minimum List

of International Standards of Accounting and Reporting

for Transnational Corporations, 1977.________________________________________________________

A. Main items in financial statements

BALANCE SHEET

Long-term assets

Current assets

Long-term liabilities

Current liabilities

Other liabilities and provisions

Shareholders' equity

Balance sheet foot-notes

INCOME STATEMENT

Revenue

Costs and expenses

Net income

Income statement foot-notes

STATEMENT OF SOURCES AND USES OF FUNDS

B. Disclosure of accounting policies

C. Financial information on members of a transnational corporation group

D. Reporting on segments of a transnational corporation

Segmentation by geographical areas

Segmentation by industries

E. Some items in non-financial reporting

________________________________________________________

The report [6] lists information items in four (A-D) parts. The first category treats main items of

information on individual transnational corporations and their affiliates. Forty-one items of

information including name of corporation, organization, accounting information and financial ratio

are listed. The second is concerned with main items of information on laws, regulations and policies

relating to transnational corporations. These items number a total of twelve. The third is on main

items of information about contracts and agreements between transnational corporations and host

country entities. The fourth treats main items of bibliographical and documentary information. We

show four categories as follows(37);

List of Information Items

in Development of an Information System, 1977

________________________________________________________

SOME MAIN ITEMS OF INFORMATION

A. Some main items of information on individual transnational corporations (and their

affiliates)

B. Some main items of information on laws, regulations and policies relating to

transnational corporations

The law

Definitions in national legislation

Administration of foreign direct investment

Establishment of foreign enterprise

Investment guarantees

Ownership and managerial control

Finance

Transfer of technology

Employment

Competition laws and regulations

Corporate taxation

Information and supervision

C. Some main items of information contracts and agreements between transnational

corporations and host country entities

Type of arrangement

Parties to an arrangement

Economic sector

Main clauses

D. Some main items of bibliographical and documentary information

1 Conceptual and definitional questions and general

2 Explanations of foreign direct investment and management and

organization (including textbooks on international business)

3 Data and information on individual enterprises

4 Aggregate (statistical) data and information on transnationalcorporation

activities : size, growth, distribution, characteristics, trends(including country

case studies)

5 The role of transnational corporations in individual economic sectors (see 7 for

impact)

6 The role of transnational corporations in individual countries,regions and the

internal system (see 7 for impact)

7 The impact of transnational corporations

8 Transnational corporations and other actors

9 Technical assistance

________________________________________________________

The report [7] classifies information items to be disclosed into two classes. Items in one class are for

general purpose reporting. Furthermore these items are divided into financial information and non-

financial information. Items in the other class are for special purpose reporting. The latter parts treat

the user, purpose and confidentiality with regard to the special reporting of transnational corporations.

The former class is shown in the following(38);

List of Information Items inInternational Standards of Accounting and Reporting

for Transnational Corporations, 1978

__________________________________________________________________

Part 1. Financial Information

SECTION A. ENTERPRISE AS A WHOLE

List of minimum items for general purpose reporting in financial statements of a

transnational corporation

1. Main items in financial statements

BALANCE-SHEET

Long-term assets

Current assets

Total assets

Long-term liabilities

Current liabilities

Other liabilities and provisions

Minority interests

Shareholders' equity

Total shareholders' equity

Balance-sheet foot-notes

PROFIT AND LOSS STATEMENT

Sales

Gross profit

Interest and investment income

Equity in income(profit and loss) of associated companies

Depreciation

Amortization of intangibles

Interest expense

Taxes on income

Unusual charges and credits(describe)

Minority interest in income of group companies consolidated

Net income

Profit and loss statement foot-notes

STATEMENT OF SOURCES AND USES OF FUNDS

(Not applicable to banks)

2. Disclosure of accounting policies

3. Information concerning members of a group and associated companies

4. Segmentation by geographical area

Segment and disclose geographically

To the extent identifiable with a geographical area, disclose

5. Segmentation by line of business

Segment and disclose by line of business

To the extent identifiable with a line of business, disclose

SECTION B. INDIVIDUAL MEMBER COMPANY

1. Main items in financial statements

BALANCE-SHEET

PROFIT AND LOSS STATEMENT

STATEMENT OF SOURCES AND USES OF FUNDS

2. Disclosure of accounting policies

3. Financial information on members of a group of companies

4. Disclosure of foreign assets

5. Segmentation by line of business

PART II. NON-FINANCIAL INFORMATION

SECTION A. ENTERPRISE AS A WHOLE

List of minimum items for general purpose reporting of a transnational corporation

