The practice of statutory auditing in France (1867–1935): The case of Pont-à-Mousson and Saint-Gobain companies

Abstract

The Company Act of July 1867 introduced a new actor into the life of French limited companies: the statutory auditor. It defined the assignment of this new character but gave free rein with regard to auditor recruitment. The aim of this article is to show how this new legal obligation would be implemented. To this end, this article presents the 1867 Act and the French economic, social and political context. It describes the lowly position of professional accounting organisations, their lack of prestige, the predominance of secrecy in business, and an ethos of individualism. To illustrate the actual practice of statutory auditing, this article studies the archives of two major industrial companies of that period: Pont-à-Mousson and Saint-Gobain. These archives show that the auditors were closer to the directors than the proxies of shareholders. In turn, this led to the auditors remaining tied to business secrecy and their independence was challenged.

Keywords

Auditing corporate governance France independence limited companies

Introduction

The Company Act of July 1867 introduced a new actor into the life of French limited companies: the commissaire aux comptes (statutory auditor). It put an end to the permission of the State being required to establish limited companies, but made the appointment of one or several auditors compulsory: “the annual general meeting of shareholders appoints one or several auditors, whether they are shareholders or not” (Article 32). The aim of this article is to show how this new legal obligation would be implemented in the specific French context. What was the real task of this new commissaire aux comptes? In a context where the world of business remained hostile to any external control and where business secrecy was predominant, how was the auditor chosen? Where professional accounting organisations were neither prestigious nor representative, who would the first auditors be?

In order to illustrate the actual practice of statutory auditing, this article studies the archives of two major industrial companies of that period: Pont-à-Mousson and Saint-Gobain. These two firms belonged to the “100 largest publicly-held manufacturing enterprises in France and selected private enterprises in 1913” (Smith, 1998: 56–59). The first one was Saint-Gobain with total assets of 136 million French francs (Frs) and Pont-à-Mousson was the 34th with total assets of 43.2 million Frs. Letters exchanged between the auditors and the board of directors, as well as the annual reports of the auditors and the minutes of general meetings have been found. The analysis of these documents clarifies the role of auditors and their positioning between the directors and the shareholders.

As a consequence of the Great Depression and new financial scandals during the first half of the 1930s, the government decided to introduce new measures on company accounts and managers’ responsibilities. The decree of 1935 was intended to reinforce the auditor’s independence and qualifications. It was a new stage in the French history of statutory auditing and marks the end of the period studied in this article. Current academic literature has focused on the history of statutory auditing in France, as shown in the work of Hilaire (1989), Mikol (1993), Foos (2001), Bennecib (2004), Ramirez (2009), and Praquin (2012), or on the French accounting profession (Pinceloup, 1993; Bocqueraz, 2000; Ramirez, 2005; Touchelay, 2006; Scheid, 2009). Other works deal with the training of accountants and the development of the expert accountant diploma (diplôme d’expert comptable) (Degos, 2002). This article contributes in an original way to current literature because of the material used – that is, firms’ archives – to illustrate the actual practices of auditing, and through the choice of a period that has scarcely been studied. It is an attempt to highlight the activity of French auditors at the beginning of the twentieth century and to understand why the notion of an audit was illusory before the Great Depression. After a description of the French legal, social and economic context, the article deals with the practice of auditing in two major industrial firms: Pont-à-Mousson and Saint-Gobain.

The French legal, social and economic context

The 1867 Act set the legal framework for auditing French limited companies. Although accountancy training was developing, it was of no benefit to French auditors. Added to this lack of training was the hostility of directors to any form of external audit and the continued predominance of business secrecy. The control of accounts remained illusory.

The Act of 24–27 July 1867

The leading provision of the 1867 Act was the complete abolition of governmental authorisation that led to the implementation of auditing. Indeed, the French Code de Commerce of 1807 created a new legal form of association: the Société Anonyme (SA). This limited liability company allowed the joining of funds needed for industrial and economic development and at the same time limited the risks for the shareholders who were only liable up to the limit of the funds they had invested in the company. Owing to the absence of personal responsibility, the Code de Commerce introduced the requirement of governmental authorisation in order to create an SA. Even if there was no requirement concerning auditing in the Code, control of accounts was set up by the articles of association in 36 per cent of the SAs created between 1807 and 1867 (Fournès Dattin, 2012). This could be performed by commissaires, censeurs, contrôleurs or inspecteurs and range from a limited review of accounts 15 days before the general meeting through to a permanent task with extended means of investigation. Governmental authorisation delayed the growth of limited companies and it became a slow, costly and unwieldy control system, increasingly incompatible with the speeding-up of economic life during the Second Empire (Lefebvre-Teillard, 1985). The reform of the Code de Commerce became a matter of urgency.

