Three reasons for learning the consolidation of accounts by Pechiney in the 1960s.

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(1)21st Accounting, Business & Financial History (ABFH), Annual Conference, Cardiff 14-15 September 2009. Three reasons for learning the consolidation of accounts by Pechiney in the 1960s.. Didier Bensadon Didier.bensadon@dauphine.fr. University of Paris Dauphine, France DRM-MOST CNRS Abstract : Accounting historians showed that the practice of consolidated financial statements was first developed in the United States in the late nineteenth century (Walker, 1978) ; and in the United Kingdom in the early twentieth century (Edwards & Webb, 1991). Only in the 1930s, directors of Australian companies will begin to publish consolidated accounts (Whitred, 1986). The practice of consolidated financial statements came later in France. It was not until the late 1960s that some French companies with an international dimension began to publish voluntarily consolidated financial statements. This communication aims to show why Pechiney has been a one of the first French company learning consolidation of accounts in the 1960s. An examination of accounting records and minutes of board of directors reveals directors’ motivations. On the one hand, Pechiney wish to be listed on the NYSE in order to finance mergers in the United States. One of the conditions required by the SEC was the production of consolidated accounts. In France, where this technique is virtually unknown, it is to the audit firm Price Waterhouse that directors will look to produce these accounts. On the other hand, in a phase of very strong growth, consolidated financial statements turned out to be a management tool suited to monitor and control the group. Finally, in a context where demand for consolidated information is increasingly approached by investors, the expertise gained in the consolidation allowed Pechiney directors to obtain a strategic position in case a regulation of the consolidated would be developed by public authorities in France.. Key words: Pechiney, consolidated financial statements, group accounts, Price Waterhouse, France.. The author thank the Association Francophone de Comptabilité for the financial support.. 1.

(2) The potential investor can form their opinion of a company based on rumours of a merger, mass redundancies, dismissal of the CEO, or even a plan to relocate. Fortunately, shareholders do not form their views on the health of a business based solely on rumours. They are also able to rely on tangible data provided by accountancy. To gain a more precise knowledge of the net worth of the business, the shareholder must know how to interpret the corporate documents issued to them by the company at the end of each financial year. Where this is a small or medium-sized business, scrutinising the balance sheet, profit & loss account and notes poses hardly any problem at all. On the other hand, the Financial Statements only partially fulfil their function of providing information to third parties where a business deploys a strategy of growth that leads it to develop its activities and create a large number of subsidiaries over which it has some control to a greater or lesser extent. As a general rule, this control is determined by the percentage of retained voting rights which may vary between 1% and 100%. The creation of subsidiaries around the parent company makes it more difficult to establish a real knowledge of the holdings of this collective, termed the Company Group1. To compensate for this disadvantage, an accounting innovation referred to as the "consolidation of accounts" has been developed since the mid 1950s. This technique consists of substituting the voting shares appearing in the parent company's assets at the book value with the proportion of the net worth of the consolidated companies that is represented by these shares. Preparation of the consolidated accounts relies on a whole series of accounting choices left to the discretion of the Group Directors. Analysis of the Pechiney case shows the extent to which it is difficult to perceive the economic power of a Group where there are a large number of subsidiary companies. During the 1960s this company experienced considerable growth, both commercial and industrial. The balance on the "Participation in Subsidiaries" account increased 3.75 times between 1956 and 1961 from 106.23 to 398.57 million French francs. This development has been the result of a strategy of internationalisation and diversification in skills closely linked to the production of aluminium. Furthermore, after its merger with Ugine Kuhlmann in 1971, Pechiney has become the leading French industrial private Group. In the face of this drastic change, new management tools appeared (Cailluet, 1995). For Berry (1983), they are "the conceptual or material means that are intended to reduce 1. The Company Group does not currently exist as a legal entity in France. 2.

(3) complexity and simplify the reality of running a business". More recently, Moisdon (1997) defined a management tool as "every formalisation of organised activity and every reasoning diagram categorically connecting a number of the organisation's outcome variables destined to direct the various management tasks". For Gilbert (1998) the management tool is defined as being "any conceptual or physical means equipped with formative properties by which a manager pursuing certain organisational goals in a given context implements a management technique". This article intends to study how Pechiney gradually introduced the consolidation of accounts during a period of strong growth (1956-1971). The presentation of Pechiney's strategic orientations during the 1960s will allow us to explain the development of the structures of production and the growing complexity of the Group in a way that can no longer be achieved simply by reading the corporate documents. Next, an analysis of the drafting of accounting doctrine in respect of consolidation will allow the role played by certain parties in the dissemination of this accounting innovation to be identified. Finally, analysis of the implementation of consolidation at Pechiney will allow the policy issues behind this technical system and the involvement of the American audit firm Price Waterhouse to be examined.. Strategic developments and the complexity of structures at Pechiney (1956-1971) The history of the Pechiney industrial Group during this period is characteristic of the profound economic transformation seen in France. After the Second World War, the French aluminium industry was operating in a world that was rather uncompetitive and largely protected by the authorities. The target of reconstruction and the directions put forward by the State Planning Commission made Pechiney a relatively sheltered aluminium producer. Indeed, the Fifth Plan (1966-1970) advocated the creation of large Groups in the principle branches of the economy, but their number was to be limited. The Sixth Plan (1971-1975) anticipated the increase in French investments abroad and the emergence of French-based multinational corporations. The policy of expanding Pechiney led the Group Directors to look for sources of supplies of raw materials outside France, to establish factories in localized markets in order to penetrate new markets and so oppose a more or less rapid saturation of the. 3.

