G. STEVENSON SMITH
SOUTHEASTERN OKLAHOMA STATE UNIVERSITY
MAURICE STANS’ VIEWS ON SOCIAL RESPONSIBILITY IN THE ACCOUNTING PROFESSION
Abstract: maurice Stans (1908-1998) is remembered for his role in the Watergate scandal of the 1970s, but he was also an early contributor to the literature on the accounting profession’s obligations to the general public. his writings and speeches in this area have a place in the history of social responsibility accounting. the paper discusses his writings as well as his comments collected in an audio-taped interview about his role in the accounting profession as president of the american institute of accountants, senior partner in alexander Grant (now Grant Thornton), and one of the first well-known practitioners to discuss broadly the importance of the accounting profession’s social responsibilities. today when accounting scandals have created questions about the credibility and integrity of financial reporting, it is reflective to see how concerns about financial reporting were once articulated.
INTRODUCTION
maurice Stans (1908-1998) is largely remembered for his political association with richard Nixon and his role with the republican National Finance Committee and the Watergate scandal of the 1970s. yet, before his entry into the politics of the 1950s, he had distinguished himself in the accounting profession as one of the first senior partners in the firm of alexander Grant & Company, president of the american institute of accountants (aia) (1954-1955), gold medal recipient for distinguished service to the profession (1954), a member of the Committee on accounting Procedure (CaP), an early member in the accounting hall of Fame (1960), and a writer and advocate for articulating the accounting profession’s social responsibilities to the public as denned within the accounting framework of the late 1940s through the 1950s.
acknowledgments: the author would like to thank the two anonymous re-viewers for their invaluable suggestions for improving the paper, mr. Stans for allowing the interview to take place, and the editor for his patience.
it is valuable to look at his writings and consider his per-sonal views on social responsibility as expressed in an audio-taped interview conducted in 1994.1 Stans’ description of social responsibility was based on a call for fairness in financial reporting through a greater standardization of accounting practices. he perceived that this approach would help reduce potential social class conflicts and labor strife in the u.S. economy arising from an underlying suspicion that the accounting profession endorsed practices supporting corporate interests over accurate reporting responsibilities to the general public.
today the accounting profession has been beset by a num-ber of scandals. accordingly, it is worthwhile to record the historical insights of an accountant who faced his own integ-rity challenges and still strongly maintained his views on the accounting profession’s obligations to society. this article reviews Stans’ writings and the 1994 oral history interview in which mr. Stans identified the role he played in developing practitioner-based arguments for expanding the accounting profession’s public responsibilities. Prior to beginning this analysis, the advantages and pitfalls of an oral history methodology will be briefly considered.
ORAL HISTORY METHODOLOGY: ADVANTAGES AND PITFALLS
the primary resource for this paper was the 1994 oral his-tory interview with maurice Stans. Such an oral history can be considered a record of “personal reminiscences that are of his-torical significance focusing on impressions, attitudes, feelings, and descriptions, rather than facts” [lamour, 1994, p. 2]. as with any research model, there are advantages and pitfalls to be considered when using oral history.
academic support for oral history has evolved as it supple-ments written records with a rich verbal account of an event or events [Zeff, 1980; Collins and Bloom, 1991]. others have argued
1the oral history interview was conducted over a two-day period by the author at mr. Stan’s home in Pasadena, California on July 20-21, 1994. the questions covered a number of topics related to mr. Stans’ work as a practicing accountant. the only restriction on the questions was that they would not deal with Watergate. the questions were not submitted to mr. Stans in advance of the interview, and the direction of the discussion was open-ended. the audio-taped interview was transcribed into a 79-page oral history. after the interview, a copy of the transcription was sent to mr. Stans. that copy now resides in the minnesota historical Society in St. Paul. the oral history is available from the minnesota historical Society in St. Paul, minnesota or from the author.
that the purpose of oral histories is to “problematize and contradict the traditional stories of accounting” [hammond and Sikka, 1996, p. 81]. the latter view considers oral history as a means to show how the official written record of events can cause more extensive societal effects than might initially appear. this oral history collection corresponds more to the Collins and Bloom model.
the problems that can arise from an oral history interview occur when the interviewer injects his/her preconceived ideas into the interview, creating a bias in the questioning that can skew responses toward the interviewer’s point of view. another difficulty arises if there is no rapport between the interviewee and interviewer, thus decreasing the candidness of the responses [Collins and Bloom, 1991]. therefore, the interaction before, during, and after the interview are as important as securing consent for the interview. None of these issues arose in the Stans interview.2 thus, the current paper combines the candid recollections of maurice Stans about his work in the accounting profession with an analysis of his published work on social responsibility.
STANS’ ENTRY INTO THE ACCOUNTING PROFESSION AND GOVERNMENT SERVICE
maurice Stans was raised in the small town of Shakopee, minnesota before beginning his accounting career at age 20 with alexander Grant & Company in Chicago. eventually, he worked his way up to become senior partner. in 1953, his firm was working on a consulting assignment with the u.S. Postal Service. as a result of that job, Stans left his position in 1955 to begin his career in government service in the u.S. Post Office as deputy postmaster general during the eisenhower administration.