The 1867 Act put an end to governmental authorisation being required to establish limited companies and made the appointment of auditors by the general meeting of shareholders compulsory¹ in order to maintain investors’ trust, even if the administrative control was abolished. However, no criteria for independence or technical skills were mentioned in the law. The inspection practised by the auditors was limited to the three months prior to the general meeting. This restriction was due to the directors’ reluctance to accept external inspection. The report of the parliamentary committee tasked with reviewing the bill on companies reveals much about the fear of directors of too great an intrusion into management by the auditors at that time. This attitude is evident in the following commentary from the time:

We fear that this duty … will degenerate into a true inquisition that is more detrimental than useful to the company. … The management, though needing to be monitored, must also be free in its movements. A report, complemented by a three month examination of the books and operations of the company, is of course enough to prepare and develop the resolutions of the general meeting.²

French auditors had the duty to draft a report to the general meeting on the company’s situation, on the balance sheet and on the accounts presented by the directors (art. 32, Company Act 1867). They were the shareholders’ proxies and guaranteed “the good management of directors”, according to Du Miral, a French Member of Parliament.³

In the United Kingdom (UK), further to the promulgation of the 1844 Joint Stock Companies Act, companies had to produce “a full and fair balance sheet which was to be audited and presented to every general meeting of shareholders” (Maltby, 1999). But the 1856 Joint Stock Companies Act abandoned these provisions. Instead, it provided model articles on accounting but gave no guidance on the principles required (Bryer, 1998). The appointment of an auditor was made optional. According to Praquin (2012), “it was not until the Companies Act, 1900 that the appointment of an auditor became compulsory”. However, just as in the French case, the English legislation made no mention of any specific skills that were required for appointment as an auditor.

Marginal ‘expert in accountancy’ qualifications

The general standard of education in accounting remained very low in France at the beginning of the twentieth century. In 1870, Jacques Siegfried, a co-founder of the Mulhouse Business School, wrote:

It looks as if in France we are still thinking that business is of such little importance that there is no need to prepare anyone for it; although, as far back as 1848, a bill contained provisions for initial higher education to consist of basic knowledge in bookkeeping. In spite of this wish … the lack of skilled colleagues in accounting and administrative management has been highlighted. (Pinceloup, 1993: 56)

The lack of accounting education in the most prestigious universities and in higher education institutions continued. Business education which had developed during the 1870s remained marginal and there were only 15 business schools in France in 1905 (Maffre, 1984). The leading professional group in big companies was still that of engineers, which had established links with the State, the university environment and the business world, thanks to the prestigious and elitist grandes écoles such as the Ecole Polytechnique (Ramirez, 2001). The Société Académique de Comptabilité (SAC) attempted to strengthen the knowledge base of the accountancy profession. Although no skills were required by law, auditors could utilise the comprehensive system of accounting education implemented by the SAC and also make use of the creation of a State expert accountant qualification (brevet d’Etat d’expert comptable) in 1927.

The SAC, which was set up in 1881 and renamed Société de Comptabilité de France (SCF) in 1916, was strongly involved in education and in the spread of accounting science. It awarded three certificates organised in ascending order: the certificate of bookkeeping (le certificat de teneur de livres) created in 1900, the accountancy degree (le diplôme de comptable) in 1881 and the expert in accountancy degree (le brevet d’expert comptable) in 1905. The distinction between these qualifications has been explained as follows: “The bookkeeper sticks to the trodden path, the accountant creates the path and alters it if necessary, the expert in accountancy checks, manages, assesses, and can become an auditor”.⁴ This trilogy was the first complete system of accountancy education in France. However, the number of experts in accountancy remained very low. Between 1907 and 1931, the SCF only awarded 21 expert in accountancy certificates. In any case, although the expert in accountancy degree was the one advised by the SCF for the practice of auditing, the low number of graduates implies that only a few auditors had this degree.

The interwar period was characterised by a significant growth in the accounting services market. In France this boom was not due to costing as desired by the industrial sector and which was the prerogative of engineers, but to the establishment of heavier corporate taxation. The main reforms were the imposition of an income tax in 1914, the extraordinary taxation on war profits in 1916 and the taxation on commercial and industrial profits in 1917. The amount payable under this last tax was based on financial statements. There was then a strong demand for tax saving advice. The accounting services market attracted all sorts of individuals who either claimed to be experts in accountancy, or were called business agents, proxies or organisers, even if they had no degree in accountancy (Ramirez, 2001). In order to clarify the situation, the State established the brevet d’expert comptable with the decree of 22 May 1927. This diploma was then awarded to technicians “who want to check, to assess, and to rectify bookkeeping and accounts of all sorts as a customary occupation” (Article 1).

The State diploma, like the SCF expert in accountancy degree, was awarded to a limited number of candidates. Few candidates entered for the examination. Many accountants realised that they could probably benefit from the same advantages as the expert in accountancy qualified by the State without subjecting themselves to the heavy requirements of the State diploma. It should be remembered that the law required no specific skill for the practice of auditing. In 1932 there were 63 certified accountants⁵ who had passed the State examination and 634 accountants⁶ who were certified without having taken any examinations. These people benefitted from the transitional provision of Article 6 of the 1927 decree:

As a transitional provision, the “brevet d’expert comptable” recognized by the State may be awarded, after checking their professional ability, to French licensed qualified accountants, being 30 years old at least, giving proof of five successive years of practice in this profession without any exclusive tie to any specific profession. These qualified accountants have to submit their request within one year from the date of the present decree.