(4) European market. The search for energy sources at an attractive cost led Pechiney into West Africa. It is one of the explanations for the construction of the electrolysis factory at Edea in the Cameroon in 1954, with a planned production capacity in the order of 45,000 tons per year. In 1960, in collaboration with Ugine, the Fria factory in Guinea was opened. Its production capacity was in the order of 450,000 tons per year2. So the establishment of the Common Market, the liberalisation of trade and the lowering of trade barriers at that time obliged Pechiney to develop a strategy adapted to a very competitive environment. The expansion of Pechiney turned towards the United States with the acquisition of Howe Sound in 1964. Then Pechiney partnered up with Amax to build an electrolysis factory in the Western United States (Intalco). Two years later, Pechiney joined in the construction and operation of a factory in Australia (Queensland Aluminia). This internationalisation also occurred in Europe as Pechiney reorganised their holdings in Spanish factories and created Aluminio de Galicia. It was also the beginning of the Saint-Nicholas complex in Greece with production capacities of 200,000 tons of alumina and 52,000 tons of aluminium in 19663. In the same decade, Pechiney repositioned itself in the chemical sector. With SaintGobain it created a Pechiney/Saint-Gobain joint venture (P/S-G) within which it brought together all its chemical assets - except petrochemicals, regrouped within Naphtachimie - before dismantling it in 1969 to become part of Rhône-Poulenc. The company was also actively involved in numerous participations in the nuclear energy sector. In 1967, Pechiney, which three years earlier had taken complete control of Cegédur, bought out Tréfimétaux, the premier European transformer of non-ferrous metals. This buy-out led to a new organisation and to a change of corporate name with Pechiney becoming Pechiney Group GP. But Pechiney was not the sole producer of aluminium in France. Ugine had nearly 20% of the domestic production of aluminium. A relationship of cooperation existed between Ugine and Pechiney but there was also recurrent friction. In 1966, Ugine merged with Kuhlmann, but the anticipated prospects for growth were not achieved.. 2. For a general history of the principal sites producing aluminium see: R. Lesclous, Genèse et évolution des sites producteurs d’aluminium, essai d’interprétation des choix stratégiques de Pechiney et de leur mise en œuvre, 1893-1972, doctoral thesis on contemporary history, EHESS, 1997, and J. Larrue, Fria en Guinée, première usine d’alumine en terre d’Afrique, des stratégies originelles de 1957 aux perspectives de l’an 2000, doctoral thesis on contemporary history, Paris I –Panthéon-Sorbonne, 1994. 3 Ivan Grinberg and Philippe Mioche, Aluminium de Grèce, l’usine aux trois rivages, Grenoble, P.U.G, 1996.. 4.

(5) Some years later, the main shareholders in Ugine Kuhlmann confirmed the merger operation between Pechiney and Ugine Kuhlmann giving rise to the most powerful industrial Group. In fact, on 30th September 1971 the merger documents were signed by Pierre Jouven, CEO of Pechiney, and Pierre Grezel, CEO of the Ugine Kuhlmann Group. At the end of the period, known in France as the "Glorious Thirties" (19451975), this merger saw the birth of the first French private industrial Group with a consolidated turnover of 13 billion French francs. PUK was a conglomerate that had approximately 100,000 employees worldwide and holdings in 460 subsidiaries. From the mid 1950s, the Directors became initiated in the art of financial engineering through complex financial arrangements. This apprenticeship was made possible due to contacts signed with the Directors of American aluminium production companies participating in the management of a number of international projects (the creation of the factory in Guinea). The strategic planning and auditing of administration spread, although not without some difficulty, from the end of the 1960s (Cailluet, 1995). The new standing necessitated an organisation adapted to this. In 1967, the Directors of Pechiney asked the consultants Mac Kinsey to propose a new organisation for the Group and management tools that were better adapted to the new structure4. Pechiney had already commissioned an audit of the organisation by the firm K.B. White in 19485. The latter had proposed an organisational structure that remained in place until the mid 1960s. In Human Resources, management by target-setting was largely established. The Boston Consulting Group model was applied to Pechiney's activities. Finally, responsibility for results within each unit unequivocally introduced the notions of cost centres and profit centres (Cailluet, 1995). As regards calculating the profitability of investments, important progress was achieved using "Créange6" procedures and engagement authorisation requests (DAE)7. Pechiney also learned about audit practice and especially about the consolidation of accounts and we will address this in the last section. The strategic orientations of the Group during the 1960s led the Directors to put in place new management instruments better adapted to the environment of decision-making. 4. IHA archives, 98-2-501 IHA TRAI 9/15. IHA archives, ibid. The Créange procedures suggested that calculations should be based on gross profitability (excluding tax on profits) on the earnings retained in their own funds. In the case of large projects these procedures were proved to be inadequate for assessing not only the "class" of the investment propositions in relation to each other, but in particular for assessing the concrete financial yield. 7 For a study of the investment process at Pechiney, we return to the study by Anne Pezet Les fonctions de la décision d’investir: contribution à une technologie de l’investissement, Université Paris-Dauphine, November 1998. 5 6. 5.

