Talk to an academic my age or older, and right along with “get off my lawn” you’ll hear comments like “kids these days never read anything published more than five years ago.”  This is often true in research (outside of doctoral seminars), but is even more true about standard setting. After all, how could something written decades ago give any insight to today’s standard-setting quandaries?

Fortunately, Stephen Zeff has been making it easier to see what we can learn from the past.  Last week I spent some time with “Principles Before Standards: The ICAEW’s ‘N Series’ of Recommendations on Accounting Principles 1942-1969 (pdf).   I encourage you to do the same.  The document makes clear how we tend to take for granted that there are mandatory accounting standards, and that they are created by people other than practicing accountants.  Of course, it wasn’t always the case.  As Zeff points out in an interview with Michael Renshall, who was involved in early standard setting in the UK, “In Statement of Standard Accounting Practice, “standard” was an adjective, but it quickly became a noun.”

Here are some snippets worth pondering.  First, from a 1972 Zeff article about the 30′s and 50s in the UK:

Increasingly during the 1930s, newly qualified institute members were taking employment in industrial and commercial concerns. By 1941, more than half the total Institute membership consisted of ‘members not in practice’1 (i.e., all who do not practice as public accountants), while the Council itself had always been composed solely of ‘practising’ members. It is estimated that less than half of the number of members not in practice, i.e., about 25 percent of the total membership, was employed in industry and commerce. Many members in industry felt that the Institute was doing nothing to serve them, and for this and other reasons, one observer writes, ‘the membership was seething with discontent.’ An article in The Economist echoed this anxiety:

With a few notable exceptions in both the Institute and the Society, the [member in practice] is reasonably satisfied with things as they are. He has no very intimate contact with the accountants directly employed in industry or other public companies; and next to no contact with cost accountants. But it is precisely these, the accountants directly employed by industry and business and the cost accountants, who are, so to speak, in the front line. It is they who see industry working, and it is upon their work that the accounts are built – if, indeed, they do not do the whole preparation. They have, however, very little voice in the conduct of the accounting profession, which is determined by members of the councils of the two professional bodies. It is quite certain that there are wide differences of opinion [between members in practice and members employed in industry and commerce] in both the Institute and the Society.

Next, from Baxter’s 1953 “Recommendations on Accounting Theory”, in which he argues against accounting standards (“recommendations”) as we know them today, in an argument that could have been written by Shyam Sunder last week (and perhaps were).

The case against official recommendations on theory is threefold.  First, men do not always become better at research when they don the mantle of authority. Second, if authority takes direct part in the pursuit of truth, it may hinder rather than help. Third – and most important – there are no sure signs by which truth can be recognized.

The first objection need not keep us long; admittedly it is not always a strong factor. To judge from experience in most fields of learning, men tend to do their best research when left to their own devices. There are many exceptions; a large team of chemists may be the quickest means of dealing with a laborious task, and a government committee may be admirable at sifting evidence and assessing opinion. In general, however, thinkers are apt to be hampered by close connection with a team or with a powerful institution. The link may bring a need for diplomacy or compromise; policy may be more urgent than truth. Thus the authorities of the Church could not deal fairly with the ideas of Copernicus and Galileo because these ideas clashed with official pronouncements of the past.

The second objection is much weightier. It is an indirect way of saying that freedom is necessary for progress. Man must be able to think freely, so that the stream of new ideas can flow strongly; and men must be able to discuss and experiment freely, so that these ideas can be criticized and tested with the utmost rigour. If authority intervenes – by joining in the quest itself, or by giving its imprimatur to some favourite idea, or by making crude attacks on personal liberty – the chances of progress are lessened. Men cease to think so freely – whether from awe, fear or belief that others can do the job better; and therefore the stream of new ideas dries up. They cease to discuss and experiment so freely; and therefore criticism loses its edge, and ideas are not put to a stern test.

This train of reasoning leads us to the third objection. Under strong criticism, many ideas soon prove false. Others satisfy all immediate tests, yet we ought still to accept them as tentative only, for they, too, are likely to show flaws as the years go by. Even after an idea has survived triumphantly for centuries, some critic may shatter it, or else show it to be capable of improvement. Einstein was able both to generalize Newton’s theory and to correct it for conditions that had not previously been considered. No human being – however distinguished – can certainly foretell which idea will become a casualty. As Bacon tells us: ‘Truth is the daughter, not of Authority, but of Time.’

Finally, from an interview with Michael Renshall:

Zeff: That occurred after the Recommendations series, of course. By the way, you mentioned standards, and I have always wondered why the English Institute changed from principles to standards. Why were Recommendations on Accounting Principles succeeded by Statements of Standard Accounting Practice, known as standards? Can you recall the provenance of that change?

Renshall: Yes. There was anxious discussion. The problem was that [Recommendations on] Accounting Principles were often disregarded. People followed them if they chose and disregarded them equally if they chose. And the whole purpose of accounting standards was to establish one standard practice, not a recommendation. The term ‘principle’ might still have been apt, but it was the term ‘recommendation’ that was really at fault, because to signify things had changed they had to get away from the ineffectual term ‘recommendations’ – ‘This is a good idea, why don’t you do it?’ – to saying, ‘This is the way you should do it, and if you don’t, there may be consequences’. That was about as far as they could carry it, and the consequences, you remember, would be that you could depart from an accounting standard, provided you explained and justified it. And then there was a stick behind that, which said, ‘And you may be called to account’. And in very rare circumstances, I think some were. That was the way the standards were set up, and that’s what distinguished them from Recommendations on Accounting Principles – that it was the hard practice you not quite must follow but you should follow. But there is an escape hatch if you can justify a different treatment and explain, but you must be ready to come in to Institute head office and explain why. And there is a possibility that your explanation may not be accepted.