1. Labour and employment

2. Production

3. Investment programme

4. Organizational structure

5. Environmental measures

SECTION B. INDIVIDUAL MEMBER COMPANY

1. Labour and employment

2. Production

3. Investment programme

4. Organizational structure

5. Environmental measures

__________________________________________________________________

These three reports require commonly disclosure of minimum items of accounting and non-

accounting information as the greatest common divider, although the ways of classification differ

from each other. It seems that the amount of items of information is very large. The reason of the large

number of information items, in particular, of non-accounting information items, must come from the

United Nations' motivation that these should be employed in developing and accepting countries to

regulate transnational corporations in spite of the wording of the purpose (a) in the report [6] (39). In

this stage, the United Nations is paying attention both to a position that accounting information

disclosure should be used to obtain the understanding of the public in developing and accepting

countries and to the other position that it should be used as a supplementary measure to regulate

directly business activities of transnational corporations.

But the United Nations changed their position toward transnational corporations since issuing the

report [8] in 1978 which is the revised version of the report [1]. This means that the United Nations

began to take a cooperative attitude toward multinational corporations in substitute of an aggressive

attitude. For example, The report says that;

Its central theme is not so much whether transnational corporations have, on balance,

exerted positive or negative effects in the past, but whether, how what directions their

activities might be moulded or channelled to bring about positive effects in the future(40).

It can be understood that the change in attitude of the United Nations reflects the change in attitude of

developing countries since the trend of the United Nations is usually affected by developing countries.

The change could also be reflected in the position of the United Nations regarding accounting

information disclosure. The report also says that;

The monitoring of changes of this kind by Governments in developing countries may be

seen as a countervailing force that can offset the tendency of transnational corporations to

pursue goals which may conflict with national goals, or the non-implementations of agreed

terms and conditions, such as the development of local sources of supply or the opening up

of export markets. .... Such an administration cannot, of course, be built up

overnight, ....(41).

Judging from the sentence, the United Nations begin to be negative in adopting the monitoring system

of multinational corporations by using accounting information disclosure. Professor Kojima predicted

in 1978 that the United Nations would begin to require only the extent of accounting information

disclosure conducted in stockholder meetings of the mother country by a multinational corporation in

substitute of requiring accounting information for exposing problems, in other words, for direct

control of business activities. He also asserted that such change should be welcomed as an escape

from "collecting information without purposes."(42)

Does the relaxing of United Nations trends contribute to the formulation of international standards

concerning accounting information disclosure? Changing to the cooperative attitude of developing

countries means that they begin to take advantage of multinational corporations. Moreover, their

taking advantage of multinational corporations means that they accepted the accounting information

disclosure of multinational corporations as a means of persuading them or of checking business

activities of multinational corporations and also means that they abandoned the function of accounting

information disclosure as aiding for direct control of business activities of multinational corporations.

Does this change in attitude make sense for developing countries? Is it possible for developing

countries to employ the accounting information disclosure only as checking and watching the business

activities of multinational corporations? For answering these questions we should survey the reports

published by the United Nations since 1978.

IV Turn of Accounting Information Disclosure of Multinational Enterprise

In the previous two sections, we looked to the fact that two different views of function were

mingled in the reports of the United Nations and other international organizations with regard to

the accounting information disclosure conducted by multinational enterprises. If we can be permitted

to repeat, one is that the accounting information disclosure would be used to regulate and control

multinational enterprise. The other is that it would be employed to increase the understanding of the

public in accepting countries. As we have already mentioned, the United Nations began to approach

the latter view in report [8]. Now we look to how the view of the United Nations would be developed

after issuing the report [8].

In 1979, the Code of Conduct for Transnational Corporations [9] was drafted and published in

considering both the different opinions developed in report [3] and the changing view in report [8]

into account. Section 43 in report[9] was devoted to the accounting information disclosure of

multinational corporations as follows(43);

43. Transnational corporations should, within reasonable time-limits and on a regular basis,

but at least annually, provide to the public in the countries in which they operate, clear and

comprehensible information designed to improve understanding of the structure, activities

and policies of the transnational corporation as a whole.