(6) The increasing number of subsidiaries and the expansion of internal operations within the Group between the parent company and its subsidiaries, or between subsidiaries (purchases/sales, acquisitions and disposals of assets) did not allow the shareholder to know the real economic potential of the whole entity. So that the latter could gain a global view of the group, the balance sheet for the parent company and each of the subsidiary companies was to be set out with a large quantity of additional information so as to facilitate the necessary reprocessing. This tiresome operation is practically impossible for the shareholder. Only the publication of consolidated accounts can allow him or her to gain an understanding of the economic potential of the whole entity. However, with this accounting technique there remain some grey areas that specialised studies of organisations will seek to clarify.. Development of the consolidation of accounts in France The consolidation of accounts was already familiar to certain French accountants at the end of the 1930s, but the thinking on the subject really only began to take off from the middle of the 1950s, and grew in the second half of the 1960s with the publication of studies carried out by various institutions connected with financial information.. The consolidation of accounts is an accounting technique originating in the United States from the end of the 19th century onwards. It became more widespread particularly after the Wall Street Crash of 1929 because the New York Stock Exchange entrusted the Stock Exchange Commission with the task of enforcing the publication of consolidated accounts for parent companies. The intended aim was to favour transparency of the financial markets and to protect and encourage public saving. The consolidation of accounts was presented at that time as the means to restore potential investors' confidence after the collapse of the financial markets during the "Black Thursday" crisis. In Britain, the growth in the consolidation of accounts dates back to a law passed in 1948 which favoured the publication of consolidated accounts for those companies making a public appeal for savings, yet arrangements for the presentation of consolidated accounts are fairly flexible in these two instances. As is the custom in Anglo-Saxon accounting systems, only general indications were set out regarding usage, to a large extent leaving Groups with a free hand.. 6.

(7) In France the situation was different. The principle of consolidation of accounts was already being practised by some accountants in the inter-war years. Some articles were published in professional accounting journals about conditions governing the preparation of consolidated accounts and recalling an interest in presenting them (Snozzi, 1933). Two years later, some worked examples illustrated this concept (Snozzi, 1935). Consolidation was also the subject of a presentation during an international accountancy conference held in Paris in 1936 (Schwing, 1936). Publications started again from the beginning of the 1950s, but the real point of departure in the discussion about the subject of consolidated accounts was a presentation given during the accountants' annual conference in 1954 (Richard and Veyrenc, 1954). The authors detailed both the theoretical and the practical aspects of the consolidation of accounts. Around the same time, two journals each published two articles on the subject8 (Anonymous, 1953; Archivalis, 1954; Fain, 1954; Charles and Alii, 1956). The subjects examined include the merger of businesses that express the desire by companies to attain a critical size, hence allowing them to compete with foreign rivals. The authors (exclusively qualified accountants) again pointed out that the increase in subsidiaries and transactions made it difficult to understand the financial position. Consolidated accounts at that time were a means of assisting with the transparency of groups. In these articles, we also find the wish to define the terminology used so as to avoid confusion between a consolidated balance sheet and a cumulative balance sheet9. From a business point of view, the initial conferences succeeded due to work carried out in 1964 by a working group under the leadership of René Pain-Savanier10 . This group was set up by the “Compagnie Française des Pétroles” Head Office to facilitate the sharing of experience between the Finance Directors of the large French Groups and to propose a general method of consolidation adapted to the specific needs of French Groups. This work brought together administrative and financial managers from the Compagnie française des pétroles, Pechiney, the “Compagnie Générale d’Electricité”, Saint-Gobain and Rhône-Poulenc. In 1964, their findings led to the publication of a. 8. Économie et Comptabilité (1953 and 1954) and Bulletin de la Société de Comptabilité de France (1954 and 1956). A cumulative balance sheet is one which accumulates the assets and liabilities of the subsidiaries and the parent company. It provides a truncated view of the Group holdings because of the existence of reciprocal transactions which can generate fictional profits between the subsidiaries and the parent company. 10 René Pain-Savanier, graduate of a major French business school, is a qualified accountant and a Commissioner of Companies registered with the Paris Court of Appeal. He is also an internal auditor at the Compagnie française des pétroles (French Petroleum Company). 9. 7.

(8) booklet entitled Pour une méthode générale d’établissement des comptes consolidés (A General Methodology for the Preparation of Consolidated Accounts). This first conference was followed by the establishment of a working group by the “Conseil National de la Comptabilité” (National Accounting Board) in October 1965 bringing together nearly 70 experts from the world of economics and finance. The aim was to formulate the guiding principles that could be applied by the Finance Directors of the French Groups affected by consolidation. This report was approved by an order from the Minister of Economics and Finance on 20th March 1968. At the end of the 1960s, French company law underwent an important change with the law of 24th July 1966 and the decree governing its enforcement of 23rd March 1967. This law defined the concepts of subsidiaries and holdings in Articles 354 and 355 but not those of the Group. The only reference to consolidated accounts is in Article 248 of the enforcement decree of 23rd March 1967 which anticipates the opportunity for companies to append a consolidated balance sheet and profit & loss account to their balance sheets. Even where the choice of the consolidation method could be freely made, it still had to be specified. At the end of the 1960s when the “Conseil National de la Comptabilité” (National Accounting Board) was examining consolidation, other interest groups from the world of economics were also considering this subject. The “Conseil National du Patronat Français” (CNPF) (the National Council of French Employers) published a report entitled Les comptes consolidés, (Consolidated Accounts) whose conclusions did not differ much from the report of 1968, except on one technical aspect concerning the method of proportional integration. The French accountancy body, “Ordre des Experts-comptables”, also put together a working group, the “Comité d’Etudes et de Financement des Entreprises” (CEFE) (Committee for Enterprise Studies and Finance), tasked with studying the issue of consolidated accounts. The two working groups, the “Conseil National de la Comptabilité” and the “Ordre des Experts-comptables”, merged very quickly. The “Conseil Economique et Social” (Economic and Social Council) also presented a report, entitled Consolidation des bilans (Consolidation of Balance Sheets) which shed light on the different aspects - legal, economic, financial and fiscal - and also insisted on drafting a law for Groups that had until then been totally absent in France (Conseil Economique et Social, 1965).. 8.