During the 1935 sitting, only 15 candidates passed the final examination and 28 passed the preliminary examination.⁷

An illusory audit for the sake of appearances

The perceived usefulness of auditing was undermined from the end of the nineteenth century owing to many scandals and financial crises. Two events were particularly significant: the scandal of Union Generale and the Panama scandal. The Union Generale was a bank that experienced significant growth by making small and very profitable transactions of agiotage.⁸ The shares of this bank were issued in 1878 at 500 Frs and rose to reach a price of more than 3,000 Frs⁹ in December 1881 due to a boom in speculation to support investments in central Europe. Then, in January 1882, the European economy crashed. Speculators had to repay their debts; the Paris and Lyon stock exchanges collapsed; and small savers ran to take out their deposits (Bonin, 1989). The Union Generale went bankrupt in February 1882. Its auditors were charged with having confirmed in their report the existence of fictitious profits. The Panama scandal was a result of Ferdinand de Lesseps’ dream to open the Isthmus of Panama (Degos and Prat-dit-Hauret, 2008). Building work was very hard and required a lot of money. The Panama Company issued shares for an amount of 1,393 million Frs and borrowed another 250 million Frs. However, the company still went into liquidation in January 1889. The problem was that to float a share issue the Panama Company would have compromised about a hundred members of Parliament and the press of that period. Indeed, a law was necessary at that time to float a share issue. In order to get the trust of investors and the favourable vote of members of Parliament, the company had paid journalists, bankers, politicians and other persons who could provide support. In 1892, Lesseps and his son were charged with fraud and perverting the course of justice. These financial scandals led to mistrust of the business world and in turn sowed doubt about auditors’ skills. However, they were an opportunity for associations such as the Ligue pour la réforme des lois sur les sociétés par actions (Association for the Reform of the Company Act) to request reform of auditing in limited companies and for some standardisation of accounting rules. Despite the establishment of several extra-parliamentary committees (1875, 1883, 1902), these attempts remained fruitless. The setting up of standards not only had to overcome the opposition of a liberal and inflexible conception of business, but also problems in setting up these standards and controlling them. At the beginning of the twentieth century, France was one of the most liberal European countries as far as accounting was concerned: “Laissez-faire wins over interventionism” (Lemarchand, 1995: 7).

The business environment remained hostile to any external audit and preferred to keep auditors in a purely formal function. Individualism and business secrecy were predominant. According to Gustave Doyen, who was to become the president of the future Ordre des Experts Comptables et Comptables Agréés (OECCA),¹⁰ “the 1867 Act is just used for making auditors, recruited without any interest in their ability, responsible for writing a bogus report on the balance sheet and accounts of the company for the annual general meeting”.¹¹ Unlike their Anglo-Saxon counterparts, French directors were opposed to any external audit. In the UK the accounting profession enjoyed an excellent reputation, even if this may have varied over the period. Certainly following the banking crisis of 1892, the question “what is the value of an audit” was vigorously debated. However, whilst there was no requirement in the law, the auditor was usually a professional accountant. Indeed, among a sample of 950 companies out of 1,100 quoted companies in 1886 in Great Britain, 98 per cent were audited and 75 per cent were audited by a professional accountant. For 600 of these companies the auditor was a member of the ICAEW (Anderson et al., 1996).

As the French law required no specific skills to be an auditor, French auditors were for the most part insufficiently educated in accounting and management to undertake an effective audit. Thus, on 4 May 1905, La Vie Financière described auditors as:

accountants, seldom; bald men, sometimes; decorated, often; decorative, always; such auditors are, moreover, charming people. Even too charming because, appointed by the shareholders to verify the accounts submitted by the board of directors and supposed to audit their management, they forget the mandate they have been entrusted with as soon as they are appointed.

Auditors were more aligned with directors rather than being the true proxies of shareholders. Statutory auditing was seen as an honorary and formal task and its function remained illusory.

To comprehend the practice of auditing in an empirical way and to assess whether the auditing of accounts was truly illusory, the analysis of companies’ archives regarding this system is needed. The archives of the Compagnie Saint-Gobain are very substantial and consist of records from both Compagnie Saint-Gobain and société Pont-à-Mousson, two jewels of French industry at the beginning of the twentieth century. Letters between directors and auditors, auditors’ annual reports and the minutes of general meetings offer a wealth of opportunities to learn about the function of auditors during this era.

The auditor as the board of directors’ right-hand man: The case of Pont-à-Mousson and Saint-Gobain companies

As revealed by parliamentary debates, the spirit of the 1867 Act was that an auditor had to be the shareholders’ loyal proxy and had to constitute a sort of opposition to the power of the board of directors. The successive study of the function of auditors in Pont-à-Mousson and in Saint-Gobain shows that the auditor remained the right-hand man of the board of directors.

Auditor of the ‘SA des hauts fourneaux et fonderies’ (blast furnace and foundry company) of Pont-à-Mousson

After a brief introduction to the company two periods will be discussed: the Lenglet period (1886–1914) and the Darmour period (1914–1926), named after the two main auditors at that time at Pont-à-Mousson (1891–1926).¹²

In 1856, Frédéric Mansuy, a merchant trading in Pont-à-Mousson, obtained the concession of an iron ore deposit that was discovered during excavation works (Baudant, 1980, 1983). He established the first industrial company running a factory in the town of Pont-à-Mousson. In 1866, the factory production lines turned out their first cast-iron pipe. Xavier Rogé, who was already the factory chief executive, succeeded Mansuy as managing co-director of the limited partnership. On 7 August 1886, the limited partnership switched to a joint-stock company: the Société Anonyme (SA) des hauts fourneaux et fonderies of Pont-à-Mousson. Rogé became the main limited company shareholder and remained director until 1900, when Camille Cavallier, who was his pupil for 20 years, succeeded him. Camille Cavallier continued the company tradition until the 1910s: he personified power and took over the management of the company alone. In 1917, Cavallier, the only director, arranged the appointment of a board of directors, choosing his son-in-law, Marcel Paul, graduate of the Ecole Polytechnique, as his future successor. In 1926, Cavallier died and Paul succeeded him, ensuring the continued traditions at Pont-à-Mousson.