Though judging from the cited sentences, a great amount of information would be expected to be

disclosed, we must pay attention to the sentence ; " citation ". It could be understood that the

unique purpose of accounting information disclosure in the report was obtaining the understanding of

the public in accepting and developing countries concerning business activities of multinational

enterprises. The change in view of accounting information disclosure reflects the fact that the United

Nations have still taken the cooperative attitude toward transnational enterprise.

Subsequently, reports [10][11] were made public at the beginning of the 1980s. We continue to

survey them. Report [10] was published as an intermediate report by the Experts' Group in the

Commission on Transnational Corporations(44) in answering the above-cited Section 43(45) and report

[7]. Five tasks (referred as a - e )were carried out in report[10]. First task (a) was a comment on the

Section 43 of report[9](46). According to report[10], some member countries asserted that the

following clauses should be added to section 43 in the Code of Conduct in contrast to the fact that

section 43 was content with the extent of accounting information disclosure offerring understanding

of the public in accepting countries(47);

(a) Transnational corporations should, at least annually, give a clear statement that they had

not, during the period they are reporting about, been involved in any illegal act in the

countries in which they operate, directly or indirectly, and that they are abiding by the laws

of the country of origin and the countries in which they operate and the International Code

of Conduct;

(b) The report should include a statement by the corporation on its activity, where appropriate,

in the field of transfer of technology to the developing countries, especially the countries in

which it operates.

This assertion can be understood as a kind of criticism from developing countries to the United

Nations which began to take a cooperative attitude toward multinational enterprises, that is, to take the

side of developed countries since the end of the 1970s. Such critical spirit can be recognized in the

second task reexamining the minimum list of information items listed in report [7]. For example,

some countries insisted that some additional items of information should be prepared for obtaining the

true and fair view of business activities of multinational corporations. Other countries asserted that it

would be enough for multinational corporations to disclose only information for providing complete

and correct financial information(48). The conflict between developing countries and developed

countries can be clearly recognized in the discussion. But we can not help having an impression that

the change in view and attitude of the United Nations is decisive so that the assertion of developing

countries was inserted only as a reference.

Next we briefly make a survey of report [11]. The report was issued by the Centre on Transnational

Corporations for surveying previously differing views and their development concerning the

(accounting) information disclosure. After all we must focus our attention on the viewpoint adopted

by the Centre when surveying the development. The Centre characterized the previous efforts and

research on accounting information disclosure of multinational corporations conducted by some

international organizations as the process of adjusting and of integrating internationally different

accounting and reporting standards and techniques. But as we have already noticed, basic

problem of accounting information disclosure of multinational enterprises colored by the North-South

problem can not be resolved by the adjustment or integration of accounting standards and techniques.

We think that whether the modern accounting information disclosure can function effectively or not in

a certain socio-economic condition does not depend on accounting standards and techniques or on

their integration. The Centre, however, took the position that the disclosure problem could be resolved

by the integration of different accounting standards and techniques. This means ultimately that the

Centre took the position that the problem of information disclosure would be a kind of technical

problem so that it could be resolved by techniacl adjustment and integration. Then the extent of

accounting information disclosure provided by the integrated accounting standards, will be formally

accepted by the United Nations. And this integration will be carried by developed countries which are

also mother countries of multinational corporations. This must be an extension of the position taken

for the first time in report [7].

After report[11], we had two revisions of report [1] as [12] and [14]. Ad Hoc Intergovernmental

Working Group also published the report [13]. From report [12], It can be recognized that to

encourage transnational corporations to extend their business to developing countries became

serious problem than to regulate them in developing countries because they changed their investment

policies as follows(49);

The decline of in the efforts which transnational corporations are devoting to the exploration and

development of petroleum and gas resources in developing countries is a matter of serious concern

not only to there countries but to the international community as a whole. The leading

transnational corporations have redirected their investments toward locations that they

consider to be least exposed to risk.

In such situations, the regulation of multinational corporations by accounting information

disclosure cannot be a main concern even to developing countires which have kept employment in

their countries and have intended to develop themselves by taking advantage of the economic powers

of multinational corporations. Thus report [13] throughout discusses the general reporting purpose

of accounting information, although it continuously lists numerous information items as a relic of

the past.

