Journal of Co-Operative

Accounting and Reporting

Stewardship: The core of

cooperative accounting

Alan Robb Abstract

Adjunct Professor, Saint Marys University, Stewardship is a core feature of accounting for
NS Canada cooperatives in contrast to investment oriented
accounting for capitalist companies.

The right to redemption of capital in cooperatives

had no parallel in investor-owned companies and
is central to understanding cooperative accounting.

Generally accepted accounting principles for

business enterprises in the twentieth century were
influenced by distortionary concepts such as the
pre-eminence of income measurement and the
matching concept.

The development of formalized accounting

standards based on the needs of investor-
owned businesses has been at the expense of
stewardship function.

Cooperatives and other mutuals are right to resist

the pressure to conform to such standards and
should report in ways that recognize the impor-
tance of stewardship in the twenty-first century.

Journal of Co-Operative Accounting and Reporting, V1, N1, Summer 2012 19

 Stewardship: The core of cooperative accounting

Introduction transactions could scarcely avoid arriving at

Stewardship - or the accounting for all erroneous conclusions ... but the directors en-
amounts received and paid together with the tertain the hope that the proprietors will rest
resulting balances - was historically the earli- content with the assurance that the establish-
est stage of accounting and is acknowledged ment is carried on with every regard to econo-
to be the most basic of accounting functions my consistent with efficiency...
(Firmin, 1957, 569). As such it was the base
for all types of accounting entities, sole trad- In contrast to this, in 1844 the Rochdale Eq-
ers, partnerships, local authorities. uitable Pioneers Society had included within
its rules a requirement for quarterly general
The development of the limited liability com- meetings at which members would receive
pany was intended to grant limited liability in audited financial reports of the cooperative
return for accountability to shareholders,the (Birchall, 1994: 54).
suppliers of capital.
Accountability and stewardship were inherent in
However, businessmen have always treasured cooperatives from the beginning.
secrecy and so they and their accountants began
to devise ways of circumventing the financial pub- A second stewardship principle in the
licity laws (Chambers, 1993). Rochdale cooperative was that added in 1854;
the disposal of net assets without profit
In most cases this was by the creation of secret to members.
reserves through the deliberate understate-
ment of assets and income or the overstate- This meant that no-one would be tempted to
ment of expenses and liabilities in the name break up the cooperative for personal gain.
of conservatism. In some cases there was an Members were entitled to draw out their con-
outright refusal to disclose any information. tributions and any allocated dividends standing
Naylor (1969:120) cites the following from an in their name - and the cooperative accounted
1847 Directors Report: to them on a quarterly basis for their equity.

On more occasion than one, the question has Unallocated surpluses were held for the ben-
been mooted at the general meetings as to efit of future generations, arguably one of the
the publication of the accounts of the earliest instances of accounting for intergener-
company, and the opinion has been ex- ational equity.
pressed by the board, that the period had not
yet arrived when it would be expedient to do Knowledge of the value of assets and liabilities
so, and at the same time the proprietors have was equally important to cooperators because
been informed that it was not in their inter- they could expect to withdraw their equity if/
est that such a course should be pursued. ... when they ceased trading with the cooperative.

Proprietors at a distance, forming their opin- Good stewardship was inseparable from co-
ion of the the future position of the company operative principles and values. It was at the
from the published accounts of past heart of cooperative accounting.

20 Journal of Co-Operative Accounting and Reporting, V1, N1, Summer 2012

 Stewardship: The core of cooperative accounting

Reporting net profits and any increase the the selling value is a
profit, and is dealt with accordingly.
Investor-owned accounting was dominated by (Salisbury v Metropolitan Railway
the balance sheet until the collapse of the Roy- Company (2), 1870.)
al Mail Steam Packet Company in 1931. No
financial report was required of revenue and In order to ascertain the profits earned and
expenditure. If presented it was not covered divisible at any time, the balance sheet must
by the audit report. Therein lay the opportuni- contain a fair statement of the liabilities of
ty for misleading financial reporting. the company, including its paid up capital;
and on the other hand , a fair or more prop-
The Royal Mail company issued a prospec- erly bona fide valuation assets, the balance, if
tus in 1928 which appeared to show that the in favour of the company, being profits. (City
company had been profitable for many years. of Glasgow Bank v Mackinnon, 1882).
In fact it had been operating at a trading loss
since 1928 but undisclosed transfers from The word profits has ... a well defined legal
secret reserves had obscured this unpalatable meaning, and this meaning coincides with
fact (Ashton, 1986). the fundamental concept of profits in general
parlance ... This can only be ascertained by
Despite protestations from the accountancy a comparison of the assets of the business
profession that undisclosed transfers to/from at two dates. For practical purposes these
secret reserves were an acceptable part of assets, in calculating profits, must be eval-
business new legislation was passed requiring uated and not merely enumerated. ... Even
major changes in accounting disclosure and if the assets were identical at the two peri-
in auditing. Among other things it became ods it would by no means follow that there
obligatory to present an audited profit and loss had been neither gain nor loss, because the
statement (in much less detail than is required market value - the value in exchange - of
today). This inevitably drew attention to in- these assets might have altered greatly in the
come and income measurement. meanwhile. (Spanish Prospecting Co Ltd,
In re The, 1910, 576).
A series of cases from the late 19th century
had established clearly that income or net Knowledge of assets, liabilities and residual
profit was the net increment arising from equity (based on market values) was thus orig-
periodical asset valuations. The relevant value inally as important for investor-owned compa-
of assets was their value in exchange or net nies as for cooperatives. But unlike members
realizable value: of a cooperative, investors in a limited liability
company could not withdraw their equity if
It is the duty of a partnership to ascertain in they chose. They were dependent on other in-
any way it can the value of the assets; and vestors being interested in buying their shares;
any diminution in the selling value is a loss that in turn depended on the expectation of
the company making profits.