(9) At the end of the 1960s, the “Société Française des Analystes Financiers” (SFAF), the French Society of Financial Analysts, only recorded twenty two companies presenting consolidated accounts. Furthermore, the quality of information was found to be particularly wanting11 because the methods were not consistent and there was scarcely any explanation given on to how to understand the financial documents. The “Commission des Opérations de Bourse” (COB) (the French equivalent of the FSA), instituted by the decree of 1969, decided to make the publication of consolidated accounts obligatory from 1st July 1971 for those companies who wanted to be listed on one of the seven French stock exchanges. It referred Groups to the provisions of the 1968 report for all questions relating to methodology. In the last part of this article, we will show that the implementation of consolidation by Pechiney meets the aim of amongst other things, auditing the subsidiaries and also shows that the influence of the American audit firm Price Waterhouse was considerable in the implementation of the consolidation of accounts at Pechiney.. Pechiney facing the consolidation of its accounts (1956-1971) The classic instruments for financial monitoring of subsidiaries no longer seemed appropriate for exercising control over them. Pechiney therefore looked to familiarise itself with the consolidation accounts, which appeared to offer an appropriate solution. Furthermore, this accounting technique was a condition sine qua non of access to American financial markets. From 1965, the Directors used the help of the American audit firm Price Waterhouse to apply the principles of the consolidation of accounts within the Group12. They were then confronted with a set of technical, organisational, fiscal choices along with a financial information strategy. Once these difficulties were overcome, Pechiney published consolidated accounts for the first time in 1969.. Confirmation of the desire to control the subsidiaries The desire to control subsidiaries first became evident when financial monitoring of subsidiaries was implemented. The study carried out by the American firm K.B. White 11. A study by the SFAF published in issue 12 of the journal Analyse financière, (Financial Analysis) 1972, showed that in 1967 some Groups referred to their annual reports as consolidated balance sheets when these were in reality cumulative balance sheets, and that the reprocessing had not been undertaken, internal profits had not been neutralised and there was no detail given on the consolidation perimeter.. 9.

(10) in 1948, which aimed to provide Pechiney with a new organisational structure, did not tackle consolidated accounts as communication instruments of the Group yet13. Nevertheless, this firm gave accounting services an important place in the administrative organisation. Among the eight accounting "divisionals" that were planned, three directly concerned the monitoring of subsidiaries (auditing of subsidiaries and advising on their bookkeeping, the quality of accounting of some subsidiaries and the quality of accounting of holdings). The tasks associated with organisation, audit and advice for the subsidiaries' bookkeeping, were entrusted to inspectors who had no influence on running the subsidiaries and who were limited to presenting reports to the heads of the accounts departments. One of the tasks of the Chief Accountant was to receive the balance sheets and the division trading accounts every quarter in order to summarise the main points for senior management14. An audit of the accounts was carried out by inspectors who verified on the spot that the accounts were correct, that there was no fraud and that the books were able to withstand an in-depth investigation by the tax department. Setting up a service for accounting methods was necessary in the context of the new aspect of accountancy and its decentralisation. This service included two specialists in these methods. The goal was to make accounting more useful, to reduce costs and to ensure uniformity between the factories. These specialists drafted instructions for all accounting transactions and kept abreast of developments in best practice and accountancy tools. This organisation, as presented in 1948, continued to exist until the reorganisation of 1967-1968 led by the firm Mac Kinsey. At the end of 1962, Pierre Jouven handed the setting up of the organisation and monitoring of subsidiaries over to Jacques Ribadeau Dumas15, as both were growing considerably. In fact, as of 30th September 1962, the nominal value of the capital held by the company in the eight largest subsidiaries was in the order of 330 million French francs16. Pierre Jouven was deeply concerned that each subsidiary was pursuing its policy for its own ends to the detriment of the Group. A project was conducted to 12. Pechiney archives 001-10-20530. Pechiney archives 90-3-501-IHA-1. Pechiney archives 90-3-501-IHA-1, procedures manual: 66. 15 In 1962 Jacques Ribadeau Dumas is one of the Directors of Pechiney; he takes responsibility for the general management control in 1964. He leaves this office in 1969 after failing to assert management control on the operational departments (Ludovic Cailluet, ibid: 782). 16 At 31st December 1962, the Balance Sheet total increased to 2,015 million French francs. 13 14. 10.