In the next section, we analyze the information disclosure problem of multinational corporations

from the viewpoint confirmed in the previous chapter, which will suggest essentially the direction of

resolution.

V Some Emerging Issues — Conclusion —

The United Nations came to adopt the view of function regarding accounting information

disclosure, that it aids the public of developing countries in understanding and watching

business activities of multinational corporations, which is similar to the contemporary function of

accounting information disclosure in developed countries. In Japan, a business man similarly asserted

that "multinational enterprises of the Western countries publicize skillfully that they contribute to the

governments and industries of accepting countries by using their annual reports. .... In contrast,

Japanese multinational corporations do not recognize the importance of international information

disclosure and they have poor industrial relations so that even relatively large international

corporations of Japan do not publish annual reports at present. ... They must continue to make efforts

to satisfy the discontent of accepting countries by disclosing this information(50)." In his opinion, it is

also understood that information disclosure would aid in allaying discontent. In other words, his

opinion is exactly the same as the opinion of the United Nations that it is useful for increasing the

understanding of the public of accepting countries.

Furthermore, both Professor Ryutarou Komiya and Professor Kiyoshi Kojima evaluate such a

cooperative position on the basis of the cost-benefit analysis that unnecessary and excess information

disclosure should be avoided.

But we should here reiterate the problem if it is possible that the accounting information disclosure

functions as a means to persuade and to appease the public in developing countries, in other words as

a means to check and to watch the activities of big businesses from the viewpoint of the public, which

recently have become dominant and a popular phenomenon even in developed countries other than

the United States. Of course, the United States exceptionally has a long history of modern accounting

information disclosure. In the remainder of this section, we point out the conditions of assuring the

persuading and watching function of accounting information disclosure to testify if such conditions

are met by developing and accepting countries.

As we have already analyzed in the previous chapter, it was necessary for a economic society to

employ accounting information disclosure both as a checking function for the public and as an

appeasing function from big business to meet some socio-economic conditions. First, industries in the

society should be monopolized or oligopolized so that they adopt cooperative and democratic

management policy. Second, there should exist several sufficiently organized interest groups

surrounding big businesses. Third, there should exist a democratic ideology and tradition in the

society concerned. Last, two conditions can be integrated into one condition of establishing a mass-

democratic society. To describe more fully, the public should be sufficiently organized to demand

their own interests to big business and to their government in the democratic manner. In this process,

the public require the accounting information disclosure of big corporations for aiding them in

obtaining the exact information on business results of big businesses while the big businesses disclose

their accounting information for appeasing the public. And there should exist social value recognition

which affirms such democratic negotiation process. But we can not think that there have already

appeared such socio-economic structures in developing countries. We think that the rise of

nationalism in developing countries based on the tendency of anti-multinational corporations is

completely different from the criticism toward big business in a mass-democratic society usually

observable in developed capitalistic countries. Then the accounting information disclosure of

multinational corporations in developing countries is useful only as a supplementary means for

direct control of business activities of multinational corporations, otherwise this procedure is

useless for the public of developing countries.

According to the lesson drawn from American accounting history, in particular, from American

railroad regulation in the nineteenth century, it can be said to be impossible in developing countries to

realize the social mechanism in which the improvement of understanding of the public and the

dissolution of economic conflict between the public of developing countries and multinational

corporations are expected to be reached by using accounting information disclosure. Such social

mechanisms can be realized only in a special economic society which has already reached a certain

level of industrialization and has a common social value recognition of democracy. This can not be

universally realized at the present time. Nonetheless, if someone asserts that accounting information

disclosure can be used as dissolving economic conflict between multinational enterprises and

developing countries, he says this only as an excuse from the viewpoint of multinational enterprise.

If we are permitted to use analogy, developing countries can follow the way taken by the state of

Illinois in the nineteenth century when it regulated the railroad corporations. They can not follow the

way of the state of Massachusetts. If they desire to more realistically follow the way taken by the state

of Wisconsin or some other Mid-Western states in the latter half of the 1870s, they should, first of all,

industrialize their own countries. They can not do it by using accounting information disclosure of

multinational corporations.

