Rick Elam
UNIVERSITY OF MISSOURI

THE CULTURAL SIGNIFICANCE OF ACCOUNTS-THE PHILOSOPHY OF DR SCOTT

Abstract: DR Scott was an economist, historian, philosopher, and accountant. Most of all he was a scholar who merged some of the most up-to-date ideas of the 1920s into his book The Cultural Significance of Accounts. He concluded that our culture was in a time of relative turmoil because the market was no longer the primary controlling force within our institutions. Accounting as the vehicle of the scientific method would replace the market as the synthesis of institutions which make up our culture.

Evidence suggests that the outcome foretold by DR Scott in 1931—that American society would witness the use of Accounting as a principal means of political and economic control—seems to have come to pass in the contemporary “Bottom-Line” culture of the 1970s.

The purpose of this article is to explain how DR Scotta reached the conclusion quoted above. DR Scott can fairly be described as an economist, historian, philosopher, and accountant. Most of all he was a scholar who brought together knowledge from all those disciplines and merged them into a new view of accounting. The discussion which follows is a synopsis of his most important con-tribution, The Cultural Significance of Accounts. In reading the following, one must remember the ideas were expressed during the late 1920s. The reader should not expect revelations from the following because Scott, by his own statement, was only suggest-ing a way of thinking about accounting.

Scott joined the faculty of the newly established College of Com¬merce at the University of Missouri in 1914 as an Assistant Pro¬fessor of Economics. By 1920 he had been promoted through the ranks to Professor of Economics. In 1930 his title changed to Pro¬fessor of Accounting and Statistics and he was appointed Chairman of that newly formed department. He continued as chairman until 1940 and as professor until his death in 1954. During his career he published many articles on accounting subjects and matters relating to higher education. A bibliography of Scott’s writing ap¬pears at the end of this paper. He was an active member of both the American Accounting Association and the American Associa¬tion of University Professors.

Readers of The Cultural Significance of Accounts will note a marked likeness to the writings of Thorstein Veblen. Scott acknowl-edges in the preface that Veblen is the source of the “viewpoint” expressed in the book. Scott’s contact with Veblen was through their mutual close friend, H. J. Davenport. Davenport had been Veblen’s student at the University of Chicago, and as Chairman of the Department of Economics at the University of Missouri had hired Veblen.

Veblen’s biographer, Joseph Dorfman, suggests that he was aloof from most of the faculty during his six years at Missouri.2 How-ever, he was very close to Davenport; in fact, he lived with Daven¬port and his family for some time. Scott’s close relationship with Davenport and his acknowledgement of both in The Cultural Signifi¬cance of Accounts are evidence enough that he had close contact with the thoughts of Veblen. We need only compare the complete title of Veblen’s most important work, Theory of the Leisure Class: An Economic Study of the Evolution of Institutions, with the content of The Cultural Significance of Accounts to see the connection.

The literature of “Scientific Management,” much of which is attributed to Frederick Taylor, was very influential on Scott’s ideas. A Chapter of The Cultural Significance of Accounts relates the scientific management movement to our culture and accounting. In fact, the basis of Scott’s theory is a merger of the ideas of Taylor and Veblen.

Institutions

Scott has been described as an Institutionalist. As such, his ideas regarding accounting were based on the assumption that a culture is made up of many interrelated institutions. These institutions were held together to form a culture by the sharing of a common philo¬sophical viewpoint. When that philosophical viewpoint becomes outmoded by changes in the environment, a period of cultural changes occurs.

Scott demonstrated that cultural institutions change over time, not in a constant, even flow of evolution but through periods of relative stability followed by a period of change. During periods of stability, a society (culture) is in relative harmony with its environ-ment. As the environment changes, existing abstractions and theories are slow to adjust. His view, from the prospective of the 1920s, was that we were in a time of change. The nature of the change was that the market was declining in influence and was being replaced by a dependence upon accounts. This dependence upon accounts would be recognized at some future time, but the present (1920s) was a period of conflict between theory and the environment.

Consistent with his view that cultural institutions evolve he believed accounting as it was then known was also changing. Ac-counting was becoming a theory which encompassed both book-keeping and certain scientific techniques. Essentially this meant accounting was an integral part of the emerging scientific approach.