Paul Lenglet was appointed auditor of the SA des hauts fourneaux et fonderies de Pont-à-Mousson as soon as it switched from a limited partnership to a limited liability company in 1886. He was the only auditor until 1901. Paul Lenglet, a senior banker, was the son of Jean Baptiste Lenglet, one of the founders of the foundry (Moine, 2003). A second auditor, Haldy, also a banker, was appointed in 1902. During the 1914–1918 conflicts, a new character appeared: Henri Darmour. He was appointed auditor in 1914 alongside Paul Lenglet. Lenglet became director in 1917 and Colonel Plassiart succeeded him as auditor from 1917 to 1919, followed by Louis Greff, also a senior banker, from 1920 to 1926 (see Table 1).

Table 1.

List of auditors at the “société Pont-à-Mousson” from 1886 to 1926.

Period	Name of the auditor(s)
1886–1900	Paul LENGLET
1901–1913	Paul LENGLET – François HALDY
1914–1916	Henri DARMOUR – Paul LENGLET
1917–1919	Henri DARMOUR – Jean PLASSIART
1920–1926	Henri DARMOUR – Louis GREFF

The Lenglet period (1886–1914)

The SA des hauts fourneaux et fonderies de Pont-à-Mousson adhered to the 1867 Act provisions with shareholders appointing an auditor after the switch to a joint-stock limited company in 1886. Paul Lenglet submitted his first report to the general meeting pertaining to the 1886–1887 accounting year.

During the Lenglet period, auditors were close to the management. Although information circulated between management and auditors, there was no openness towards shareholders. Thus, after receipt of the 1900–1901 accounting year balance sheet and the statement of receivables and payables on 30 July 1901, Lenglet asked Cavallier for further information, telling him that this information “will be only for me, as was the other information, and will absolutely not be shown to the shareholders”.¹³ Cavallier remained closely attached to business secrecy. Even if the balance sheet was distributed to shareholders, it “depicted only a ‘reality’ that had been largely reviewed and corrected prior to dissemination” (Lemarchand, 1993b). In 1904, Lenglet did not hesitate to suggest that Cavallier should fiddle with the procedures of the general meeting in order to let shareholders believe that they had been given all the information they needed:

Besides, it would not be bad to get a shareholder (Paul, who is used to this role, or anybody else) to ask questions decided upon in advance that are included along with the answers in the minutes of the general meeting and that should provide the proof that everything has been mentioned to shareholders and that we haven’t left anything out … of what they need to know.¹⁴

In preparation for the 1912–1913 general meeting, Cavallier suggested to Lenglet:¹⁵

Given that we could have this year some new shareholder who could ask for the inventory and a copy of the balance sheet before the general meeting, my intention is to present something as an official inventory that is much less detailed than anything we usually produce.

Cavallier hoped to draw up an official and highly summarized inventory and balance sheet and to hold an unofficial book and detailed records that would not appear in the inventory book.

Auditors carried out more of the function of advisor to the director rather than serving as a representative of shareholders. In 1902, the auditors advised shareholders to rally round the establishment of a defence fund as a safety precaution in order to get through difficult periods: “We need to reach foreign markets by covering all the risks inherent in these distant transactions”.¹⁶ In 1911, they considered that, thanks to equity investments in coal firms, Pont-à-Mousson’s goal was in sight, that is to say, freeing itself from its dependency on big French and foreign collieries. Lenglet was also happy to poke his nose into management affairs and offered to play a part in the take-over of a forge located at Homécourt.¹⁷ Exchanges between auditors and Cavallier were frequent and concerned both checking accounting matters and the company’s strategic choices.

The auditor’s inspection of business management was illusory, if not non-existent. In 1893, Lenglet stood by the promise given by the director:

We have always come to the understanding that you guarantee the figures written down on the balance sheet – stock on hand, portfolio, payables etc. (simply their accuracy and their concordance with the books). It will spare me, as well as you, the waste of time and the formulation of detailed checks.¹⁸

A few years later, in 1901, Lenglet asked himself:¹⁹

I still wonder whether our balance sheets are properly set up! …

1. We never mention general expenses in the balance sheets,

2. We widely amortize (I’m not complaining about this) during the accounting year and before the inventory! Shareholders are not consulted about this depreciation! However, we could say that, without knowing what it covers, they implicitly ratify it when they endorse the balance sheet! Have we got the right to use it in this way and to what extent?”