During richard Nixon’s run for governor of California, Stans served as his finance chairman. in 1968, he chaired Nixon’s election Campaign Committee, and later during the campaign became chair of Nixon’s Finance Committee. after the election, Stans was named commerce secretary in Nixon’s cabinet, but he resigned in 1972 to become chairman of the Finance
2Prior to conducting the interview, the author attended an oral history seminar conducted by Charles t. morrissey, a nationally renowned oral historian. morrissey’ s oral history workshops, conducted throughout the u.S., deal with the methodology of oral history interviewing. the morrissey method was used in the Stans interview.
Committee to re-elect President Nixon and chairman of the republican National Finance Committee. in 1973, he was in-dicted in the Watergate scandal but was subsequently acquitted of those charges.
Before beginning his government service, Stans spent 27 years directly involved in the accounting profession. his concept of professional responsibility as reflected in his writings was strongly influenced by the social and political issues of the era.
THE SOCIAL AND POLITICAL BACKGROUND OF THE ERA
From the early 1930s to the mid-1950s, a social and politi-cal upheaval occurred in the u.S. this time period began with an economy in virtual collapse as almost every bank closed in 1933, and americans beginning to question the principles of democracy, capitalism, free enterprise, and individualism upon which the nation was built. Growing out of the economic tur-moil, american business found its place in the country’s social fabric as overseers of commerce undergoing enormous change. Businessmen witnessed new political threats to the american system of government, labor strife increased as unions grew in size and powerful labor leaders were elected to represent their members, and new social legislation was enacted to protect the public from abuses of the past.
the U.S. reacted to the financial turmoil of the 1930s with new legislation to help solve the economic problems of the period. Such legislation provided stronger federal oversight of economic activities. in 1933-1934, the Securities acts were passed, and the Securities and exchange Commission (SeC) was established with regulatory powers over Wall Street and the accounting profession.
Workers were given substantial collective bargaining power in 1935 with the Wagner act. in 1938, the Fair labor Standards act set a minimum wage of 25 cents per hour and a maximum work week of 40 hours. During World War ii, labor-management disputes were controlled through no-strike pledges in support of the war effort. after the war, labor-management relationships became bitter again. During 1945 and 1946, there were numerous crippling strikes in the automobile, coal, and railroad industries. During 1946, 5,000 strikes involved 4.6 million workers.4 the united mine Workers under John l. lewis instituted one such strike in 1946 that had the potential to shut down businesses, stall World War ii recovery in europe, and deny warmth to american homes heated with coal. With this new political power, labor unions began demanding that corporate financial records be opened for scrutiny during contract negotiations.
these changes in the corporate regulatory and political environment began having an effect on the role of the accountant. With the passage of new financial market and reporting legislation, it became important for businesses to demonstrate that they were complying with the new rules. Consequently, the obligations of the accountant began to extend beyond the traditional role of responsibility only to corporations. Since the terms “independent public or certified accountant” had found their way into the Securities act of 1933, accounting responsibilities had now expanded with obligations to the public sector.5
New practice guidelines were also developed for the ac-counting profession. Statement on auditing Procedures (SaP) #1, Extensions of Auditing Procedures, was passed in 1939 by the AIA largely in response to the audit failure at mckesson & rob-bins Company featuring fraudulent inventory and accounts receivable.6 SaP #1 required auditors to be present when inventories were counted and to conduct a confirmation of receivables.
the standardization process in auditing and accounting practices did expand with a number of new accounting research Bulletins (arB), accounting terminology Bulletins, and SaPs. however, standardization moved ahead only slowly.7 Within this political and economic environment, Stans began to write about social responsibility.
4″For example, in November 1945, the 180,000 members of the auto Workers at General motors struck for 113 days. in 1946, national strikes crippled the soft coal industry and the nation’s railroads. that year there were a staggering 5,000 strikes, involving 4.6 million workers” [american Bar association, 1995, p. 19].
5the Securities Act of 1933 deals with the certification of financial statements. yet, the meaning of independence, as mentioned in the act, would not be more fully addressed until the 1960s and 1970s.
A SOCIAL RESPONSIBILITY PERSPECTIVE: THE CALL FOR UNBIASED REPORTING
an underlying argument about societal responsibilities is that no group can survive if it simply pursues its own interests without considering the consequences of its actions on society [linowes, 1974; Committee on Social measurement, 1977]. For the accountant, early definitions of social responsibility were viewed as professionals doing good work for clients. this per-spective did not include measures of general human well-being, such as environmental effects, social accounting, or the impacts of business on local health and housing. awareness of these issues began to develop in the late 1960s through the 1970s [Colantoni et al., 1973; epstein et al., 1977].
early views were more professionally introverted, linked to the avoidance of questionable practices that would reflect badly upon the profession in regard to tax preparation, for example, as noted by accounting practitioners in the Journal of Accountancy [Joplin, 1919; richardson, 1919]. other accounting authors wrote about the accounting profession’s public role. rose [1923, p. 337] observed that “the accountant must be prepared to fulfill his duties and obligations, not only to his clients, but also to the public,” but this role was not fully denned. another view on public responsibility was voiced by Clark [1923], a well-known economist. he believed labor’s miseries during economic downturns could be mitigated if factory accounting methods were revised. he argued that charges for the social costs of labor needed to be forecasted and added to factory overhead as a new fixed cost.