Decline of Market Control

Scott argued that the accepted economic theory of the market resolving conflicts of supply and demand was a theory unmatched to the realities of his time or the future as he viewed it. In his view, the market theory was probably correct when applied to the period beginning about two centuries prior to the beginning of the Industrial Revolution. That time was characterized by its individualistic pur¬suit of profits and lack of large scale business and professional management.

With the growing importance of large scale industry came the need for professional management. Competition led to instability in prices and profits. Capitalistic monopolies were formed to com-bat the fluctuations and spelled the beginning of the end for the individualistic type of market control. Simultaneously labor began to organize in protest to the treatment it had received under the competitive individualistic system.

Because the market is only one thread in our complex cultural fabric, Scott saw its decline in relevance as disrupting many other institutions.
In a broad sense the market is part of the machinery of government just as the principles which underlie the theory of market control are part of the prevailing system of law. Economic, political, governmental, legal and other in¬stitutions serving to effect adjustment of human interests,

he Accounting Historians Journal, Fall, 1981 develop out of a single process and together they con-stitute a coordinated unit.

Changes in the economic realities of the western world spelled the beginning of the end for the market as primary controller. Un-fortunately, but not unexpectedly, economic theory and law did not adjust to the changes. “In the eyes of the law and theoretical eco¬nomics, the market still stands as the central, supreme economic authority. But it stands thus without the loyal support of a large majority of those who are subject to this faltering control.”4
Scientific Management

During the period of individualistic competition when the market was the most significant controlling force within our culture, ac-counting served only a simple bookkeeping function. As industries and businesses grew, more professional management was required. These professional managers had to rely on accounting for more and more of the information necessary to manage their businesses. As accounting increased in importance for management, it rapidly evolved into a body of knowledge far surpassing basic bookkeep¬ing. Scott felt strongly that statistical methods were becoming an integral and fundamental part of accounting. “[Accounting theory] has become, or is rapidly becoming, a theoretical summary of the application of statistical methods to programs of public and private economic administration.”

Scott’s meaning for the term “statistics” is somewhat different from its common usage today. In his context the term is analogous to present-day cost accounting and data processing responsibili-ties6 Many of Scott’s ideas were based on the emerging scientific management literature. The impact of those theories on cost ac-counting during the period has been pointed out by Eldon Hen-driksen:

. . .of the more important influences on cost accounting during the first two decades of the 20th century were the work of the so-called “scientific management” engineers. . . . The greatest impact on management and cost account¬ing did not come until after Taylor’s death in 1915.

Scott seems to use the phrases scientific management, scientific method and the objective point of view interchangeably throughout his book.

Control by Commissions

Application of scientific management techniques was fundamental not only to management of business but also to the commissions and agencies which, in Scott’s opinion, were to play an ever grow¬ing role in our society. “Opposing economic and social groups hold to radically different beliefs and do not recognize common allegiance to one fundamental authority. An essential contention in the present discussion is, however, that present opposing groups do share a common, though unrecognized, allegiance in their faith in the scientific or objective point of view.”8 Note in the foregoing quotation Scott writes that the opposing groups have an “unrecog¬nized allegiance” in adopting the objective point of view. This does not imply that any of these institutions would disavow the relevancy of that philosophy. Rather that in general they were using it while believing that the market was the most important controlling factor in our culture. The period of “social readjustment” or conflict would continue until the various institutions were reconciled because of their application of the objective point of view.

The following paragraph is Scott’s presentation of evidence to support his contention that the market is no longer in control and the application of scientific management using accounting data was becoming dominant.

When the market has failed to regulate certain economic activities effectively, the government has stepped in to as¬sume direct responsibility for them. This change has been of very great importance in the development of an in¬dependent status of accounts. In their early history, regula¬ting commissions were somewhat at sea. They could not turn to the market for the market had failed to meet the situation. They owed their existence to its failure. When they turned to the law they found it assuming an adjust¬ment of economic interests according to the principles of a competitive regime. As a result, instead of dependence upon the market or upon law, regulating commissions turned to accounts and accounting principles for guidance and support.

Scott does not tell us specifically which examples of regulatory commissions were “at sea” or when the law had failed a commis-sion. However, the relationship between railroads and the Interstate Commerce Commission during the 1920s was probably the most important influence. The turmoil to which he refers is not the stock market crash of 1929. In spite of the fact that The Cultural Signifi-cance of Accounts was not published until 1931, it was written prior to the crash.

