In almost every country, in almost every sector – private, public or not for profit – you will find two people at the top of most organisations – a chief executive and a chief financial officer. The chief executive is responsible for employing the right people, achieving organisational objectives and strategy. The chief financial officer is responsible for achieving the same thing, but also measuring value creation, profit, cash generation and articulating it. Charities look at grants given, or social impact.
The reports accountants produce are used by the tax collector, shareholders, unions, prospective employees, current employees, prospective and current clients, prospective and current suppliers. These reports are also used for judging the track record of the senior management team of any organisation.
Accountants have to reckon with changes over time of business models. They have to make difficult judgements like how to measure the value of 100 customers? the value of movie rights if it was sold between a buyer and seller? the value of land? the value of buildings? the value of patents, the value of trademarks, the value of brands, the value of financial instruments, or even the total liability of King Inc to players in Candy Crush of in-app items purchased not yet used like “extra lives”. How would you account for that?
If an asset rises in value, drops in value, has to be maintained, how do you account for that? A car rental company for instance has to service its cars, fix blown tires. A printer rental company has to make sure the toner is in good working condition and that the printer is in good working condition by maintaining it. If the company owner lives in the UK which uses sterling but owns a company in the United States which uses dollars, what is the effect of Brexit? How do you estimate the value of the company? and in what currency?
In every modern business language, the basic tools of accounting are 4 reports:
- The Income statement. This shows your sales, your costs, gains, losses and if you’ve made a profit.
- The Cash flow statement. This report shows if you are making money from your operations or just giving away money (“using money”). It shows what an organisation is using cash to invest in or how much cash it is getting from when it sells surplus assets.
- The Balance sheet. This report is a snapshot of all the different types of assets an organisation owns at a particular date and all the types of debts the organisation has (like bank debt, hire purchase, amounts owed to suppliers and amounts owed to employees). If it’s positive, the organisation isn’t bust and it can borrow more money for any legitimate reason.
- Key Performance Indicators. This report is an early warning system. It is based on common sense. It shows the stakeholders in an organisation the results of non-financial measures. A hotel for instance would want to know how empty its rooms were during the year, 5% empty or 50% empty. Clearly 50% is worse than 5% empty. A TV production company many want to know how many TV episodes it delivered to broadcasting networks in each month. If every TV episode were of equal quality and worth the same value at every hour during a full day, a company that delivers 300 episodes every month is clearly doing better than one that delivers 1 episode every month.
Good financial management will help the owners of a business achieve various goals:
- Owner wants to retire and sell the business. A well run business can be sold for more money than a loss-making or badly run business.
- Owner wants to increase profits. A well run business can identify opportunities to use plant and machinery or process changes to reduce the headcount of people or how to use less costly staff.
- Owner wants to borrow money to expand the business. Having a strong balance sheet with assets banks will accept as collateral is important.
- Owner wants to relocate to another country. A well run business with the right staff will run itself because the opportunity to commit fraud, the incentives to commit fraud and the likelihood of people making errors is minimised through “controls”. Controls detect, prevent or insure against bad actions or bad actors.
- Owner needs to pay the correct amount of tax to the government. A well run business will not make the mistake of underpaying or overpaying its tax. It will pay every form of direct tax, indirect tax, employee tax deductions or capital gains tax it needs to pay.
- Owner needs to retain good staff. A well run business will make enough profits to be able to offer employee the right basic salary, health insurance cover, perks paid for by the employer, car allowance, pensions or legal contributions to the government relating to each employee.
- Owner dies and a will has to be executed. A well run business will enable the tax authorities to work out the value of the estate of the deceased and the inheritance taxes to be paid.
The slave trade and slavery in Africans posed these questions to American, British, French and Spanish slave owners, slave traders, banks which lent them money, insurance companies who insured them all and the super-rich who leased out ships and land to them all.
Accounting for businesses run with slave labour was more complex than accounting for factories in the North of the United States. People had health issues, had a gender (male or female), had variable reading skills, had variable understanding of English, had different ages (from infants to the old), had variable immunities and had varied skills.
When an employer compensates an employee, it pays an agreed amount each month or an agreed daily rate. If you need to understand the cost of an slave, you have to break the causes of spending into many pieces, and work out: the cost of food, the number of meals given to slaves, the cost of slave quarters, slave beds, trousers, shoes, tools, torture equipment, plantation equipment, whips, doctors etc.
A factory in North America was more straightforward to account for. It had the same exact format as slave plantations but workers had to be paid. Mature slaves had skills and came from societies with metallurgy, metal smelting skills, medicine, carpentry, chemistry, laws and similar literacy levels in their native languages to pre-1800 Europe and North America. Copper was used in Africa before 3,500 BCE and iron before 2000 BCE. The African species of rice and beans were invented in Africa before Europe prior to 3,000 BC.
Some of the raw materials that the North of the USA used for manufacturing were sourced from the south of the USA such as “cotton”. How did the South work out how to price a global commodity at a profitable level, if not by developments in “accounting”?