auditors’ public responsibilities were perceived as tran-scending the mathematical accuracy of the financial numbers to determine the true state of affairs of the organization under audit, but there was little call for standardization of accounting practices. the institutionalist writings of Dr Scott during this period described accounting changes as part of a continuing and fluid cultural evolution or social process based on objective rather than subjective thinking [Scott, 1931]. limperg [1932, p. 19] also viewed the audit in an evolutionary context. he wrote
9Clark was concerned with labor’s suffering during downturns in the business cycle. he thought revisions in accounting practices were needed to allow labor costs to become part of factory overhead charges to be used subsequently by managers to moderate the effects of idle capacity and unemployment during economic downturns. Current employer payments to unemployment compensation funds are an implementation of Clark’s ideas.
about the obligation of the accountant to “carry out his work in such a way that he does not betray the expectations which he evokes in the sensible layman.” littleton [1933, pp. 267, 271] mentioned the “social interest” and, within that context, discussed the evolutionary rather than the revolutionary nature of change in the accounting profession.
in a 1930 injunction, issued by the Court of Common Pleas against the merger of Bethlehem Steel Corporation and youngstown Sheet and tube Company, the obligations of the accounting profession to the general public were identified as a central issue [editorial, 1931, p. 86]. after commenting in the decision on the need for uniform standards of accounting to allow stockholders to accurately determine whether the offer from Bethlehem Steel was fair, Judge Jenkins went on to state:
i am further of the opinion that directors, shareholders …should have a clear, explicit explanation of the ac-counting facts…which…will enable the ordinary reader, without hiring a technical interpreter, to determine the actual state of the company’s business….Corporate statements and reports are for the information of the laymen.
in the same editorial section, a.P. richardson, the editor of the Journal of Accountancy, described this statement as the “depth of the morass” and called uniform rules of reporting impractical.
later writers wrote about a general public interest the ac-counting profession represented within the economy, but they did not correlate this public interest with accurate financial reporting based on generally prescribed methods [Wilcox, 1939]. Scott [1940, p. 508, 1941] wrote of “a vision of social responsibility” and expressed his concern that accounting practices needed to provide fair representation to all interests. Paton and littleton [1940] wrote about the social importance of accounting to the flow of capital, but did not mention social class issues. all these views predated Stans’ writings. Although significant in other ways, these observations did not combine the concepts of social responsibilities, more uniform accounting standards, and societal class conflict as characterized Stans’ writings a few years later.
Citations in Stans’ writing help identify supporting sources for his ideas on social responsibility. Beginning in the late 1940s, an underlying reference in Stans’ arguments regarding social responsibility came from arB #1 [aia, 1949, p. 1] and its reference to the social purpose of accounting.
the committee regards corporation accounting as one phase of the working of the corporate organization of business, which in turn it views as a machinery created by the people in the belief that, broadly speaking, it will serve a useful social purpose. the test of the corporate system and of the special phase of it represented by corporate accounting ultimately lies in the results which are produced. these results must be judged from the standpoint of society as a whole – not from that of any one group of interested parties.
although not generally called “social responsibility” by the practitioners of this time period, there were two general views of the profession’s responsibilities. one view held that the accountant’s role was to serve the client professionally. in such cases, the accountant acted as the client’s advocate in financial matters. a second view considered the accountant’s obligation to the client to be mitigated by a duty to act in good faith to and to serve the greater good of the general public. Stans’ ar-guments supported the latter view. the belief that accounting practices should not support any one group of interested par-ties was repeated in Stans’ writings and speeches throughout his accounting career. he believed that expanding prescribed accounting practices served as the means for implementing accounting’s social responsibility to the public, not just the client or investors.
LABOR UNIONS AND FINANCIAL REPORTING
as noted, the period immediately after World War ii was characterized by high levels of labor unrest in the u.S. labor leaders and their advisors began using corporate financial re-ports to determine the share of a company’s resources that could reasonably be expected to support wage increases for union members. as they reviewed the methods used by the accounting practitioners in preparing these financial reports, they became suspicious of the accounting practices being followed.
Barkin’s [1951] views can be considered representative of the labor movement’s perspective toward financial reporting during this period.11 He wrote that financial statements which do not clearly disclose total income and benefits transferred to owners and managerial interests cannot be trusted by workers and unions.12 From his perspective, it was important to have financial statements that accurately showed the amount of in-come available for distribution to the factors of production. For collective bargaining purposes, he believed the influence of the separate entity and the conservatism principles biased financial reporting towards owner/managerial interests over those of labor. these underlying principles were seen as resulting in overly cautious reporting that unnecessarily reduced owner profits and put labor at a disadvantage in collective bargaining. Barkin [1951, p. 1196] believed that the accountant needed to “define the biases and distortions introduced into the recording by the power which management has hitherto exercised over accounting.” Stockholders, creditors, directors, and executive managers were identified by Barkin as the four distinct entrepreneurial groups within the corporation who act as providers of either capital or managerial talent. after making this point, he described accounting practices related to these four groups that distort financial reporting. For stockholders, many of the recognized costs of stockholder operations (e.g., meetings, legal fees, etc.) are withdrawals from residual earnings and not reductions in current earnings. For creditors, their interest payments should be recognized as a reduction of the company’s net worth, not an expense on the income statement. Payments to directors should also not be recognized as charges against income. executive managers act as replacements for the single proprietor; thus, any payments to them, such as bonuses or expense accounts, should not be deducted from income but should be recognized as deductions from retained earnings. he believed that the current method of preparing financial statements allowed companies to siphon off profits to their affiliated companies or to burden one enterprise with the expenses incurred by an affiliate. Barkin called for additional reporting to the SEC to allow for the disclosure of such information. he argued against any accounting methods which would tend to build reserves for future losses.