There is some evidence that Scott’s prediction that our economy would be run by commissions using accounting and statistics as their basis of control has come full circle at this time. Primary ex¬amples are the Interstate Commerce Commission with its current deregulation of the trucking industry and the Civil Aeronautics Board deregulation of airlines.
The Cultural Significance of Accounts

Scott summarizes The Cultural Significance of Accounts in the following paragraph.

The prospect of an economic organization around ac-counts suggests that accounting theory should be ex-pected to take the place of market theory. But institutions and systems of theory do not come into existence full grown. Accounting theory is not now a general theory of economic organization. Hence the suggestion here referred to can only be that accounts and accounting theory promise to serve respectively as points of origin and or¬ganization for a reshaping of economic institutions and the development of a system of theory running consistently or primarily in objective terms.

Accounts and accounting principles were the primary vehicle of the objective point of view, and therefore the most important single factor in resolving social conflict. However, true to the institution-alist theory, Scott does not let his theory rest on the previous argu¬ments but states that the period of stability is only temporary. “It is a commonplace observation upon cultural development that the radical and subversive principles of one era become the cherished, conservative dogmas of a following era.”

The implications of the importance of accounting in the present and future cultural period is that extreme care must be exercised in the formulation of accounting principles. Scott did not clearly make that point in The Cultural Significance of Accounts. In that book he simply concluded with accounting as surpassing the market as the unifying philosophy guiding our culture. It wasn’t until later, in an article on the subject of accounting principles published in The Accounting Review, that he stated the connection between account¬ing principles and the cultural significance of accounts.

That accounts will constitute a central feature of the system of economic control in the future is a matter which is no longer open to question. There is no cause for concern on that score. The danger is rather that doctrinaire or half-baked formulations of principles may be frozen into the rigid requirements of law. And the surest way to bring about the adoption of such half-baked principles is for leadership in the accounting profession to take the position that public accounting practice cannot be subordinated to a system of accounting principles or theory. Somehow, the positions of the doctrinaire theorist and the rugged individualist who refuse to recognize the importance of theory must both be avoided.12
One is led to wonder what Scott’s opinion would be of the failure of the Accounting Principles Board and the Financial Accounting Standards Board to be much more than rule makers for the account¬ing profession. One would also wonder if Scott would write today that the institution of accounting is standing on the quicksand of an entirely changed environment.

Summary

After the first reading of The Cultural Significance of Accounts, one is tempted to conclude that DR Scott had much in common with the Oracle of Delphi, making statements that are sufficiently open-ended to be defined as true no matter which outcome of a forecast event transpired. Actually, the book is a synthesis of the economic theory of Thorstein Veblen, scientific management, fathered by Frederick Taylor and accounting as observed by Scott. He stitches these ideas together with evidence of their interrelationship in the increasing control being exerted by commissions during the 1920s. A thorough reading leads to an appreciation of the logic and definitive nature of Scott’s conclusions.

He argues persuasively that history demonstrates the evolution of institutions and thus our culture is based on the interaction of environmental and philosophical factors. He also argues that the scientific or objective point of view is the emerging but as yet unheralded unifying philosophy of the near-term of our culture. Accounting, as the primary vehicle of the scientific method, would replace the market as the synthesis of institutions and thus of our culture.

58 The Accounting Historians Journal, Fall, 1981

FOOTNOTES

1Previts and Merino, Preface. 2Dorfman, pp. 310-311.
3Scott, The Cultural Significance of Accounts, p. 229. 4Scott, The Cultural Significance of Accounts, pp. 82-83. 5Scott, The Cultural Significance of Accounts, p. 283.
6For more on Scott’s view of statistics see: Scott, “The Influence of Statistics upon Accounting Technique and Theory,” pp. 81-87. 7Hendriksen, p. 36.
8Scott, The Cultural Significance of Accounts, p. 159. 9Scott, The Cultural Significance of Accounts, p. 235. 10Scott, The Cultural Significance of Accounts, p. 284. 11Scott, The Cultural Significance of Accounts, p. 173. 12Scott, “The Basis for Accounting Principles,” p. 343.