(11) implement an information system to enable communication with the subsidiary managers on top-level policies for the Group. The goal was to bring the subsidiaries together around a project to be defined by the parent company. J. Ribadeau Dumas' tasks hinged around two points. The first dealt with the links formed between the subsidiary financial teams and the Group General Secretariat. The second related to collecting information periodically, working closely with financial services. These factors for monitoring subsidiaries did not affect the information aimed at potential investors. They consisted of management tools developed by Pechiney to provide internal information and to align the subsidiaries in the group. To progress from the stage of monitoring the accounts of the subsidiaries to a more developed one of producing consolidated accounts, Pechiney's Directors not only considered the methodology in the consolidation of accounts, but also the consequences of such a process. The first comments about consolidation appear at Pechiney in 1956. The first of these is found in the minutes of the meeting of the Board of Directors from the 26th June 1956 in the paragraph on the “Association Nationale des Sociétés par Actions” (ANSA) (National Association of Joint-Stock Companies): "At the meeting held yesterday evening, information was provided about integrated balance sheets, as Esso Standard is trying to gain some fiscal advantages in this matter17." In the second note dated 20th November 1956, the issue of taxation was also raised. This, moreover, seemed to be the major concern of the Directors with regard to consolidation. They were looking to avoid a cascade of taxes on earnings from the subsidiaries and on gains on the disposal of assets between companies within the same Group. The intended goal was twofold. On the one hand, to offset the losses of one company against the profits of another subsidiary and on the other, for the parent company to increase the depreciation margins18. Without justifying its cause, the authors of the ANSA study expressed fears about a potential increase in the level of taxes. In the face of such uncertainties, the authors of the study recognised that it was preferable to move, for the moment, towards concerted action aimed at obtaining an improvement in the current fiscal system. 17. Pechiney archives, 072-10-21968. For an analysis of the concept of depreciation in accountancy for businesses, we re-examine at the work of Y. Lemarchand, Du dépérissement à l’amortissement, Enquête sur l’histoire d’un concept et de sa traduction comptable, Ouest Éditions, 1993. 18. 11.

(12) The fiscal consequences of the operation were thus immediately associated with consolidated accounts. In both sets of management committee minutes, no allusion was made to the desire to improve the financial information; it seems that before any expansion of the technique, it was hoped that problems of a fiscal nature, generated by the consolidation of accounts, would be resolved. A memo from July 1961, addressed to Max Duval (Pechiney Secretary General) by Pierre Jouven, informs us about the way the Directors viewed the issues of consolidation. We read the following: "The problem of consolidated balance sheets, [...] is that the Anglo-Saxon rules are irrelevant or unacceptable to Pechiney, and it would be good to reflect on the rules that Pechiney would be able to propose19." The Anglo-Saxon rules might have appeared unacceptable or irrelevant to Pierre Jouven because they planned to include only those subsidiaries in which Pechiney holds more than 50% of the voting rights within the consolidation perimeter. Now, in the organisation chart of 1961 there were only 23 subsidiaries out of 113 in which this percentage was greater than 50%. Likewise, the Anglo-Saxon rules advocated only the integration of domestic subsidiaries (for an American company, those which are set up on the American continent); at that time, Pechiney was in a phase of considerable international expansion which was leading it to create subsidiaries on all five continents. Issues of financial information were uppermost in the minds of the Group Directors since they were seeking to anticipate potential regulation with regard to the consolidation of accounts and to put forward rules which protected their interests. Consequently the managers were trying to gain some expertise that would allow them to be able to negotiate when the time came on the specific issues of accountancy norms, having already gained an in-depth understanding of the issues and mechanisms of the consolidation of accounts. It is in this context that Pechiney appointed representatives who would know how to defend its interests. These questions naturally pushed the Pechiney Directors to look for additional information on consolidation.. Issues surrounding the consolidation of accounts The questions raised by the consolidation of accounts required the Directors of Pechiney to gather information. Two sources of information formed the basis of their thinking. 19. Pechiney archives, 001-10-20530.. 12.

(13) The first approach was a study by ANSA sent to Max Duval on 25th July 1961. This document has not been found in the Pechiney archives. The second was a study20 of nine pages ordered by Jacques Marchandise21 for his colleague at the Council of State, André Jacomet. 22. , who was then in charge of the “Société Civile pour l’Etude des Problèmes. Industriels du Marché Commun” (Civil Company for the Study of the Industrial Problems of the Common Market). This study, dated 1st August 1961, explained that the concept of the consolidated balance sheet was an accounting improvement stemming from a twofold movement caused by the expansion of groups of companies and information for shareholders. This study quickly introduced the practical experience of consolidated balance sheets in the United States and the early stages of this accounting technique in France. It underlines the fact that the committee for company law reform hoped to make consolidation compulsory under certain conditions. André Jacomet stated that the practice of consolidated balance sheets should be developed cautiously and within certain boundaries. Only those subsidiaries with a holding, either direct or indirect, of more than 50% must be integrated within the consolidation perimeter. He encouraged excluding those companies whose financial year end did not coincide with that of the parent company, those who were operating under specific business rules (banks, insurers, investment companies) and overseas subsidiaries. The inherent limits of consolidated accounts were linked to the existence of numerous overseas subsidiaries, where those subsidiaries were majority or minority holdings, and also the fact that the consolidated balance sheet was only of informative value with regard to the shareholders. He would be unable to replace the preparation of company accounts which guarantee information about the solvency of legally independent companies. The fiscal problem was then tackled, since consolidated balance sheets might result in additional taxes, following the increase in the value of equity capital and the increase in the profits it generated in relation to the parent company. A. Jacomet concluded that. 20. Pechiney archives, 001-10-20530. Jacques Marchandise (1918-2002), senior member of the Council of State, joins Pechiney in 1955. He manages several African projects as much on the political level as on the financial. He holds responsibilities in the department of central administrative services from 1967. After the merger, he becomes Deputy Executive Director for general administration until 1975. 22 André Jacomet (1917-1993): senior member of the Council of State, joins Pechiney in 1964. He chairs Établissements Coquillard from 1964 to 1967, then manages the American-Pacific-Spanish region at Pechiney from 1967 to 1969. Having been Director General then Deputy Executive Director of Howmet Corporation in the USA from 1970 to 1971, he becomes Director of the copper processing arm at PUK from 1972 to 1975. As CEO of Tréfimétaux from 1975, he rejoins the Council of State in 1978. (Taken from Béatrice Wattel, Who’s Who in 20th century France, 2001: 1087, Éditions Jacques Lafitte, Paris: 1087) 21. 13.

