Auditing and corporate governance in nineteenth century Britain: the model of the Kingston Cotton Mill

ABSTRACT The Kingston Cotton Mill Company (KCM) was one of the first companies to be formed under the Joint Stock Companies Act 1844. This Act led to an explosion in company formations, as it was intended to do. The provisions of the Act anticipated a number of the concerns about what would now be called ‘corporate governance’, caused by the divorce between ownership and management. The KCM provides an interesting case study on the effectiveness of the early governance provisions. The extent of the agency problem at the KCM was especially acute because of the relatively large body of shareholders (just over 400) starting a large-scale project from scratch with no knowledge of the cotton industry. Particular attention is paid to the accountability and audit provisions introduced into the KCM's constitution. Evidence of the weaknesses in these provisions is derived from the legal proceedings which followed the company's collapse in 1894. The purpose of this study is to provide a basis for better understanding some key issues in corporate governance in mid- to late-Victorian Britain through the examination of the background to a company whose name has been familiar to generations of accounting students and practitioners.