BIBLIOGRAPHY

Bennington, L. J. “Accounting Related to Social Institutions—The Theoretical For-mulations of D. R. [sic] Scott.” Accounting Research, Vol. 9 (January 1958), pp. 17-30.
Dorfman, Joseph. Thorstein Veblen and His America. New York: The Viking Press, 1935.
Hendriksen, Eldon S. Accounting Theory. Homewood, Illinois: Richard D. Irwin, Inc., 1970.
Previts, Gary John and Merino, Barbara Dubis. A History of Accounting in America: An Historical lnterpretation of the Cultural Significance of Accounting. New York: John Wiley & Sons, 1979.
Qualey, Carlton C., ed. Thorstein Veblen. New York: Columbia University Press, 1968.
Scott, DR. “The Basis for Accounting Principles.” The Accounting Review, Vol. XVI (December 1941), pp. 341-349.
Scott, DR. The Cultural Significance of Accounts. New York: Henry Holt and Com¬pany, 1931.
Scott, DR. “The Influence of Statistics Upon Accounting Technique and Theory.” The Accounting Review, Vol. XXlV (January 1949), pp. 81-87.
THE WRITINGS OF DR SCOTT Articles
“Conservatism in Inventory Valuations.” The Accounting Review, Vol. I (March
1926), pp. 18-30. “Valuation of Investment Securities.” The Accounting Review, Vol. IlI (December
1928), pp. 375-382. “Depreciation and Repair Costs.” The Accounting Review, Vol. IV (June 1929),
pp. 116-120. “Valuation for Depreciation and the Financing of Replacements.” The Accounting
Review, Vol. IV (December 1929), pp. 221-226. “Unity in Accounting Theory.” The Accounting Review, Vol. VI (June 1931), pp.
106-112. “Observed vs. Theoretical Depreciation.” The American Accountant, Vol. XVll (June
1933), pp. 170-171.

Elam: Cultural Significance of Accounts—Philosophy of DR Scott
“Communication—Veblen Not an Institutional Economist.” The American Economic Review, Vol. XXlll (June 1933), pp. 274-277.
“Toward More Effective Participation.” The Journal of Higher Education, Vol. VII (October 1936), pp. 383-386.
“Trends in the Technique and Tools of Management.” The Accounting Review, Vol. XII (June 1937), pp. 138-145.
“Freedom in an Age of Science and Machines.” Journal of Social Philosophy, Vol. II (July 1937), pp. 317-326.
“The Tentative Statement of Principles.” The Accounting Review, Vol. XII (Septem¬ber 1937), pp. 296-303.
“What the A.A.U.P. Is and What It Is Not.” American Association of University Pro-fessors Bulletin, Vol. XXlV (March 1938), pp. 214-245.
“Science and Social Guidance.” The Philosophical Review, Vol. XLVll (November 1938), pp. 638-642.
“Accounting Principles and Cost Accounting.” The Journal of Accountancy, Vol. LXVll (February 1939), pp. 70-76.
“The Significance of Interlocking Directorates.” The American Economic Review, Vol. XXlX (March 1939), pp. 109-110.
“Science and the Association.” American Association of University Professors Bul¬letin, Vol. XXV (December 1939), pp. 567-573.
“Responsibilities of Accountants in a Changing Economy.” The Accounting Review, Vol. XIV (December 1939), pp. 396-401.
“Selling Accounting Short.” The Accounting Review, Vol. XV (December 1940), pp. 507-509.
“The Basis for Accounting Principles.” The Accounting Review, Vol. XVI (Decem-ber 1941), pp. 341-349.
“Professors Administrant.” American Association of University Professors Bulletin, Vol. XXVlll (April 1942), pp. 247-256.
“A Simplified Solution of Circuit Ratio Problems.” The Accounting Review, Vol. XVlll (April 1943), pp. 99-103.
“Defining and Accounting for Depreciation.” The Accounting Review, Vol. XX (July 1945), pp. 308-315.
“Due Process in Higher Education.” American Association of University Professors Bulletin, Vol. XXXll (Summer 1946), pp. 367-373.
“Role of Accounting in Public Utility Regulation.” The Accounting Review, Vol. XXll (July 1947), pp. 227-240.
“The Influence of Statistics Upon Accounting Technique and Theory.” The Ac¬counting Review, Vol. XXlV (January 1949), pp. 81-87.
“Rationale of Academic Freedom.” American Association of University Professors Bulletin, Vol. XXXVl (Winter 1950), pp. 629-643.
Books
Theory of Accounts. Vol. I. New York: Henry Holt and Company, 1925.
The Cultural Significance of Accounts. New York: Henry Holt and Company, 1931