(14) large Groups could present consolidated balance sheets to their shareholders as optional supplementary pieces of information. However, he expressed the wish that no regulation be imposed that made consolidation compulsory, regardless of any more general regulations introduced by the Common Market defining the fiscal consequences of consolidated balance sheets. Furthermore, André Jacomet emphasised the importance of presenting consolidated information on turnover, earnings and the percentage of equity held by the parent company. The publication in extenso of subsidiary summary documents was to be used cautiously since they only gave a partial view of the parent company/subsidiaries together and some distortions remained, arising from the non-compensation of reciprocal transactions. He also pointed out that internal funds transactions or some losses associated with the start-up of factories did not need to be publicly disclosed. As regards consolidated turnover, the author hoped that a unique calculation formula would be defined and that it would be widely published. This and the ANSA study constituted the initial elements that would allow the Directors of Pechiney to initiate a conference on the effective implementation of consolidation within the group. After establishing consolidated accounts for the fiscal year 1962 as an experiment23, a meeting was organised to define the rules governing the preparation of accounts and the accounting policy of the group. In a note, M. Guyot, Director of Financial Services, referred to the experimental nature of the accounts produced, the large number of companies that had not been taken into account and the lack of any real consolidation of net earnings. The rules for the preparation of accounts had been drafted in collaboration with other industrial Groups to ensure consistency between large French businesses and to have a common position should the potential imposition of regulation ever be discussed. This first draft inspired management to work on the internal organisation of the group by defining four main foci: • Making the methods and accounting documents used across the whole group consistent; • Refining the definition of consolidated turnover;. 23. We have not found these documents in the Pechiney archives. We only know of their existence from a note by Guyot. Pechiney archives, 001-10-20530.. 14.

(15) • Extending the use of perforated and electronic cards to make it easier to prepare consolidated accounts; • Hiring qualified staff. If the production of the consolidated balance sheet was useful for the financial policy of the Group, the fear of publication was very prevalent. The Directors did not envisage circulating such accounts in the public domain because that would run the risk of considerably tying the hands of the accounting departments in charge of preparing the consolidated accounts. But fear was also provoked by the fiscal, legal and corporate consequences that might compromise the Group's position if such information were to be made available to third parties. This opinion was entirely shared by the ‘Conseil National du Patronat Français’ (National council of French industrials) which had been unofficially following the progress of the preparation of consolidated accounts, and Guyot concludes, "... that it would perhaps be good to gently hint to the Compagnie Générale d’Electricité and Kuhlmann that too open a policy might accelerate the risk of provoking unprecedented anger amongst the larger French businesses24.". In this period of introducing consolidation, the Directors were confronted with a situation in which they had to arbitrate on the one hand between corporate and fiscal consequences, and on the other, navigate their subsidiaries more effectively by implementing consolidation. However, the spirit that seemed to have guided the general approach was characterised by a twofold desire: to construct an efficient management tool providing global information about the Group and secondly to construct an in-house pre-standardisation aimed at anticipating any potential regulation having a bearing on the definition of the group and on the consolidation methods. Consequently, the preoccupation with the circulation of financial information intended for the shareholders did not appear to be the aim that was researched. Assistance of audit firm Price Waterhouse The Pechiney Directors turned to the audit firm Price Waterhouse to assist in the preparation of consolidated accounts. The audit led by Price Waterhouse was wide24. Pechiney archives, 001-10-20529.. 15.

(16) ranging, since the accountants had to verify the accuracy of all the figures, and keep a watchful eye to see that the practices generally accepted by the Stock Exchange Commission (SEC) were observed. No fewer than nine Price Waterhouse auditors had to be employed for six weeks in order for the accounts of Pechiney and its subsidiaries to be brought into line with the rules of the SEC. They had to amend the Balance sheets and Profit and Loss Accounts for Pechiney for the period 1960 to 1964. The SEC system of reference was directly determined by the requirement to observe these norms so that the shares could be quoted on the New York Stock Exchange. Pechiney, Cegédur, Seichime and Tréfimétaux shares were already trading on the European stock exchanges in Paris, Amsterdam, Brussels, Frankfurt, Dusseldorf, Hamburg, Geneva and Zurich25. The principle corrections were: • Depreciation; • Gains on disposals of internal assets; • Costs of loan issue; • Some allowances/provisions; • Recomputation to the year of origin for some transactions brought forward in the period. As regards depreciation, Pechiney was using shorter depreciation lives than those agreed by the SEC. For example, as a rule, heavy industrial buildings were depreciated over a life of twenty years, but should instead have been spread over forty years according to the American system of reference. The depreciation life for industrial equipment had changed from ten to twenty years. As a general rule, all depreciation lives were lengthened. The costs of bond issues and call premiums were depreciated over the life of the bond. Depreciation allowances not intended to cover certain expenditure were regarded as reserves. The balance sheet was presented in the format required by the SEC. Assets consisted of Current Assets and Investment Assets. Liabilities appeared as Current Liabilities and Equity Liabilities, the latter showing the part due back to the shareholders. Once the task of standardisation had been achieved, Price Waterhouse's second mission was to proceed with the actual consolidation of accounts for the fiscal years 1962, 1963 and 1964. The rules used by the American auditors were a compromise between the 25. From the daily publication L’opinion économique et financière dated 15 October 1964. 16.