12Barkin developed support for his arguments against conservatism by citing Paton [1948] and Gilman [1939]. it should be noted that Gilman’s arguments on conservatism in turn drew support from a Dohr [1938] article. as will be seen, Dohr was also a source cited by Stans as well as someone who opposed Stans’ call for stronger standards to control accounting procedures.
13he cites any inventory valuation method not based on cost as recognizing inventory losses before the inventory is sold. FiFo, liFo, normal stock, market,
John Carey [1951, p. 165], executive director of the aia, commented on Barkin’s article in a Journal of Accountancy editorial, describing Barkin’s ideas as another example of spe-cial interest arguments that would neither help stockholders or potential investors nor be useful to taxation or regulatory authorities. rather, Carey believed accounting should focus on a “fair presentation of income from all points of view.”
Barkin was not the only labor activist calling for changes in accounting practices. Pillsbury [1954] reports on a national study of union research directors, citing their suspicions re-garding the establishment of contingency reserves, inflated depreciation reserves, the liFo inventory method, and inventory reserves.14 these union research directors believed corporate profits should show the amount of resources available for distribution to land, capital, and management.
STANS’ RECOMMENDATIONS FOR CHANGE
Stans began to express his own concerns about ongoing labor-management conflicts.15 Stans drew support for his opinions about these clashes from ruttenberg [1950], Slichter [1951], and Dohr [1952]. Dohr’s arguments in his 1952 article were used by Stans to reinforce his own ideas on the importance of avoiding class conflicts.16 Dohr articulated a conservative vision for the american economy that focused on a utilitarian philosophy for
and standard cost are all considered inventory cost-flow assumptions that distort company profits. these methods are used to protect current property rights and are based on assumptions of future business expansion. Such assumptions about future changes are not likely to be shared by all the factors of production in the same manner as they are being currently distributed.
14these concerns were also found in the accounting literature. in the Nature and Purpose of the Income Statement, the Subcommittee on the income Statement of the CaP reported that accounting procedures could as easily cause the understatement of net income as its overstatement. thus, any proposed solutions to accounting issues need to consider how they create both effects [aia, 1945].
15Stans acted as president and director of moore Corporation, a Joliet, illinois stove manufacturing company, from 1938-1945. the company’s workers were represented by the iron molders and Foundry Workers (imFW) union. Stans de-scribes being inducted into the imFW as an honorary union member in 1943 and retaining his union card from that date onward [Stans, 1995].
16See Stans [1952, 1953a, b]. Dohr was an accounting professor, practitioner, and director of research at the aia. his publications included books and numerous articles in the Journal of Accountancy. it is interesting to note that Dohr coau-thored an article with George o. may challenging the previously published Stans-Goedert s article calling for stronger rules of accounting practice [may and Dohr, 1955]. this debate is discussed later in the paper.
societal good. as suggested in arB #1, there exists a need for cooperation among all economic groups. it is disadvantageous when a labor force adopts monopolistic practices in an attempt to raise wages.
as noted previously, labor unions were not hesitant to express their opinions about factors affecting their economic well-being, such as the reliability of corporate financial state-ments used in labor negotiations. Stans’ [1947a] paper on in-dustrial peace uses sources from the united mine Workers, The Truth about Fake Company Financial Statements, and the united electrical radio & machine Workers of america, How Corporations Conceal Profits, to illustrate labor’s distrust and doubts about financial reporting. to support his perspective on the need for accurate financial reporting, Stans also built upon rutten-burg’s [1950, p. 14] paper, Labor Views of Financial Statements.17 ruttenburg, a labor activist, argued that the current format being used to prepare financial statements is designed “to fool the public.” he believed such accounting reports contributed to the climate of labor unrest. he considered the accounting practice of setting up reserves for price increases and decreases simultaneously was only used to deceive labor unions about the true level of corporate profits. With better financial reporting, ruttenburg hoped strikes could be diminished.
Stans’ articles drew inspiration from Sumner Slichter’s [1951] book, What’s Ahead for American Business.18 Slichter, who favored entrepreneurship, was a conservative labor economist who wrote about labor issues such as employee turnover, unions, and unionization. Stans synthesized Slichter’s arguments in supporting the american economy against economic systems that had a propensity toward communism or socialism. Slichter believed he was witnessing a fundamental change in American business as labor’s increasing influence diminished management’s power in the workplace.
Stans [1947b, d] wrote and spoke about the need for “industrial peace” and the importance of the accounting profession’s role in serving the public interest. he believed that responsibility to the public mandated unbiased financial reports, ones for all groups, not just stockholders or potential investors. Such reports would allow others, such as labor’s representatives, to view financial reporting as a fair process. Stans [1947b, p. 28] mentions the “proportionate distribution of the excess of venture income over a measured return to each economic part-ner.