When we think of the difficulties involved in accounting information disclosure in developing

countries, we can not help but consider the difficulties involved in the integration of different

accounting standards and techniques.

Finally, we should add that our viewpoint and methodology will be useful for analyzing the validity

of accounting information disclosure conducted in partly democratized East European countries.

Notes

(1) The definition of multinational corporation or transnational corporation has very variety. But

we adopt the definition of the United Nations in this paper. The difficulties involved in

defining multinational corporation were described in Chapter 1 of [1] or Ryutarou Komiya, "

Takokuseki Kigyou to Teikaihatsu Koku -- Kokuren Kenkyu Guruupu no Houkokusyo wo

Megutte --," Keizaigaku Ronsyu, Vol.40 No.3 ( October,1974), pp.5-7.

(2) Tadakatsu Inoue, " "

(3) D.A.Heenan and H.V.Perlmutter, Multinational Organization Development, Addison-Wesley Pu.

Co., Massachusetts, 1979, Chapter 1.

(4) Notorious cases among developed countries are as follows: Crysler took over Cimca in 1963 in

France; G.M. took over Machine Pull in 1963. The notorious case between developed and

developing countries is the case in which I.T.T. of the United States intervened in the election of

the presidency in Chili in 1970. Hiroshi Fukuda ed., Takokuseki Kigyou no Koudou Shishin,

1976, Chapter 2, and Ryutarou Komiya, op.cit., footnote(4) pp.3-4.

(5) Nippon Ginkou, Cyousa Toukei Kyoku, Cyousa Geppou, October,1977, p.16.

(6) [1] p.7.

(7) [1] p.7.

(8) Hiroshi Fukuda, op.cit., pp.62-63.

(9) Professor Komiya points out that the effect of multinational corporations on international trade

has not been empirically studied and has been emotionally criticized. Ryutarou Komiya, op.cit.,

pp.24- 26.

(10) The problem of income division extends to the problems of transfer of profits to mother countries

and of royalty in transfering technology.

There did not exist any theoretical approach toward the problem of why large corporations in

developed capitalistic countries go abroad by themselves rather than selling production

technology and why accepting countries necessarily suffer from disadvantages. An

exceptional research was done by P.J.Buckley and M.Casson, The Future of the Multinational

Enterprise, The Macmillan Press, London, in which they asserted that large corporations went

abroad with production know- how to avoid inefficiency of market, subsequently, to internalize

markets concerned. This assertion is compatible with the one made by A.D.Chandler,Jr. in the

field of business administration. Conversely, accepting countries can not in reality utilize the

production technology which might have became free because of economic externality if the

technology had been traded in market.

(11) [2],p.1.

(12) The formal name of the group is the United Nations Group of Eminent Persons to Study the Role

of Multinational Corporations on Development and on International Relations.

(13) [1],p.85.

(14) [1],p.85.

(15) [1],p.85.

(16) [1],p.86.

(17) [1],p.87.

(18) [1],p.86.

(19) [1],p.98.

(20) Ryutarou Komiya, op.cit., p.4

(21) Ibid.,p.11.

(22) Ibid., pp.2-3. See also p.11 in [2] " The World Perspective ", which seems to take the side of the

South in considering the North-South problem into account.

(23) Ryutarou Komiya, op.cit., p.11.

(24) Ibid., p.12.(25) Ibid., p.13.(26) Ibid., p.14.(27) Ibid., p.16.(28) Ibid., p.16.(29) Ibid., p.17.(30)

Ibid., p.17.(31) [1], Introdictin, p.xiv.

(32) For example, see the following papers; Kiyoshi Kojima, "Kokuren no 'Takokuseki Kigyou

Koudou Kihan' " Sekai Keizai Hyouron, Vol.21,No.8 (August, 1977), Kenji Kojima, " Zoku

'Takokuseki Kigyou Koudou Kihan' Zukuri," Sekai Keizai Hyouron, Vol.22, No.6 (June,1978).

(33) OECD, International Investment And Multinational Enterprises, 1976, pp.14-15.

(34) [6],p.3.

(35) The report [4] is the result of a questionnaire covering foreign multinational enterprises in

accepting countries and multinational enterprises in mother countries, which may affected the

information items selected as items of minimum list.

(36) [5],pp.13-23.

(37) [6], Annex I,p.1.