These comments firstly show that Lenglet was not an experienced accountant, as general expenses never appear in a balance sheet because they are operating expenses written down in the profit and loss account. Cavallier’s answer²⁰ was immediate:

I have no scruples and no worries about the way we set up our inventories and our balance sheets:

1. As far as substance is concerned, because they are fundamentally honest and because it’s only I who could complain about myself;

2. As far as form is concerned, because the main business is about earning money. When you earn money and when you operate honestly, there is nothing to fear from shareholders with regard to form, even if you were able to criticize it, which you should demonstrate to the contrary. Yet, our way of doing it, and, basically, this is entirely to the shareholders’ advantage, is still the way that should apparently satisfy them for the longest time.²¹

According to Cavallier, the substance was predominant over the form and posed no problems because he set up honest inventories and balance sheets. The question of form was irrelevant because there was no need to frighten shareholders with this matter when the unique goal was to earn money (Lemarchand, 1993b). So, Cavallier made the decisions and Lenglet complied.

The auditors reported back to shareholders on their assignment. Initially, the report was very brief: the auditors contented themselves with restating that the accounts were held in order, sincerity and/or accuracy. From the 1900s, the auditors’ task became more detailed: “Several times during the current year I have gone to Pont-à-Mousson in order to check entries, portfolio and cash. … The balance sheet has been given to me within the allotted time. I have noted its sincerity and its concordance with the accounts.”²² It corresponded to the 1867 Act’s provisions. There was little accounting information in the reports; those studied during this period contain no figures. Moreover, a practically unchanging dividend for the duration of the period studied was ensured by accounting mechanisms like depreciation, reserves and provisions. The report comments on the strategy followed by the director in glowing terms and ends with congratulations to the director and to the whole staff. Thus, Lenglet’s first report for the 1886–1887 accounting year speaks highly of the good management at Pont-à-Mousson. “The results obtained give us renewed proof of the skill, the energy and the foresight used in a business of this importance by your management, of whom we can only sing the worthiest praises.” Additionally, the auditor involved himself with management. He did not see himself as an external controller but as an integral part of the firm. The reports studied are written in the first person, with references to “our company” and “our management”.

Lenglet and Haldy were not shareholders’ proxies but rather management men. Their reports give little information on the accounts and strategic choices are mentioned mainly in order to sing the praises of management. There appears to be no opposition to the director. The auditor even went as far as to interfere in management by giving advice on the strategy to follow. He considered himself to be an internal controller and not an external reviewer who could analyse management activity. Accounting was not seen as a tool reflecting a firm’s operations but as justification for keeping dividends quasi stable through a set of written papers. Business secrecy was maintained and inspection was illusory: the auditors always agreed with Cavallier, praised his strategy and gave him management advice. They could not be judge and judged.

The Darmour period (1914–1926)

Henri Darmour became auditor of the Pont-à-Mousson company in 1914, replacing François Haldy. Auditing seemed clearly to be a springboard to reach the position of director. Indeed, the general meeting voting on the 1916–1917 financial statements appointed the new members of the first board of directors to take up their posts on 1 October 1917. The members were Camille Cavallier, Marcel Paul, Emile Henry, Henri Cavallier and, of course, Paul Lenglet, the former auditor at Pont-à-Mousson. Colonel Plassiart was appointed auditor by the 1916–1917 general meeting. During his speech when he took up his post, Plassiart stressed that the auditor’s function was a sort of waiting room to the most prestigious position of director.

When the first board of directors was appointed during the general meeting of 24 January 1917, I couldn’t set my sights on the post of director because of my military status. As compensation, you have made me responsible for checking the company by entrusting me with the position of auditor.²³

It was also felt that Darmour would become a future director in a subsidiary of Pont-à-Mousson. Indeed, in 1925 at the request of Cavallier, he joined the board of directors of Beeringen, in which Pont-à-Mousson held shares. Cavallier was “delighted with this new link that ensures for Pont-à-Mousson a valued collaboration”.²⁴

The auditor, Henri Darmour, admired Camille Cavallier. This is evident in many letters, to the extent that we may have reason to doubt his true independence with regard to the directors. Thus, whilst regretting not being able to attend the general meeting of 7 May 1924 at Pont-à-Mousson, Darmour commented on Cavallier’s speech in glowing terms:

I am familiar with reports from a number of commercial and industrial firms but I don’t know any that can compare with Pont-à-Mousson for its official and latent wealth, created, devised and accumulated by a management that has been able to predict the future and pursue its course of action without ever diverting from the plan it has drawn, however grandiose it may have seemed when it was set up.²⁵

It does not seem surprising that during this second period the auditor remained, above all, the right-hand man of the board of directors, keen to guard its business secrecy. Thus, in a document sent to Cavallier preparing the answers they would give shareholders during the next general meeting regarding the 1924–1925 fiscal year accounts, Darmour wanted to limit the information conveyed to shareholders. He suggested answering with regard to the submitted balance sheet:

that a banking firm, a mining business, a metallurgic business or metallurgic construction business only ever give a brief inventory, a summarized balance sheet and submit only the balance of the profit and loss account. Besides, the Company Act [the 1867 Act] talks about a balance sheet summarising the inventory.²⁶

Some shareholders, even if they were not very many, did not consider that business secrecy was the main issue. Lucien Bailly, who was one of Pont-à-Mousson’s shareholders, harassed Cavallier incessantly. He asked for more information during the general meeting but, despite the lack of disclosure, all resolutions were passed. This conflict began in 1914 and lasted until the late 1920s (Lemarchand, 1993b).

