Working away on an SCM paper for a Thursday deadline has made for light blogging recently...
The factual fackground and many of the ideas in the following semi-long post (but not any of the possible confusions on my part about accounting!) are indebted to my co-author Deirdre Collier, who's completing an accounting history Ph.D. thesis that focuses on AT&T and how the firm's strong espousal of a scientific approach to depreciation in the early twentieth century both coincided with and transcended the firm's immediate interests.
Any institutions in the NY/NJ area looking for an accounting professor--you should hire Deirdre, who can do a great job not only with history but also with numbers!--in addition to the topics touched on below, her thesis includes a very nice forensic accounting analysis of AT&T's accounting for storm damage--
So...Two possible approaches to 1920s/1930s regulation of AT&T and other utilities, and the incentives they produce:
1) Regulators allow company a reasonable profit, with reasonable defined in terms of the percentage difference between annual income and expenses = incentive for company to overestimate expenses, including by accelerating depreciation
2) Regulators allow company a reasonable profit, with reasonable defined in terms of the percentage annual income represents of the company’s capital = incentive for company to underestimate expenses, including by denying/delaying depreciation
Therefore it seems that regulators concerned with avoiding manipulative expensing/depreciation practices by companies should maintain ambiguity on whether they are using 1) or 2), or use a mixture of both 1) and 2).
AT&T with its skills in depreciation should prefer 1), the RRs and other utilities with their weaker skills and preference for replacement should prefer 2).
AT&T’s preference for a slower probabilistic version of depreciation as opposed to a faster accountants’ version works in terms of a smoothing story, with the company assuming that regulators in practice apply both 1) and 2).
Savvier regulators who are subject to legal demands to clearly explain themselves as using either 1) or 2) have a problem that less savvy or law-bound regulators don’t have. Possible real-world regulatory issue: Effects on ICC and FCC from becoming both more sophisticated and more law-bound in the 1930s compared to the past.
AT&T’s value commitment to probability science: Makes sense in terms of a smoothing story, not so much in terms of gaming 1) or 2).
Social value of AT&T’s commitment to probability science: Useful both in terms of egoistic values—AT&T mgrs working harder than otherwise to advance co. interests—and altruistic values—AT&T mgrs in some cases taking positions that were different from co. interests.
Value competition? Unclear on 1920s value rival inside or outside firm to AT&T’s commitment to science. One possibility: Commitment to a human-oriented, interest-based, incentive-based, countervailing/cooperating-forces approach to regulation. Possible emergence of that competing approach in the 1930s, both in government and in AT&T? One straw in the wind: AT&T exec Chester Barnard’s human-centered approach to management was articulated in 1938 in Functions of the Executive…