(38) [7], pp.58-75.

(39) There may be some issues concerning the selection of accounting information items. The result

of the questionnaire presented in [4] was provided by the Price Waterhouse Accounting Firm.

How can be it useful to disclose accounting information in developing countries which is

useful in developed countries ? The probelm is not discussed anywhere.

(40) [8],p.4.

(41) [8],p.141.

(42)Kenji Kojima, " Zoku 'Takokuseki Kigyou Koudou Kihan' Zukuri,", p.20.(43) [9],p.7.

(44) This group was established in 1979 by the Economic and Social Council, the United Nations.

The formal name is the Ad Hoc Intergovernmental Working Group of Experts on

International Standards of Accounting and Reporting.

(45) After publication of the report, the section 43 was slightly revised in the part following the

second clause.

(46) [10],p.5.

(47) [10],Annex II,p.4.

(48) [10],p.7.

(49) [12],p.8.

(50) Michio Houjou, " Kokusai Kigyou Katsudou to kigyou no Jouhou Koukai, Jurisuto, No.703,

( November 1, 1979),p.39.

Reports of The United Nations

[1] United Nations, Multinational Corporations in World Development, New York,1973(ST/ECA/190).

[2] Economic and Social Council, The Impact of Multinational Corpo- rations on the DevelopmentProcess and on International Relations. Report of the Secretary-General (E/5500, 14 June1974). Report of the Group of Eminent Persons to Study the Role of Multinational Corporationson Development and on International Relations, 1/2/ (E/5500/Add.1 (Part I), 24, May, 1974),(E/5500/Add.1 (Part II) 12 June 1974).

[3] Centre on Transnational Corporations, Transnational Corporations: Issues Involved in theFormulation of a Conduct, (E/C 10/17 June 1976). Related Materials; (E/C 10/18)(E/C 10/19)(E/C10/20) 1976, (E/C 10/30)(E/C 10/31)(E/C 10/33)(E/6006)(E/C 10/AC, 2/3) 1977, (E/C 10/AC2/3) 1978.

[4] Commission on Transnational Corporations, Information on Transnational Corporations, (E/C10/11 and Add.1), 1976.

[5] Centre on Transnational Corporations, Technical Papers : Inter- national Standards ofAccounting and Reporting for Transnational Corporations, (ST/CTC/5), 1977, Which contains

i) Towards International Standards of Accounting and Reporting for Transnational Corporations.ii) International Standards of Accounting and Reporting.iii) Some Aspects of Corporate Accounting and Reporting of Special Interest to Developing Host

Countries.[6]Commission on Transnational Corporations, Development of an Information System. Progress

Report of the Secretariat,(E/C 10/283/March 1977).[7] Commission on Transnational Corporations, International Standards of Accounting and

Reporting for Transnational Corporations, Report of the Secretary-General Report of the Groupof Experts on International Standards of Accounting and Reporting, (E/C 10/33),1978.

[8] Centre on Transnational Corporations, Transnational Corporations in Word Development Re-examined, Unedited Version, 1978.

[9] Outcome ofthe Seventh Session of the Intergovenmental Working Group on a Code of ConductTransnational Corporations : Code of Conduct ; Formulation by the Chairman", CTC Reporter,Vol.I, No.6, (April, 1979).

[10]Commission on Transnational Corporations, Comprehensive Informa- tionSystem :Internatinal Standards of Accounting and Reporting, Report of the Ad HocIntergovernmental Working Group of Experts on International Standards of Accounting andReporting on its first, second, third, and fourth sessions. (E/C 10/81, 27 May 1981).

[11]Centre on Transnational Corporations, Towards International Standardization ofCorporate Accounting and Reporting, (S/CTC/30), 1982.

[12]Centre on Transnational Corporations, Transnational Corporations in World Development, ThirdSurvey, 1983.

[13]Centre on Transnational Corporations, International Standards of Accounting and Reporting,Report of the Ad Hoc Intergovernmental Working Group of Experts on International Standards ofAccounting and Reporting, 1984.

[14]Centre on Transnational Corporations, Transnational Corporations in World Development, Trendsand Prospects, Fourth Survey, 1988.

[15]Report of Intergovernmental Working Group of experts on International Standards of Accountingand Reporting(1982 established).