Like his predecessors Lenglet and Haldy, Darmour’s assignment was more of an advisor to management rather than a proxy for the shareholders. Foremost, he was consulted on legal issues. Indeed in 1921 Cavallier wanted to bring amendments to the articles of association and took advice from Darmour. The auditor was in favour of setting up a board of directors and of making a distinction between delegate director and managing director. He gave his opinion on the form of the articles of the statutes contributing to its creation.²⁷ Cavallier also sought the help of Darmour when, in 1923, he wondered about the possibility for the société Pont-à-Mousson to continue issuing shares with the privileged right to vote.²⁸ This work of advisor in business law was continuously carried out by Darmour throughout this period. Darmour was also chairman of Gaz de Lyon (gas company in Lyon) and when Pont-à-Mousson was about to compete for the supply of pipes for the gas pipe network in Lyon, Cavallier did not hesitate to ask for Darmour’s advice: “With the absolute intention of not telling you anything and not doing anything that could be deemed as lacking in discretion, I have only come to ask you if you could advise us or if you have any suggestion to make in this connection.”²⁹ Darmour also brought in his specific knowledge of the Lyon position to Pont-à-Mousson. He gave information to Cavallier concerning the Cex bank from Lyon, which wanted to set up a company of industrial and commercial representation in Egypt, to which Pont-à-Mousson could contribute.³⁰ These circumstances are not so far from the role of auditors in the UK described by John Mather in a paper presented at an ICAEW meeting in 1898 (Maltby, 1999: 43):

business men and company directors usually find it to their advantage to regard their accountant or auditor more as they regard their solicitor – not as a paid servant, or a shopkeeper, from whom they expect a given amount of time, labour or goods at the lowest possible market price rather as a sort of “guide, philosopher and friend” whose advice is always available, and whose expert knowledge they may utilise at any moment.

British auditors were also management advisers but mainly about the “basis on which accounts were to be drawn up and profits distributed” (Maltby, 1999).

As for auditors’ reports submitted to the annual general meeting of shareholders, they included a debriefing on the assignment.

Accounts and records have been given to us within the allotted time, we have been able to appreciate the perfect correspondence between the balances of the general ledger and the balance sheet items and we can only repeat that your accounts are held with utmost clarity.³¹

The first figures appear in 1921 as well as the first comments on the variations observed in assets and liabilities:

In the assets, the account for expenses paid for war damage repairs and not reimbursed by the State stands at 21,610,999.70 Frs, an increase of 15,036,564.33 Frs compared with the previous fiscal year. Knowing from successive reports of your board of directors the extent of damage caused to your plants, you will not be surprised about this increase.³²

Another noteworthy difference with the Lenglet period is that the use of “we” disappears from auditors’ reports. They were now considering themselves as an external body. They spoke to shareholders by saying “your company”, “your directors”. However, the reports still ended with praise for the directors.

From now on, your board of directors, with the conscientiousness that you are accustomed to, is preparing to bring back industrial activity to all the former plants. … The “société Pont-à-Mousson” may be confident that it will see renewed energy in its industries and greater development than in the past, and this in spite of the dreadful consequences of the German devastation.³³

The auditors’ report therefore was not neutral. The auditors commented on the strategy followed whilst speaking highly of the board of directors. They still appeared to be closer to the directors rather than the shareholders (see Table 2).

Table 2.

Auditors at “Pont-à-Mousson”: Progress within the firm and links with management.

Name	Occupation	Period	Numbers of years	Links with management	Progress within the company
Paul Lenglet	Banker	1886–1916	30 years	Son of Jean Baptiste Lenglet, one of the founders of the company	Appointed director in 1917
François Haldy	Banker	1901–1913	12 years	The Haldy family was a partner in the first partnership created by Mr Mansuy in 1862	He had to resign in 1913 due to his German origins
Henri Darmour		1914–1926	12 years at least^a		Appointed director in a subsidiary of Pont-à-Mousson in 1925
Jean Plassiart	Colonel	1918–1919	2 years	Xavier Rogé’s son in law. Rogé was director from 1886 to 1900	Appointed director in 1920
Louis Greff	Banker	1920–1926	6 years at least^a

Our study ends in 1926, the year of the death of Cavallier.

Auditors at the Compagnie Saint-Gobain

Auditing practices within the Compagnie Saint-Gobain have been studied using the minutes of general meetings. After providing an introduction to the company and its auditors, the auditors’ reports during the 1907–1937 period will be analysed; the 1907 general meeting being the first general meeting held in the presence of auditors.

Louis XIV signed the letters patent establishing the manufacture of mirrors at Saint-Gobain in Paris in October 1665 (Pris, 1975; Daviet, 1988). The company benefitted from a temporary but renewable monopoly to develop its production and to keep pace with the demand for mirrors for homes and royal buildings. The factory nevertheless received an impressive and symbolic order in 1684 for 357 mirrors for the Hall of Mirrors in the Palace of Versailles. Thanks to a home-grown invention, glassware table casting, the manufacturer’s sales quadrupled between 1720 and 1786.