Stans [1953b] went further in outlining a method for a more equitable distribution to labor, capital, and management with social-accounting financial statements. he describes an income statement in which “business expenses” are initially deducted and then distributions are made to labor, capital, and management as a means of recognizing the cooperative nature of these groups. in expanding on this approach, he suggests developing a pre-negotiated social budget for the division of profits. the budget would be based on a formula for the “social division” of income to all groups involved in the generation of company profits. again, he stressed the accounting profession’s role in making financial reporting understandable, trustworthy, honest, consistent, complete, and respected.
Stans [ 1994 interview] felt financial reports could contribute to industrial peace by helping to prevent general public suffering arising from devastating and violent labor strikes and political threats to the government:
Those figures were important in a great many ways besides security holders too, for example, labor de-pended on their earnings reports of companies. and, when they found out what was going on, they became very critical of earnings reports. less and less dependent on the results of those reports in labor negotiations. the company said we had a bad year, last year we lost 50 million dollars. yeah, how much did you take out for future reserves, future contingencies, or how much did you bring in to pad it by improving the earnings, by that process. Well, that was my conception that – and i made one particular speech on it at a meeting in minneapolis for the institute, yeah, on carrying that social responsibility business still further by seeing that financial statements in all respects were as accurate and as comparable as possible for the interest in labor that had to deal with negotiations on wages.
as later stated in his book One of the Presidents’ Men [Stans, 1995, p. 38], he believed that accounting practices at the time were “inadequate for a real public understanding of the facts of business.” his perspective for more standardization was based on his worry over fairness and conflicting economic interests.19 Stans believed that without clear reporting, accounting served as a tool for those who wanted to distort the general public’s view of the american economic system. Stans [1947b, p. 26] describes the job of the accountant as:
…the development of independent, truthful, and understandable reports of the facts of business operation for labor and the public, and in giving authenticity to such reports.
Stans’ [1947, p. 26] speeches and writings represent the views of a recognized accounting practitioner calling on the profession to improve its reporting practices in order to encourage industrial peace: “the honest, independent representations of the public accountant, applied to information fully and clearly presented, can eliminate much of labor’s distrust of management and management’s distrust of labor.” Stans [1947a, p. 25] felt that “the public accountant has thus far failed to establish his independence in their eyes.
he was one of the early practitioners calling for the reform of accounting standards as a necessary part of the need to avoid social class conflicts as typified in labor-management disputes. in the interview, he stated:
Furthermore, i took the front steps, pretty largely, in criticizing the quality of standards and workmanship of the profession in a series of articles in the Journal of accountancy that you may have seen – even to the point of drawing fire on me, from some of the old timers in the profession, who thought that accounting would be better served…operated and would better serve the public if given a lot more freedom of choice on the ways to make entries. i felt very strongly that that was not right and i denned it as a social responsibility and wrote several articles on it.
in 1947, he first used the term “social responsibility” in his writings.20 at that time, Stans [1947b, p. 35] noted:
19after World War ii, Storey [1964] identified accountants’ focus on social responsibility arising from three concerns. they were: (1) meeting the reporting needs of others beyond the traditional groups; i.e., investors, management, and creditors; (2) a growing third-party emphasis on accounting independence; and (3) improving the financial reporting by decreasing the discretionary differences in reporting practices.
20Writing in 1943, Stans [1943, p. 239] used the term “social responsibility” in his first published paper on small businesses’ war obligations, but he had not
…the art of accounting is today a social force and those who practice the art must assume social responsibilities. to the accountant, therefore, this implies not only the performance of all activities in a manner consistent with the public interest, but also a continuing aim to expand the field of service in all ways in which the well being of the economy can be advanced.
he believed the accounting profession’s role was to help minimize social problems by preparing public financial reports that clearly showed how the wealth of the production process was fairly allocated among the factors of production. he worried that the general public was suspicious of an accounting profession that appeared to be working with corporations to hide corporate wealth.
Stans derived many of his arguments from the american political context of the times. in a 1948 paper, Stans [1948, p. 100] referenced the social changes that have occurred in american society over the period from 1928 to 1948:
…of the responsiveness of accounting to social forces. each of these development [changes in accounting practices] came as an acknowledgment that the previous practices were not wholly truthful or adequate in reports of stewardship.
he believed accountants were “to be employed in the full recognition of a primary responsibility to the broad public” [Stans, 1948, p. 99].
During this period, it was a common accounting practice to smooth company earnings with a variety of techniques. these included directly crediting or charging earned surplus (retained earnings), recording stock discounts, recognizing depreciation when “justified” by revenues, using reserves for possible price increases or decreases, reporting net income before depreciation deductions, inadequately reporting stock options resulting in the dilution of stockholder’s earnings, and making asset revaluations without strict adherence to cost principles. income appropriations and charges from questionable future event income were recorded. there were large inconsistencies in calculating net income among similar companies. tellingly, Stans’ writing emphasizes the need for unqualified public confidence in the accounting profession’s reporting practices through the curtail-ment of these practices. he considered accounting to be an art where judgment should not be circumscribed by rules, but where such judgment should not be used “in the narrow interest of [one] social structure to the detriment of others” [Stans, 1948, p. 106]. Stans [1948, p. 105] argued that accounting practices should be used in a manner to improve the general public’s understanding about the distribution of corporate resources and rewards.
accounting presentations must be tailored to the pub-lic interest by means of codified standards of adequate disclosure which recognize the invalidity of any type of statement which fails to tell a full and clear story.