Chapter ThreeGeneral Conclusion

Adaptation of Accounting Information Disclosure to Problem of MultinationalCorporations

We should here reiterate the problem if it is possible that the accounting information disclosure

functions as a means to persuade and to appease the public in developing countries, in other words as

ameans to check and to watch the activities of big businesses from the viewpoint of the public, which

recently have become dominant and a popular phenomenon even in developed countries other than

the United States. Of course, the United States exceptionally has a long history of models accounting

information disclosure. In the remainder of this section, we point out the conditions of assuring the

persuading and watching function of accounting information disclosure to testify if such conditions

are met by developing and accepting countries.

As we have already analyzed in the first chapter, it was necessary for a economic society to meet

some socio-economic conditions when it intended to use accounting information disclosure both as a

checking function for the public and as an appeasing function from big business. First, industries in

the society should be monopolized or oligopolized so that they adopt cooperative and democratic

management policy. Second, there should exist several sufficiently organized interest groups

surrounding big businesses. Third, there should exist a democratic ideology and tradition in the

society concerned. Last, two conditions can be integrated into one condition of establishing a mass-

democratic society,. To describe more fully, the public should be sufficiently organized to demand

their own interests to big business and to their government in the democratic manner. In this process,

the public require the accounting information disclosure of big corporations for aiding them in

obtaining the exact information on business results of big businesses while the big businesses disclose

thew accounting information for appeasing the public. And there should east social value recognition

which affirms such democratic negotiation process. But we can not think that there have already

appeared such socio-economic structures in developing countries. We think that the rise of

nationalism in developing countries based on the tendency of anti- multinational corporations is

completely different from the criticism toward big business in a mass - democratic society usually

observable in developed capitalistic countries. Then the accounting information disclosure of

multinational corporations in developing countries is useful only as a supplementary means for direct

control of business activities of multinational corporations, otherwise this procedure is useless for the

public of developing countries. According to the lesson drawn from American accounting history, in

particular, from American railroad regulation in the nineteenth century, it can be said to be impossible

in developing countries to realize the social mechanism in which the improvement of understanding

of the public and the dissolution of economic convict between the public of developing counties and

multinational corpora6ons are expected to be reached by using accounting information disclosure.

Such social mechanisms can be realized only in a special economic society which has already reached

a certain level of industrialization and has a common social value recognition of democracy, This can

not be universally realized at the present time. Nonetheless, if someone asserts that accounting

information disclosure can be used as dissolving economic convict between multinational enterprises

and developing countries, he says this only as an excuse from the viewpoint of multinational

enterprise.

If we are permitted to use analogy, developing countries can follow the way taken by the state of

Illinois in the nineteenth century when it regulated the railroad corporations. They can not follow the

way of the state of Massachusetts. If they desire to more realistically follow the way taken by the state

of Wisconsin or some other Mid- Western states in the latter half of the 1870s, they should, first of all,

industrialize their own countries. They can not do it by using accounting information disclosure of

multinational corporations.

Finally, we should add that our viewpoint and methodology will be useful for analysing the validity

of accounting information disclosure conducted in partly democratized East European countries.

Adoption of Commission System by the United Nations

As we have already said, the commission system appeared based on both the democratic social

environment and the origopolitic economic environment. In particular, this system was usually in the

United States accompanied with accounting information disclosure, because the latter reflected the

ideal of democracy as assuring the publicity of big organizations. It functioned like sunshine. And we

drew the conclusion that the real function of the commission system was avoiding the polarized and

extreme solution toward the economic problems concerned by employing accounting information

disclosure. But as such function was soundly conducted only in the specified economic and social

situation, so accounting information disclosure functioned only in the Emoted situation.

Then, does there emerge the special economic and social situation in developing countries in which

multinational corporations operate? And much more important, does the situation surrounding the

united Nations meet the special requirements specified in the first chapter? The most harmful factor

for the commission system accompanying with accounting information disclosure must be the

polarization in non-democratic society and organization which leads to a catastrophic solution of the

problem concerned.

Considering the above-mentioned requirements into account, we cannot help drawing the

conclusion that the accounting information disclosure system or the commission system

accompanying with it is not essentially suitable for solving the problems which were caused by

multinational corporations in developing countries and subsequently were colored by the North-South

problem.