Journal of Co-Operative Accounting and Reporting, V1, N1, Summer 2012 21

 Stewardship: The core of cooperative accounting

The growth of the matching concept to being a tabular statement or summary of

balances (debit or credit) carried forward af-
From the 1930s onwards the approach to in- ter an actual or constructive closing of books
come measurement came to be dominated by of account kept by double entry methods
the matching concept. An early example was according to the rules of accounting
expressed by Scott (1925) but the major influ- (AIA, 1941).
ence was Paton & Littletons An Introduction to
Corporate Accounting Standards in 1940: Matching depended on the notion that costs
attach:
Interested parties need test readings [of the
outcomes of business activity] from tie to It is a basic concept of accounting that costs
time in order to gauge the progress made. can be marshalled into new groups that
By means of accounting we seek to provide possess real significance. It is as if costs had
these test readings by a periodic matching of the power of cohesion when properly brought
the costs and revenues that have flowed past into contact.
the meter in an interval of time. (Paton &
Littleton, 1940:14) Ideally, all costs incurred should be viewed as
ultimately clinging to definite items of goods
Belief in the supremacy of matching costs sold or services rendered. (Paton & Little-
and revenues was echoed by the American ton, 1940: 13,15)
Accounting Association,
Rejection of matching
Income is measured by matching revenues
realized against costs consumed or expired, Paton was later to regret the influence that the
in accordance with the cost principle (AAA, Paton & Littleton monograph had:
1941:55); May (1943:26) gain is a differ-
ence and must be measured by matching For a long time Ive wished that the Paton
costs and expenses against revenue; Gil- and Littleton monograph ... had never been
man (1944:115) we can never complete a written, or had gone out of print twenty-five
structure of accepted principles of accounting years or so ago. Listening to Bob Sprouse take
without basing such principles upon a logi- issue with the matching gospel, which the
cal, consistent convention of matching costs P&L monograph helped to foster, confirmed
with revenues and Fitzgerald (1948:46) my dissatisfaction with this publication.
Perhaps the greatest advance ever made in
explaining accounting theory is the concept The basic difficulty with the idea that cost
that the preparation of a profit and loss dollars, as incurred, attach like barnacles to
account is a process of matching cost with the physical flow of materials and stream of
income. operating activity is that it is at odds with the
actual process of valuation in a free compet-
Consequently the investor-owned balance itive market. The customer does not buy a
sheet changed from being a stewardship re- handful of classified and traced cost dollars; he
port showing the values of resources entrusted buys a product, at the prevailing market price.

