text: royal mail case the royal mail case or r v kylsant & was a noted english criminal case in 1931 . the director of the royal mail steam packet company , lord kylsant , had falsified a trading prospectus with the aid of the company accountant to make it look as if the company was profitable and to entice potential investors . following an independent audit instigated by hm treasury , kylsant and john moreland , the company auditor , were arrested and charged with falsifying both the trading prospectus and company records and accounts . although they were acquitted of falsifying records and accounts , kylsant was found guilty of falsifying the trading prospectus and sentenced to twelve months in prison . the company was then liquidated , and reconstituted as the royal mail lines ltd with the backing of the british government . as well as its immediate impact , the case instigated massive changes in the way companies were audited . the case highlighted flaws in the way company accounts were reviewed , and " probably had a greater impact on the quality of published data than all the companies acts passed up to that date " . the case " fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds " , and has also been linked to reduced public trust of big businesses . the case is also seen as the reason for the demise of accounting with the aid of secret reserves . background the royal mail steam packet company was a british shipping company founded in london in 1839 by james macqueen . it became the largest shipping group in the world when it took over the white star line in 1927 . lord kylsant had been chairman of the company since 1902 . he had expanded the company rapidly : aside from the white star line , he bought the pacific steam navigation company in 1910 for £ 1 . 5 million , the union - castle line in 1912 , and assumed control of the harland and wolff shipyards in 1924 . the company had prospered during the first world war as the government paid to requisition its ships as military supply vessels and troop transports . the company had saved the profits , predicting that it would need them to cover income tax and excess profits tax . after these taxes had been paid there was approximately £ 1 million left , which they again saved , hoping to use this to cover any financial difficulties that might arise . the reserves were again boosted with government money paid under the trade facilities act 1921 , but between 1921 and 1925 the profits of the company rapidly dropped and , beginning from 1926 , the directors supplemented the company income by taking money from the reserves . in 1929 the company asked hm treasury for an extension of the period in which government loans to the company could be paid . the treasury first demanded an audit of the company accounts , and sent sir william mcclintock to write a report on the financial state of the company . mcclintock 's report revealed that the company had not earned any trading profits since 1925 , but was still paying dividends by taking money from the reserves . the company had reported £ 439 , 000 profits for 1926 , but had drawn £ 750 , 000 out of the reserves and falsified accounts to make it appear that the money came from trading . in 1927 the company made a trading loss of £ 507 , 000 , but money was again drawn from the reserves to make it appear that the company had made a profit of £ 478 , 000 . as a result of this , and a report that in 1928 the company had issued a fraudulent prospectus inviting customers to buy shares in the company and saying that it had earned an average £ 500 , 000 a year in the last decade , arrest warrants were issued for lord kylsant and john moreland , the company auditor . at the time the ruse was discovered the company had a trading deficit of £ 300 , 000 a year , the reserves were completely exhausted , and the company owed £ 10 million . trial the trial began at the old bailey on 20 july 1931 before mr justice wright , with sir william jowitt , d.n. pritt and eustace fulton for the prosecution , sir john simon , j.e. singleton and wilfred lewis for lord kylsant and sir patrick hastings , stuart bevan , frederick tucker and c.j. conway for john moreland . the indictment contained 3 counts . on count 1 kylsant was charged with issuing a document , namely the annual report for 1926 with intent to deceive the shareholders about the true state of the company , morland was charged with aiding and abetting this offence . count 2 was an identical count relating to the annual report for 1927 against both defendants and on count 3 kylsant alone was charged with issuing a document — the debenture stock prospectus of 1928 with intent to induce people to advance property to the company . all counts were contrary to section 84 of the larceny act 1861 . both defendants pleaded not guilty to all counts . the main defence on the use of secret reserve accounting came with the help of lord plender . plender was one of the most important and reliable accountants in britain , and under cross - examination stated that it was routine for firms " of the very highest repute " to use secret reserves in calculating profit without declaring it . patrick hastings said that " if my client ... was guilty of a criminal offence , there is not a single accountant in the city of london or in the world who is not in the same position . " both kylsant and moreland were acquitted of counts 1 and 2 , but kylsant was found guilty on count 3 and was sentenced to 12 months in prison . appealed his conviction on count 3 and was bailed pending the appeal . the appeal was heard in november 1931 where the court of appeal upheld the conviction , ruling that although the statements within the prospectus were all true , the document as a whole was false because of what it concealed , omitted or implied . aftermath following kylsant 's conviction the company was liquidated , and reconstituted as the royal mail lines ltd with the backing of the british government . the case led to several changes in the way companies were audited . because many accountants shared plender 's view that secret reserve accounting was a regular and respectable practice , and because the pair had not been found guilty of publishing false information as a result of this , the professional response was disjointed and half - hearted . there were major changes , however : although the practice of secret reserve accounting remained acceptable , companies disclosed their use of this in their audit reports . the companies act 1947 made it clear that failing to disclose the use of this process was unacceptable , and undermined the " true and fair view " companies were required to give in their financial statements . a second major change was in the approach accountants took to their job . previously the attitude was that accountants were only required to do their legal duty , but after the royal mail case accountants were more and more expected to use their ethical and moral judgement in making decisions . contemporaries said that the case " probably had a greater impact on the quality of published data than all the companies acts passed up to that date " . the case " fell like an atomic bomb and profoundly disturbed both the industrial and the accountancy worlds " , and has been linked to reduced public trust of big businesses . following his release in 1932 , kylsant stayed mainly out of the public eye despite a brief return in 1933 .