The fall of the Ancien Régime created new economic and competitive conditions. In 1830, the manufacturer switched corporate status to become a société anonyme (limited liability company). The company then ventured into the chemical industry with the establishment of a subsidiary to make the sodium carbonate required for glass production. The glass industry blossomed during the second half of the nineteenth century. In 1858, the company merged with its main domestic rival, Saint-Quirin, giving rise to the Manufacture des glaces et produits chimiques de Saint-Gobain, Chauny et Cirey (the Saint-Gobain, Chauny and Cirey manufacture of mirrors and chemical products). New products appeared creating fresh markets in the first half of the twentieth century with the continuous flow manufacturing process of flat glass, glass-tempering technology (1929), the automotive industry (in the 1930s), electrocasting, glass wool and glass fibre. The chemical branch was growing and Saint-Gobain diversified during the interwar period into the nitrogen, petroleum, wood and paper sectors.

Auditing was established in the Compagnie Saint-Gobain from the time it switched to a joint-stock limited company in 1830. According to Article 20 of the statutes of this authorised joint-stock company,³⁴ “business management is entrusted to a board made up of seven members. Furthermore there are two censors (censeurs) and one general agent (agent general)”. Article 28 stipulates that:

censor functions consist in keeping an eye on corporate transactions. More particularly, censors must check that the statutes are observed to the letter. When they judge it appropriate, they may check all accounting records, cash and shop records and inspect the various establishments. Six weeks before the general meeting, they check the board of directors’ report and submit a brief report to the general meeting of shareholders on the results of their monitoring and of their audit.

Censors were appointed by the general meeting of shareholders; their assignment was permanent; and, they were internal auditors of the firm.

Delegate shareholders (actionnaires délégués) then succeeded censors during the merger with the Manufacture de Saint Quirin. Their function was quite similar:

To carry out the audit of accounts and inventory … the eight delegate shareholders will come together at a special meeting. They will have the right to audit … all accounts, records and books, as well as the statement of cash and stores, and to visit if need be the firm’s entities, in order to make sure of the accuracy of accounts and of the compliance of the transactions carried out with the statutes.³⁵

In accordance with the statutes, the delegate shareholders’ report for the general meeting of 30 April 1883³⁶ stated:

the inventory and the different accounts which were given to us a month ago, in accordance with your statutes, and following the audit of your delegates, do not seem to us to be any less well drawn up than the previous ones. We are able to see the accounts of each branch of your industry and we have been able to follow all transactions of the firm. In a word, we have found in your accounting the order and legality that your board of delegates is pleased to note each year.

Business secrecy was already predominant. But some shareholders did not seem to be satisfied with the information disclosed. One of them, De Failly, who held 15 out of a total of 8,710 shares, lamented that the board’s report contained too few details. He even tried legal proceedings but his demands were dismissed and “From 1880 onwards the individual’s name was no longer to be found on the list of shareholders” (Lemarchand, 1993b).

It was only in 1907 that the company amended its statutes to make them comply with the requirements of the law. Because the last statutes of the SA were established in 1858, the company was not subject to the 1867 Act due to the principle of non-retroactivity of laws (Lemarchand, 1993a: 544–545). These statutes specified a duration of 50 years for the Saint-Gobain company which was extended in 1907. The SA then had to comply with the 1867 Act. An extraordinary general meeting was held on 11 May 1907, in order to pass the statutory amendments and to appoint auditors for the first time. The 10 delegate shareholders were appointed auditors by the general meeting of shareholders.

The practice of auditing

As in Pont-à-Mousson, the function of auditor seemed to have been an excellent springboard for reaching the position of director. Indeed, in 1924, five former auditors were among the 15 directors of the company.³⁷ The ratio was the same in 1929. Links between the function of auditor and the function of director, which were often denounced by the press or by accounting professionals, were evident. Appointment as auditor was a kind of first stage for attaining the position of director.

The auditors’ report at the Compagnie Saint-Gobain is similar to Darmour’s at Pont-à-Mousson. Indeed, this report gives an account of the practice of auditing.

We have carried out the audit of your corporate entries for the past accounting year. Accounts are held with order and clarity; we are grateful for the willingness and eagerness of the staff responsible for showing them to us. We have checked the trial balance against the general ledger and made verifications of all sorts. Consequently, we can be assured that the balance sheet and accounts that have been submitted to you are correct and show the situation of your company on 31 December 1907. The submitted balance sheet is the first set up since your company applied the 1867 Act’s regime.³⁸

Order and accuracy are the principles highlighted by the auditors’ report followed by legality. It generally included the list of assets and liabilities with short comments on their amount and on the observed variations. For example, among these assets, mention is made of the inventory of procurements and produced-goods. The auditors explain its rise briefly as, “in surplus … due to the inventories’ increase and to the prices’ increase”.³⁹ Finally, the auditor had become more external to the company. Speaking to shareholders, he describes the company as “your company”.

Nevertheless, business secrecy was predominant at Saint-Gobain and information disclosure to shareholders remained meagre. The year 1933 was a real turning point in the operation of the Compagnie Saint-Gobain with the creation of a shareholder advocacy group. It took place in the context of bills reforming auditing in order to improve savings protection. This association denounced the omnipotence of the board of directors over the general meeting of shareholders, when directors only held 1.5 per cent of the shares: “The Saint-Gobain directors are all and shareholders are nothing. This has been made obvious from the silent conspiracy that we have noticed during the last general meetings and from the lack of information provided to us by the board of directors’ report.”⁴⁰ According to the shareholders’ defence association, the directors’ power was due, on the one hand, to the very fact that the board of directors held a high proportion of shares with plural votes (but this privilege was to be abolished by the Act of 13 November 1933) and, on the other hand, to shareholders’ ignorance: the board of directors took advantage of shareholders who did not know their rights by asking them for a proxy vote if they could not vote personally.

