# The Paton Philosophy

ISBN: 978-1-78756-408-4, eISBN: 978-1-78756-407-7

ISSN: 1479-3504

Publication date: 1 November 2018

#### Citation

(2018), "The Paton Philosophy", Williams, K., Lawrence, H., Williams, K. and Lawrence, H. (Ed.) William A. Paton: A Study of his Accounting Thought (Studies in the Development of Accounting Thought, Vol. 22), Emerald Publishing Limited, pp. 33-54. https://doi.org/10.1108/S1479-350420180000022011

### Publisher

:

Emerald Publishing Limited

In examining Paton’s thought, it is important to consider the various influences on the man’s life and the approaches he took in formulating his accounting philosophy. Chapter 2 discussed many of the environmental factors that influenced Paton, and certainly one of the most significant of those was his background and training in economic theory. Paton acknowledged that he was influenced by earlier accounting theoreticians such as Sprague and Hatfield, among others. It can also be seen that his work in the public utility sector and his work with the War Trade Board influenced his thoughts on accounting. However, determining a person’s philosophy and his or her approach to that person’s profession is more difficult, as it requires an examination of more than just experiences and training.

Leonard Spacek (1971) said that Paton’s philosophy was always to build, and that Paton considered accounting a communication scheme that somewhat resembled a military communication scheme. In this system, information from the front is sent back to those in the rear, so that they may understand what action is taking place and what is needed in response.

Paton considered accounting part of the economic system that would improve the human struggle with forces of nature, such as those that manifest as (or in) bias, politics, and laziness, all of which hinder advancement. Spacek (1971) stated that “Paton’s philosophy was that truth overcomes all the negative forces of nature and accomplishes in the economy what we have struggled with ever since our creation” (p. 1) in short, Paton’s philosophy was based on a strong sense of ethics and honesty. The Paton philosophy, said Spacek, requires rational and methodical thought.

In an attempt to identify and define the Paton philosophy and how it impacted his thinking, consideration should be given to the various philosophical approaches employed by accountants. Stabler (1968) believes that:

In the development of a theory relative to any discipline, it is necessary first to define the objectives of that discipline and then to follow some organized approach in order to derive the basic principles in accordance with the objectives. (p. 2)

Stabler identified a number of approaches that derive from external influences he felt are possible, with some being more successful than others. Stabler felt that the most popular approaches employed by accountants included the practical, the deductive, the inductive, and the ethical.

## Approaches to Accounting

### The Practical Approach

Most accountants view accounting as a functional art. Pronouncements of the AICPA, statements of the CAP, and opinions of the Accounting Principles Board (APB) certainly follow the practical approach. Furthermore, with the exception of the Financial Accounting Concepts of the Financial Accounting Standards Board (FASB), the pronouncements and standards of the FASB also imply this practical approach. In almost all situations, these statements ignore the conceptual approach and are devised instead to treat specific problems as they arise.

According to this approach, theory is largely a rational justification of, and an explanation for, practice. Salmonson (1969) believed that this approach is similar to that used by authorities to establish speed limits on various streets and highways, after observing the speeds at which traffic moved under specified conditions. If a highway had more accidents than the average, the speed limit needed to be reduced; if an intersection had too many accidents, then it needed a traffic light. These types of approaches lead to the belief that “if it’s not good practice, it’s not good theory” (p. 2).

The practical approach has a number of advantages, with the primary one being that accounting is valued only if it provides society with useful decision-making information; indeed, this speaks to the primary goal of the practical approach. On the other hand, Salmonson felt that the major disadvantage of the practical approach is that it results in an unstructured body of propositions, primarily because the standard does not result in clearly articulated objectives. Salmonson, furthermore, felt it is not possible to build a theory of accounts in the absence of a definitive statement of objectives.

### The Deductive Approach

In formulating a theory of accounting through the process of deductive reasoning, “one begins,” asserts Stabler (1977), “by stating his objectives and postulates and then proceeding by a process of logical reasoning to develop the principles which provide the basis for practical application” (p. 15). The result is a statement of what accounting should be, and not merely a statement supporting currently accepted practices.