Stans argued that the public’s conceptions of financial re-ports as confusing and untruthful only poses additional threats to american free enterprise. During this period, american society was facing some of the biggest threats of the Cold War in eastern europe and China. it was a time when the house un-american activities Committee and mcCarthyism heightened concerns about Communists in the u.S. Beginning in 1947, Stans [1947a, p. 28] saw growing political threats and worried about the need for industrial peace:
except for those who would substitute a marxist form of government, americans believe that labor should have a fair share of the productive output, which means with due respect also to a fair share to capital and management. unless labor seeks the disillusionments of Communism or Fascism, it must accept that as a premise.
Stans’ [1949b, p. 3] concerns about both socialism and communism continued to be expressed in his writings:
in the search for social and economic adjustment, the world’s once most powerful empire (united kingdom) has turned to socialism. today’s most challenging world power (Soviet union) is sponsoring an uncertain human equation called communism…even in our own country there is a lacking of sureness, a positive confi-dence of the outcome of the future.
He argued that accounting must help to instill confidence in the capitalistic system that had been under stress and change since the days of the Great Depression. Stans called for the accounting profession to view its link and responsibility to the general public as strongly as its link to corporate clients. the underlying clashes between the policies of Communism and the free-enterprise system framed the perspective taken in many of his articles [Stans, 1953a, p. 19]:
….the major uncertainty about the course of account-ing development springs from the threats of change in the political system. So long as a democratic form of government prevails, and retains with it a climate that encourages free enterprise and the profit motive, accounting will retain its full potential. on the other hand, a nationalization of a large segment of industry or finance could lead to the paralysis of accounting.
he went on to write: an even greater political change to some form of Statism or Communism in govern-ment would…further centralize decisions and reduce accounting to a matter of classification and summarization according to rule books and regulations.
Stans [1949d, pp. 466-467] continued his social responsi-bility arguments in a 1949 Journal of Accountancy article. Stans felt that if accounting’s social responsibility obligations were recognized and acted upon, a means would be provided for correcting class-based economic disagreements, especially those arising from suspect financial reporting. he states that accounting “is the only common denominator available to solve the conflicting interests of capital, labor, management, and the public, within an economy.” He describes financial reports as “social documents” [Stans, 1949c, p. 50], and accounting practices as being “developed from a type of free-hand drawing” [Stans, 1949b, p. 5].
Stans became a member of the CaP in 1943. His qualifica-tions to several arBs demonstrate his support for stronger rules in accounting practice. Stans’ qualification regarding the potential for practice abuses in implementing arB #27, Emergency Facilities [aia, 1949, p. 226], is worth noting21:
21Stans served on the CaP from 1943 to 1948 and again from 1953 to 1954. he served on the Committee on accounting and terminology from 1953 to 1954. Stans registered dissents or qualifications on arB #27, Emergency Facilities; #28, Accounting Treatment of General Purpose Contingency Reserves; #32, Income and Earned Surplus; #35, Presentation of Income and Earned Surplus; and #44, Declin-ing-Balance Depreciation. he did not dissent on arB #20, Renegotiation of War Contracts; #23, Accounting for Income Taxes; #24, Accounting for Intangible Assets; #25, Accounting for Terminated War Contracts; #26, Accounting for the Use of Special War Reserves; #29, Inventory Pricing; #30, Current Assets and Current Liabilities: Working Capital; #31, Inventory Reserves; #33, Depreciation and High Costs; #36, Pension Plans: Accounting for Annuity Costs Based on Past Services; and #37, Accounting for Compensation in the Form of Stock Options.
Stans feels that the application of individual judgment as to what is a ‘special situation’ [accumulated amortization or depreciation] could lead to abuses in practice.
The qualification shows his concern for the standardization of accounting practices. it is a strong dissent.
as a member of the CaP, Stans’ dissent on arB #32, Income and Earned Surplus, along with two other members, was based on reducing confusion for public users of financial statements [aia, 1949, p. 265]:
…the so-called ‘all-inclusive’ concept…best serves the public interest because it is least subject to reader mis-interpretation… surplus charges and credits…tend to hinder public understandability of financial statements.
ARB #32 is considered a first step in restricting credits and charges from being recorded in earned surplus. in dissenting with the ARB’s conclusions, Stans felt this first step did not go far enough. of Stans’ four dissents or qualifications to arBs, three dealt with what he considered to be the improper recording of income.
the argument for an all-inclusive income statement was also addressed in arB #35, Presentation of Income and Earned Surplus. Stans’ dissent, along with two other members, was focused on using the surplus (retained earnings) to record expenses and revenues directly. the dissenters argued that such expenses and revenues would be better represented on the income statement. they believed arB #35 was inconsistent with previous arBs and needed to be revised. Finally, in arB #44, Declining-Balance Depreciation, Stans argued that all significant deferred income taxes should be recognized. he did not agree with the CaP’s view that the time period to depreciation reversal was the key to recognition or non-recognition.
his activities on the CaP showed his support for the ac-counting profession’s ability to police itself rather than in the government setting practice rules [Stans, 1995, p. 37]. he be-lieved that the introduction of more standardized and specific accounting practices was a required sacrifice for the common good of all society. Writing in 1955, Stans [1955, p. 216] stated:
22it is interesting to note that the 1958 revision of arB #44 stated that, “recog-nition should be given to deferred income taxes if the amounts thereof are material” [aiCPa, 1961, p. 2-a]. thus, the time period rule was eliminated. at this time, Stans was no longer on the CaP.
i believe we will soon see a more comprehensive code of professionally developed accounting principles, further refinement of auditing standards, and greater uniformity in terminology and method of presentation of financial data.