The key contributions that slavery in African lives made to American and European management and accounting practices are as follows:
Mark-to-market. This is the system of updating the value of assets to the most recent prices between willing buyers and sellers. When slave owners needed to pay for weddings, give to church, borrow more money from the bank, re-patriate money to the UK due to the American Revolutionary war or speculate on slaves during price rises, they had to work out the most recent price. When banks repossessed plantations, they had to work out the value of what they had recovered.
Depreciation. When a business bought an asset, especially when slavery was legal, it needed to work out if the asset had appreciated or depreciated. Depreciation is a fall in value due to using an asset. In this context, owners needed to work out how much a person could produce until he or she died from being shot, torture, ill-health or natural causes. A belligerent slave might have a short a short useful economic life because he or she might get shot due to insufficient respect for slave drivers. A skillful cotton picker may be able to pick tons of cotton. The accountant had to decide whether to use future capacity to produce to depreciate or useful life expectancy.
Benchmarking. Slave drivers were meant to work out the individual potential of each slave and extract innovation from them through mental harm, physical harm or If they beat their benchmark, a new benchmark was set. If they failed to beat their benchmark, they were punished.
Value in use. Plantation owners for instance may attach a higher price to an infant than an old man, a higher price to a woman than a man because she could bear children, a pre-pubescent female compared to a post-menopause female. Buying more females than males could result in using the males to impregnate multiple females. An old male could be sold to another plantation once past his prime and the cash recycled to buy a younger male.
Full Time Equivalents. A full time equivalent is the concept of using a fixed standard to establish a ratio compare a full ideal human to someone performing less than a full human. Not only was this concept used in financial management of plantations, but even in law, in the United States constitution, the idea of full time equivalents was used when each slave counted as three fifths of a human being. Practical use of concept: if a fully productive person works a 40-hour week, you need to hire 2 people working a 20-hour week to achieve one 40-hour week of production.
Middle Managers. The complex structure of modern organisations with well paid middle managers, wonderfully paid managers of managers, the owner sitting above them all and the worst paid at the bottom started under slavery. The earliest companies registered in North America were slave trading companies such as the “Royal African Company”, East India Company, Dutch West India Company, Dutch East India Company etc. It made it possible for investors to live overseas.
Such were the developments in accounting knowledge, business practices and management acumen generated from the trade and exploitation of African lives.
Today this truth is buried behind econometric theories and academic denial. “Ivory tower” theory and less violent explanations are used to explain how profits were generated during 1500-1867. Academically “robust” ideas such as the theory of comparative advantage by David Ricardo discuss whether 19th century England (or any country) should make cloth or wine, without discussing how cotton arrived in England.
Between 1500 AD and 1890 AD, over twenty-two million (22,000,000) Africans were sold into slavery (R.A. Austen 1979). Seven million (6,856,000) were sold east, 3,956,000 were sold across the Sahara and 2,900,000 across the Red sea and the Indian Ocean (R.A. Austen 1979). Fifteen million (15,000,000) were sold across the Atlantic. The median income for the United Kingdom for the tax year 2017 (6 Apr 16 – 5 Apr 17) was £27,300 (UK Office of National Statistics, 2018). The average life expectancy of a slave in the Caribbean was 9 years (D. Olusoga, 2016).
When slavery was abolished, slave owners in Europe and the United States were compensated for each slave they freed. In the UK, slaves were forced by law to work up to 4 extra years free, to prepare them for freedom as labourers on “farms”. Assuming nine years of work and an annual salary of £27,300, importing 15,000,000 slaves was equivalent to a cash injection unpaid labour costs of £3.7 trillion over nine years (or $5.2 trillion). 22 million slaves exported was therefore equivalent to £5.4 trillion over nine years or $7.6 trillion over nine years.
Caitlin Rosenthal, through Harvard University Press (August 2018), has published a book called Accounting for Slavery. ISBN 9780674972094. Accounting is how all modern organisations make sure their employees, suppliers, the tax authorities and shareholders get paid at a pre-determined time. Her book demonstrates from evidence the genesis of some of today’s modern accounting practices.
Accounting for Slavery is a unique contribution to the decades-long effort to understand New World slavery’s complex relationship with capitalism. Through careful analysis of plantation records, Caitlin Rosenthal explores the development of quantitative management practices on West Indian and Southern plantations. She shows how planter-capitalists built sophisticated organizational structures and even practiced an early form of scientific management. They subjected enslaved people to experiments, such as allocating and reallocating labor from crop to crop, planning meals and lodging, and carefully recording daily productivity. The incentive strategies they crafted offered rewards but also threatened brutal punishment.
The traditional story of modern management focuses on the factories of England and New England, but Rosenthal demonstrates that investors in West Indian and Southern plantations used complex accounting practices, sometimes before their Northern counterparts. For example, some planters depreciated their human capital decades before the practice was a widely used accounting technique. Contrary to narratives that depict slavery as a barrier to innovation, Accounting for Slavery explains how elite planters turned their power over enslaved people into a productivity advantage. The brutality of slavery was readily compatible with the development of new quantitative techniques for workforce organization.
By showing the many ways that business innovation can be a byproduct of bondage, Rosenthal further erodes the false boundary between capitalism and slavery and illuminates deep parallels between the outlooks of eighteenth- and nineteenth-century slaveholders and the ethical dilemmas facing twenty-first-century businesses.