(17) American and European practices. Taking into account the relatively large scale of Pechiney's transactions, Price Waterhouse created five sub-groups: Table 1 - Subsidiaries included in consolidation. PECHINEY Sub-Group. SEICHIME Sub-Group. ALUMINIUM FRANÇAIS Sub-Group PECHINEY/Saint-Gobain Sub-Group NAPHTACHIMIE Sub-Group. Subsidiaries. Subsidiaries. fiscally integrated globally. on an equity basis. Groupe Aluminium Français, SFDAG, Gominco, Titanium, Framalite, Génie Chimique Lacollonge, Lacollonge-Belgique, SIAP, Pechiney-Enterprise, Affifrance ASO, Coquillard, Fonderie de précision, Gerzat, Salicam, CGPIF, Consortium Technique et Mobilier, Affineries de la Courneuve Otalu, Sodème, Sofal, Laminoirs de l’Escaut. Alucam, Sanaga, Magnétherm, Seichime Group, P/SG Group, Cégédur, Naphtachimie.. Thann et Mulhouse, SPCS, Plastichimie, Armovyl, SISS, SOFEC, Vinylacq, Zuidchimie Naphtachimie. Aquitainechimie, Usine de Melle, Pechiney-Progil, Prochal, Tuboplast. Naphatachimie, P/SG, Cegédur. Table 2: Pechiney Balance Sheet as at 31/12/1963 (in thousands of French francs) Assets Establishment Expenses. Liabilities 38,819 Capital and Reserves. 1,020,516. Fixed Assets. 386,641 Provision for Losses and Expenses. Other Fixed Assets. 868,150 Long and Medium-term Debts. 618,199. Stocks. 159,617 Short-term Debts. 252,036. Assets Realisable in the Short-. 499,646. term Total. Net Earnings 1,952,873 Total. 14,612. 47,510 1,952,873. Source: Pechiney archives 072-10-21968.. Table 3: Pechiney Group Consolidated Balance Sheet as at 31/12/1963 (in thousands of French francs) Assets Establishment Expenses Fixed Assets. Liabilities 66,293 Capital and Reserves for the Group 1,234,652 Minority Interests. Other Fixed Assets. 519,543 Provision for Losses and Expenses. Stocks. 481,453 Long and Medium-term Debts. Assets Realisable in the Shortterm. 998,974 Short-term Debts. Net Earnings....... Group Share Net Earnings....... Third Party Share. Total. 3,300,915 Total. 942,065 166,150 99,788 1,183,500 841,483. 60,200 7,909. 3,300,915 Source: Pechiney archives 072-10-21968. 17.

(18) Some subsidiaries retreated from the consolidation perimeter because of the information required, the instability of the exchange rate or simply because their accounting was held to be less accurate. The help received from Price Waterhouse was invaluable for Pechiney in the conception phase of consolidation, but it raised other questions, in particular with regard to the certifying of accounts. The objectives of internal audit were always defined in collaboration with Price Waterhouse. A note relating to a project for the organisation of an effective function of internal audit, appended to the project for the development and introduction of a manual on consolidation, revealed the solutions proposed by Price Waterhouse to assist Pechiney in the implementation of internal audit26. To convince Pechiney's Directors of the benefits of internal audit, the audit firm organised a week-long seminar during which a Group Director was able to attend a meeting of auditors and clients. The aim was to allow Pechiney's Directors to gain a better grasp of the contributions of internal audit for the organisation. On returning to France, this member of Price Waterhouse was to assist the Director in setting up internal audit within Pechiney, specifying the tasks of the internal auditors and their training needs. Rather than hiring staff, Pechiney preferred to turn to one or more trust companies since the nature of the work, to be both police force and stickler for detail, would require that these staff were redeployed after three or four years. Outsourcing of this function was desired by the Head Office accounting department which feared they would lose the goodwill and confidence they had amongst the managers and Finance Directors in the subsidiaries. Finally, certification was mandatory if Pechiney wanted to be quoted on the American stock exchange; and internal audit is an element of good standing which financiers place an indisputable value on to justify any judgements they may make about a business. However, the fact that Price Waterhouse was acting as mentor was sufficient for the SEC to accept the shares on the official list.. 18.