Stans adopted a pragmatic argument linking the pro-fession’s future success with the profession’s ability to make financial statements more understandable to the general public. Stans’ pragmatic views correspond with the view of developing justice for all societal groups as a means of survival. his views encompass moral justice for “investors, bankers, the general public, labor unions, legislators, and government agencies” [Stans, 1995, p. 38]. he stated his concerns about the accounting profession’s financial reporting in these interview comments:
and if you distort any one period by stealing and transferring into a reserve, some of the results of that period, you’re not serving properly the public, stockholders, and those who have an interest in that earning power…
…labor depended on their [corporate] earnings re-ports…when they found out what was going on, they became very critical of earnings reports and less and less dependent on the results of those reports in labor negotiations.
Stans wrote to convince other accounting practitioners to adopt a broader societal view as part of their professional responsibilities, specifically to eliminate accounting practices that were misleading. in Volume 1 of the CPA Handbook [Stans, 1952, p. 14], he wrote:
in the hands of its experts, accounting can become an even more important means of creating understanding, confidence and rationality in economic affairs. in this prospect lies the real hope of eliminating the recurring dangers to the permanence of the american system.
after 1955, Stans turned his writing toward federal budget issues given his activities in Washington. yet, in his 1962 keynote address before the american institute of Certified Public accountants’ (aiCPa) 75th anniversary meeting, he again made a call for social responsibility. this speech, published in The Australian Accountant, was titled Accounting and Human Progress [Stans, 1963]. the address highlights how the accounting profession can meet its social responsibilities to better the conditions of the people of the world. again, Stans stressed the need of the accounting profession to look beyond the techniques of accounting and commit to a larger role in strengthening accountability through involvement in public policy issues.
During the 1994 interview, Stans continued to associate professional accounting practice with social responsibilities. here, he provides a definition of professionalism:
i think it’s a situation when an organized group of people with professional type responsibilities and workloads actually organize themselves in such a manner as to standardize codes of ethics, principles, and methods of developing quality in order to better serve the public best. it’s basically the development of a social consciousness and social responsibility within the work denned by the boundaries of the profession.
Similar aND oPPoSiNG VieWS
Stans’ writings on social responsibility were not greeted with acceptance from everyone in the profession. his calls for better financial reporting were viewed by many as a direct criticism of accounting professionalism, and his call for the “development and use of a comprehensive code of accounting principles” [Stans, 1949b, p. 5] was considered a threat against the professional judgment of the CPa. Stans averred in his interview:
There were some of the firms-thought i should not in anyway talk to the public or write in a way which the public got a hold of it in a manner that was critical [to the accounting profession].
looking back, i can see i was absolutely right in writ-ing despite the fact that George may, one of the retired partners of Price Waterhouse, took issue with me…very strongly.
[the profession] did respond to all the things that i urged in those days…most of them were carried out under threat rather than by professional decision.
George o. may, a leading accounting practitioner, was a former chairman of the CaP and served with Stans from 1943 to 1945.23 may had been with Price Waterhouse since 1897 and
23George o. may was a senior partner at Price Waterhouse and a well-respected accounting practitioner. He was the first chairman of the CAP, and his influence was instrumental in formulating many of the early arBs. he served on the CaP from 1939 to 1945.
a senior partner from 1911 to 1940. in 1934, he chaired the aia’s Special Committee on Co-operation with the Stock exchanges. the Special Committee determined that a variety of accounting methods were inevitable in practice and suggested that only generalized principles should be used by the accounting profession. may believed in the subjective nature of accounting and that the judgment of the accountant in recording transactions was better than a strong set of standards. he believed that the accountant’s primary obligation was to investors [may, 1933a]. may [1937, p. 425] subscribed to the belief that the “substance of the accounts may and often should vary according to the purpose for which the accounts are required.” in this regard, the accountant had no obligation to disclose the nature of reserves in the accounts if there was no material distortion of earnings. may [1950b, p. 387] stated that ”
…no amount of standardization will either (a) make an understanding of the nature of accounting process less necessary to a proper interpretation of such determinations, or (b) convert those determinations into find-ings of fact.” may’s accounting background was British-based where questions of asset valuation and accounting procedure are largely in the hands of the auditors [Zeff, 1984].
may, a strong advocate for more voluntary accounting reforms and a supporter of individualized decisions based on practitioner’s judgments, criticized Stans’ 1948 and 1949 Jour-nal of Accountancy articles. in particular, Stans’ support for a set of authoritative standards did not find favor with may who preferred “intelligent variation” rather than the “wooden conformity” he saw in Stans’ suggestions [may, 1950a, pp. 208, 210]. Further, may believed that it was unnecessary for the reader of financial statements to understand exactly “what was in the mind of the accountant on deciding…content and structure” of the income statement. may criticized Stans for suggesting that authoritative rules should be based on an external authority;
24may was not alone in objecting to the institution of controls over accounting procedures followed by the accounting profession. a number of leading accounting practitioners were opposed to the development of authoritative accounting procedures that would impede judgment in selecting the accounting methods to follow. For example, littleton [1934, p. 72] wrote:
Double entry is flexible enough to record and organize any data, and our present knowledge of uniform accounting systems is ample to permit the design of a variety of suitable mechanism. But accountants, better perhaps than anyone else, are aware of the dangers of over-rigid prescriptions; all business cannot be poured into a few uniform molds. even different enterprises in the same industry cannot with equal economy follow identical accounting procedures.