In 1933, the association succeeded in having two auditors selected from professional accountants registered to Seine courts. This implies that this was not the case before. The association therefore saw the auditor as a true proxy of shareholders, auditing the accounts submitted by management and exercising true opposition. The choice of auditors from the professional accountants would guarantee their independence and their skills. Thus, at least one professional expert in accountancy, Dominique Groussot,⁴¹ was among the auditors appointed by the general meeting of 29 March 1933. The report submitted to the 1934 general meeting was practically identical to the previous reports with regard to form and substance. It began with a description of the assignment:

We have the honour to report on the mandate you entrusted us with at the general meeting of 29 March 1933. … These books and records have been made available to us within the allotted time. We have read them at the head office where all documentation has been centralized and, over the three weeks preceding the submission of our report, we have checked the various items on the balance sheet. We’d like to thank the staff for their valuable cooperation with us during the accomplishment of our mission.⁴²

Details of the assets’ and liabilities’ accounts then follow. The report does include more comments on these items than were shown in previous reports and shows the most significant variations, specifies the amount of guarantees, offers a summary of the profit and loss account and, finally, states the income allocation. Groussot was re-elected by the general meeting of 28 May 1934 alongside five other auditors: Fouques Duparc, de Mortemart, de la Frémoire, d’Aillières and de la Basselière.

Conclusion

The 1867 Act introduced a new character to the life of French joint-stock limited companies: the auditor, who was responsible for submitting a report to the general meeting on the company’s situation, on the balance sheet and on the accounts submitted by the board of directors. This auditor was the shareholders’ proxy and his audit was intended to be an effective counter to the power of the directors. Nevertheless, faced with pressure from the business environment, ever hostile to any form of external control, no standard of independence or skill was mentioned in the law. In the end, the auditor was chosen according to the proximity of his relationship with the directors rather than because of his real accounting skills. Auditing was seen as a formal and honorary task, with control remaining illusory. However, as the law required no specific training for auditors, they were usually insufficiently educated in accounting and management to carry out an effective audit. In addition, neither the expert accountants nor the auditors had a recognised professional organisation that was either strong enough or sufficiently recognised to ensure that its members, if not having a monopoly, were at least responsible for a high proportion of auditors’ assignments.

Thanks to the study of letters of correspondence between auditors and management, of minutes of the general meetings and of auditors’ reports, the analysis of the auditing practices at Pont-à-Mousson and Saint-Gobain, two major French joint-stock limited companies, has led to the same conclusion: the audit was largely illusory. In particular:

The auditor was above all the right-hand man of the board of directors and his lack of independence was evident. Indeed, this function was a true springboard to reaching the more prestigious position of director. Auditors were very close to directors. They did not hesitate to play the role of adviser to the board of directors, both in the legal field and also with regard to strategy. They paid attention to business secrecy.

Where the auditors’ report made it clear to shareholders what the procedure of their assignment was, it generally ended with praise of the policy led by the directors. The disclosure of accounting information to shareholders remained limited.

This conclusion is important as these two firms were quite different as far as the structure of capital and the governance were concerned. Pont-à-Mousson, a family business, was an example of personal capitalism which was “sufficient for firms that remained specialized in a single product with uncomplicated marketing requirements and concentrated production facilities” (Smith, 1998:69). Saint-Gobain was a very old traditional company which could be considered as a managerial firm. Smith (1998) considered that Saint-Gobain had adopted the full Chandlerian model of managerial capitalism.

There was a sizeable gap between the spirit of the 1867 law and its implementation. The Great Depression probably served as a true catalyst, with the State realizing that a request was being made by savers to raise the moral standards of the business world. The State needed to restore investors’ trust in limited companies. There was also a change in mentality. The necessity of auditing became apparent, as was shown by the setting up of a shareholders’ defence association within the Compagnie Saint-Gobain. Supported by the many bills⁴³ introduced from the 1920s to reform auditing and to regulate accounting, the government would have all the tools necessary to reform auditing and make this practice a part of everyday life.

The decree of 8 August 1935 introduced the principle of a permanent auditing assignment and of a priori and a posteriori incompatibilities to carrying out the duty of an auditor. Listed companies were obliged to choose one of their auditors from a list of experts held by the Court of Appeal, thus ensuring better qualifications of these auditors. These auditors were tested and theoretically had to pass a technical examination before being nominated experts. But this decree was unfortunately insufficient to reinforce the independence and competence of auditors, and it was not until the 1966 Company Act that a more functional auditing profession was established in France.

Footnotes

Acknowledgements

I would like to thank Yannick Lemarchand (University of Nantes, France) for encouraging me to study the archives of the companies Saint-Gobain and Pont-à-Mousson, and the two anonymous referees for their constructive comments and suggestions on earlier drafts of this article.

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Notes

Saint-Gobain

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