(19) From production to publication of consolidated accounts Following the experience of setting up the first consolidated accounts, implementing internal audit procedures and developing an awareness of the issues arising from the audit, 1968 was a pivotal year between the experimental phase and the phase when the consolidated accounts were produced. In a note dated 21st May 1968, Philippe Thomas, Director General of Pechiney, clarified for the Chairmen and Directors of the Group Companies that, ".... from now on all credit, which the Group depends on largely for its expansion, will be accorded to the parent company as well as to the subsidiaries only after presentation and examination of the consolidated documents27". Pechiney was attempting to produce two consolidations, one according to the French standards prepared with the other large Groups and the other, spurred on by Price Waterhouse, intended for the American financial markets. This twofold production posed some problems, as Pierre Jouven stressed in a note dated 16th May 1968 addressed to Pierre Barthès: "[...] The comparison between the consolidations made for 1966 on the American side and on the French side, leads me to think that it is absolutely unnecessary, given the present state of affairs, to pursue consolidation following the French methodology; in fact, owing to how complicated the Group is, no consolidated balance sheet makes any sense by itself. Furthermore, we will be required to provide a consolidated balance sheet in the American format for some financial transactions; if we publish two different consolidated balance sheets, analysts will deliver a verdict on us from which we will gain nothing positive; in short, American consolidation is more favourable than French consolidation in the way we present our accounts. I have reached the conclusion that I am putting to you: is this not the best time to abandon work on a French consolidation that we will not have published for several consecutive years, in favour of the American consolidated balance sheet28?". Faced with the difficulties encountered, a commission to study the problems of consolidation was created on 18th June 1968, at the instigation of Pierre Barthès, who became manager of the General Inspection of Accounting Functions. The first problem examined by this commission involved the reciprocity of accounts. A first resolution was voted whereby the company issuing a document addressed to a receiving company should specify the account to be debited or credited so that the receiving company posts the exact opposite transaction. It was decided to put a Group accounting standard in place aimed at facilitating analysis of the reciprocity of the. 26. Pechiney archives, 001-10-20530. Pechiney archives, 001-10-24607. 28 Pechiney archives, ibid. 27. 19.

(20) entries. The other resolutions concerned the design of a new form common to all the subsidiaries and a model debit-credit advice common to the whole Group, as well as the production of a directory of people in charge of preparing the consolidation within the Group. The agenda for the second meeting, dated 28th October 1968, concerned the creation of a table of depreciation to calculate the American depreciation life, the problem of eliminating the profits included in the stocks, and the standardisation of the forms designed in line with the Group accounting standards. In 1969, Pechiney published consolidated accounts for the public for the first time. This publication occurred two years before the “Commission des Opérations de Bourse” (French equivalent of the FSA) made this mandatory for listed companies and before the merger document was signed with Ugine Kuhlmann on 30th September 1971, which gave rise to the largest industrial Group known in France during the "Glorious Thirties" (1945-1975). Thus, the consolidation of accounts was able in part to meet the wish for control of the subsidiaries by the Pechiney's Directors. The role of Price Waterhouse was essential in its implementation, but its introduction raised a number of questions linked to tax, audit, accounting organisation and financial communication strategy. The 1960s was a period of profound social and economic change. The Pechiney organisation chart expresses the complexity of the Group's financial and economic links. The case study of this business illustrates the extent to which French Groups with an international dimension had to change. This transformation drove Pechiney to carry out expansion strategies to make perception of the true power of the Group more transparent. In order to be able to gain a global view of the Group, the consolidation of accounts would prove to be an essential management tool. Even if the French accountancy profession had known the principles and thought about a French method of consolidation, the practice was underdeveloped. Under these conditions, the American audit firms became essential in helping Pechiney's Directors in the implementation of consolidation. We observe that implementation of the consolidation of accounts by Pechiney met several objectives: the first was the desire to be able to control its subsidiaries where monitoring by classical accounting was insufficient, the second was to be able to present consolidated accounts conforming to the demands of the American. 20.

(21) financial markets so as to overcome the barriers to entry erected by these institutions. Finally, the third motivation of the Group was to pursue a position as leader with regard to consolidation in order to be able to participate in offering advice and expertise at the appropriate time within the National Accounting Board in charge of developing French accounting standards.. Sources d’entreprise Pechiney’s Archives :. 072-10-21968 : secrétariat général 001-10-21529 : direction générale 001-10-20530 : direction générale 001-10-24607 : direction générale 98-2-501 IHA TRAI 9/15 ; étude Mac Kinsey 90-3-501 IHA-1 ; manuel de procédures.. Bibliography Berry, M. (1983), Une technologie invisible, l’impact des instruments de gestion sur l’évolution des systèmes humains, CRG École polytechnique, 1983. Bircher, P. (1988), "The adoption of consolidated accounting in Great Britain", Accounting and Business Research, vol. 19, n° 73, p. 3-13. Cailluet, L. (1995), Stratégies, structures d’organisation et pratiques de gestion de Pechiney des années 1880 à 1971, thèse d’histoire, Université Lyon II, 1995. Camfferman, K. et Zeff, S. A. (2002), "The apotheosis of holding company accounting: Univeler's financial reporting innovations from the 1920s to the 1940s", 25th Annual congress of the European Accounting Association, Copenhagen Coffman, E. N. et Douglas P. C. (1996), "Consolidated financial statements", In Chatfield, M. et Vangermeersch, R. (eds.), The history of accounting : an international encyclopedia, New-York, Garland, p. 167-168. Conseil économique et social, Consolidation des bilans, étude présentée par la Section des finances, du crédit et de la fiscalité sur le rapport de François-Maurice Richard, Paris, 1965. Conseil national du patronat français, Les bilans consolidés, Paris, 1969. Edwards, J. R. (1991), " The process of accounting innovation : the publication of. 21.

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