i.e., “power” rather than the knowledge, experience, and reputation of the accountant. in a letter, published at the end of may’s article, Stans identified the primary difference of opinion as the ability of financial statement readers to understand “what goes on” [Stans, 1950a].25 again, Stans stressed a “social aspect” and a “social revolution” as reasons for adopting more standardized financial reports. Stans [1950a, p. 211] wrote:
…i plead for greater standardization, clarity, and com-parability (in form and expression), that all may understand. to me, this is ‘usefulness’ in terms of society and at no cost to anyone.
even before his debate with Stans, may [1943] had objected to authoritative standard setting based on a new social order or some sort of abstract justice. he felt these reasons were unjustified.lining their definition for the term “book value,” wrote about the importance of having an “authoritative and comprehensive definition” for book value within the profession. in response to Stans’ proposals, viewed by may as another call for standard setting by a higher authority, may and Dohr [1955, p. 47] wrote:
that concept is that in business accounting there is neither absolute rule nor anarchy but a system that has elements of stability and adaptability, and that stresses disclosure and significance – not strict uniformity.
Both may and Dohr had correspondingly strong opinions regarding the standardization of authoritative accounting prin-ciples. For example, Dohr [1942] had written that there are no “immutable principles” or system of accounting, but rather practice consists of determining the specific facts of the situa-tion and then selecting the principles that apply.
Stans refers to Carey’s Professional Ethics of Public Accounting [1946, p. 7] as support for his views on unbiased reporting.26 Carey, who served as executive director of the aia, wrote that accountants must not “arouse a suspicion of lack of inde-pendence” or act in a manner that make the accountant appear
25it is worth noting that Carey as editor of the Journal of Accountancy published nine letters in the Correspondence, Letters to the Editor section under the title “many accountants approve maurice Stans ideas on accounting and Free enterprise.” Carey was a supporter of calls for more standardization in accounting practices.
to represent conflicting interests. During the interview, Stans mentioned the support for his arguments that he had received from Carey:
… (Carey stated to me) “i think this is exactly what the profession needs. We need to push ourselves as a pro-fession into doing things in a much better way…a more uniform way. i, as executive Director of the institute, i can’t say that but you certainly can. i hope you will.” he encouraged me several times along the way to do something more in that field. the fact that happened that way, with him, leads me to believe that there weren’t very many others geared up to write about it at that time.
Stans [interview, 1994] believed that his position regarding standardization and the social responsibilities of the profession came to be generally accepted:
and i must say i made some enemies in the profession by picking on that [reserve accounting] as an example of an unfulfilled social responsibility and that took awhile for me to live it down. if the situation hadn’t caught up with my ideas, i think that i would never have gotten elected President of the institute.
Stan’s position on the need for more accounting standardization did not alienate members of the aia as can be can be seen in 1954 when he was awarded the gold medal for distinguished service to the profession and contributions to accounting literature. Stans continued to work for a stronger standardization of accounting principles by serving as one of seven members on the aiCPa’s Special Committee formed in 1964 to study how departures from the accounting Principles Board (aPB) opinions should be handled.27 the Special Committee’s recommendations and subsequent aiCPa membership vote substantially strengthened the aPB’s role in setting authoritative standards and helped to eliminate “unnecessary obstacles to comparability” [Carey, 1970, p. 144].
CONCLUSION
Issuing untrustworthy financial statements does have a significant economic and social effect on public perceptions of
27Prior to the formation of the Special Committee, aPB opinions had been considered important, but not important enough to override an auditor’s best judgment as to how an accounting event should be reported.
the business environment. Stans’ concern for better accounting standards was framed within arguments of social responsibility to the public based on preventing class conflicts as well as serving the self-interest of the accounting profession by curtailing further governmental interventions.28 Both these concerns combined under his definition of social responsibility.
Although there were others who called for uniform finan-cial reporting, Stans was the first practitioner to associate fair reporting with social responsibility founded within a context of class conflict. Stans believed it was a mistake for the accounting profession to continue preparing financial reports without clearly prescribed practice rules since this approach created public suspicion that accounting methods favored corporate interests. underlying his concerns was labor’s growing political power as a threat that could justify the enactment of congressional legislation to control accounting practice. he saw social responsibility as the profession’s obligation to itself as well as to the country in a broader sense.
in the 1994 interview, Stans summarized his contributions to the accounting profession:
i think the major contribution that i made to the pro-fession…was the fact that i singled out this issue of accuracy of financial statements. if we were a profes-sional organization we had to have standards of performance, standards of ethics, standards of…many other qualifications. and we weren’t providing that. the fact that i stuck with that for several years and pointed out the risk of government intervention…i think that was, as least as i saw it, the most valuable thing that i could have done for the profession.
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