22 Journal of Co-Operative Accounting and Reporting, V1, N1, Summer 2012

 Stewardship: The core of cooperative accounting

And the market price may be either above or By 1953 stewardship had been redefined:
below any calculated cost figure...
The modern emphasis on enterprise income
...the central element in business operation rather than solvency suggests that reporting on
is the resources (in hand or in prospect) ... I managements stewardship is now better done
am further convinced that the most significant through the income statement than through
measure of any resource is what it is currently the balance sheet. (Littleton, 1953, 21).
worth ... How can we determine where we
stand, what earning rate we are achieving, or No longer was stewardship a report on re-
where we should go from here without know- sources held on behalf of another and ones
ing the value of employed resources? I object, ability to repay them when requested. It was
vigorously, to certified statements showing now a report on what profits were being made
land and timber at a fraction of their demon- - not a report of profitability, for that would
strable current market value... (Stone, 1971) require computation of the profits in relation
to the assets employed.
Unwarranted Primacy of the Income
Statement Such investor-focussed accounting had be-
come incomplete and uninformative. The
The increasing attention to income measure- balance sheet had become a means of carrying
ment went so far as to result in claims that forward unamortized acquisition prices, the not
the income statement was the most important yet deducted costs (AIA 1939). It was merely
financial report: a connecting link between successive income
statements (Accountant, 1946). As such it
It is probably fairly well recognized by provides little information because it lacks inter-
intelligent investors today that the earning pretability (Hendriksen, 1982, 255).
capacity is the fact of crucial importance in
the valuation of an industrial enterprise, and Relevance for cooperatives
that therefore the income account is usually
far more important than the balance sheet. Because members of investor-owned compa-
(AIA, 1932) nies have never had a right to withdraw their
equity it is understandable that they should
Perhaps the most significant change of all is have been pre-occupied with the profits re-
the shift of emphasis from the balance sheet corded by their company (and managers and
to the income account, and particularly to directors may at times have been preoccupied
the income account as a guide to earning with manufacturing such profits when they
capacity rather than as an indication of ac- did not actually occur).
cretions to disposable income. (May, 1943, 5)
In contrast, members of a cooperative and
Quite how enterprises could be ranked in their boards have, of necessity, been disci-
terms of profitability or earning capacity plined to keep a strong balance sheet with
(return on assets) without an accurate and sufficient liquid resources to allow redemption
reliable balance sheet was not explained. of capital as required.

Journal of Co-Operative Accounting and Reporting, V1, N1, Summer 2012 23

 Stewardship: The core of cooperative accounting

Profits and profitability have had less rele- International Financial Reporting
vance for cooperators than for investors. First- Standards
ly because shares are not traditionally seen
as an investment in the cooperative but as an Such a balanced approach is not provided by
equitable contribution to the resources needed international financial reporting standards.
to supply the goods or services the member The International Accounting Standards
requires. Board (IASB) objective is to develop standards
that are useful for investors, lenders and other
Secondly, in contrast to investor-owned com- creditors in making decisions involving buy-
panies where profit maximization is the prime ing, selling or holding equity and debt instruments
objective few types of cooperatives have objec- and providing or settling loans and other forms of
tives that can be measured in terms of profits. credit (IFRS 2012).
A housing cooperative may seek to provide
affordable accommodation; a workers cooper- The IASB claims that its standards are sec-
ative may seek to provide regular employment tor-neutral but this is disputed by a number of
at better-than subsistence wages; a finance authors (Ellwood & Newberry, 2007; Robb &
cooperative or credit union may seek to nar- Newberry 2007; Newberry & Robb 2008).
row the gap between interest charged and
interest paid (profit minimization?); a supply The IASB and FASB downplayed the con-
cooperative will seek to provide inputs at the cept of stewardship in their Discussion Paper
lowest cost to members and a marketing coop- Preliminary Views on an improved Conceptual
erative will seek to return the greatest amount Framework for Financial Reporting by arguing
to those members who have supplied the best that it was covered by the resource allocation
quality products. decision-usefulness objective above.

What is common to all types of cooperatives is That view was not accepted by EFRAG and the
that the board must account to members for European National Standard Setters whose
the way in which the resources entrusted to it analysis of responses to the Discussion Paper
have been used, must ensure that equity can shows that 78 per cent of respondents were
be redeemed when the members cease to be of the view that stewardship/accountability
transactors and they must ensure intergener- should be a separate objective of financial
ational equity by not allowing one generation reporting (PAAinE, 2007: 2).
to enrich themselves at the expense of another
generation. Conclusions

This requires a balanced approach to reporting It is undeniable that cooperative companies

stewardship. Such balance requires the time- differ materially from investor-owned compa-
ly and comprehensive disclosure of revenues nies. The right to redeem equity upon ceas-
and expenses, cash inflows and outflows and ing to be a transacting member is one of the
financial position that is evaluated and not most obvious differences. The obligation to
merely enumerated. make an equitable contribution to equity is a
reminder that shares are not an investment in

24 Journal of Co-Operative Accounting and Reporting, V1, N1, Summer 2012

 Stewardship: The core of cooperative accounting

the cooperative as they would be in an

investor-owned company.

The financial statements of cooperatives con-

tinue to be primarily a report of stewardship
where this has fallen to a lesser role in inves-
tor-owned companies. Stewardship basically
involves accounting for the value of assets
(and the existence of any liabilities) in terms
of their value in exchange so that members
can see whether their shares can be redeemed
should that be their choice.

The building up of unallocated equity is en-

couraged in cooperatives as being good stew-
ardship for future generations and to provide
protection for the present against unplanned
capital redemptions.

Cooperative accounting faces a challenge today

from the imposition of international financial
reporting standards developed for and by in-
vestor-owned companies. Such standards are
not sector neutral and need to be resisted if
cooperative boards are to be able to report in a
meaningful manner as faithful stewards

Journal of Co-Operative Accounting and Reporting, V1, N1, Summer 2012 25

 Stewardship: The core of cooperative accounting

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