In the deductive process, the formulation of objectives becomes most important, because different objectives may require entirely different structures and result in different principles. A primary disadvantage of the deductive method is that if any postulate or premise is false, the conclusion may also prove false. Hendriksen (1965) considers the deductive method too far removed from reality to provide realistic and workable principles that can serve as the bases for practical rules. On the other hand, the deductive approach offers the advantage of a coordinated, complete, and consistent structure of accounting theory, wherein each step follows logically from its predecessor and one attains consistency among the propositions. According to Salmonson (1969),

Orderliness of thought and method characterize the deductive approach, rather than the seeming haphazardness of the practical approach. Furthermore, each principle is carefully examined for its logic and to determine whether its application will help attain known objectives, and the model’s normative propositions can serve as standards in the evaluation of various accounting principles. (p. 7)

### The Inductive Approach

The discipline of accounting possesses an inductive characteristic, since its development was motivated by the need to meet the practical problems of commerce (Bedford, 1965). Much of accounting theory was developed by generalizing the variety of commonly used practices. This inductive process wherein one goes from specific procedures to generalized statements of theory “rests on the assumption of an existing body of knowledge known as accounting and that the problem lies in discovering this knowledge” (Bedford, 1965, p. 2). Likewise, Vorster (2007) states that inductive accounting theories are “constructed by observation and by drawing generalized conclusions from practical observations and measurements” (p. 32).

The necessity of making a deductive determination of what to observe is implied in the inductive approach because certain assumptions, such as the existence of a separate accounting entity and the provision that all data are to be measured in terms of a standard unit, must be embraced (Schrader, 1962).

Employing the inductive approach, an accountant can, says Salmonson (1969),

choose the data he wishes to observe, and if he is not influenced by existing practices, he might respond quickly with new generalizations when new phenomena appears. Careful, open-minded observation can be the source of an immense amount of knowledge. (p. 9)

Vorster (2007) believes that many of the most significant accounting educators and practitioners have been inductive theorists; he cites as examples Hatfield, Stephen Gilman, Littleton, Yuji Ijiri, and Paton himself. As will be seen later, many did not agree that Paton was an inductive thinker. (See, e.g., Bedford and Ziegler, 1975; Grady, 1965.)

The inductive approach can be hindered if the observer holds preconceived notions of existing relationships and of what should be observed because he or she may also hold a subconscious bias. Consequently, Salmonson (1969) believe that generalizations that are inductively derived must be tested by means of deductive reasoning.

### The Ethical Approach

DR Scott advocated justice, truth, and fairness as the concepts upon which proper accounting principles need to rest. Scott (1941) commented on these three primary principles:

1. Justice: Accounting procedures yield equitable treatment for all interests in financial situations covered by the accounts.

2. Truth: Accounting reports present a true and accurate statement of information.

3. Fairness: Accounting procedures are fair, unbiased, and impartial. (p. 342)

My own view is that the one basic accounting postulate underlying accounting principles may be stated as that of fairness – fairness to all segments of the business community … determined in the light of the economic and political environment and the modes of thought and customs of all segments – to the end that the accounting principles based upon this postulate shall produce financial accounting for the lawfully established economic rights and interests that is fair to all segments. (p. 57)

The disadvantage inherent in this approach appears to be obvious. What is truth, and how is it implemented? On the other hand, accountants must recognize the necessity of ethical work, because one of the auditor’s most valuable assets is his or her good name. As mentioned above, Spacek believes that Paton used the ethical approach.

### Other Approaches

In addition to the aforementioned approaches, Salmonson (1969) lists several other views: the axiomatic approach, the communication theory approach, various sociological and behavioral approaches, and the theory-is-truth approach. Salmonson commented that in his graduate theory seminars, he rather frequently encountered the viewpoint that recognizes no theory of accounting per se. Some persons contend that accountants have a double-entry technique and a few rules for its implementation. Salmonson also stated that some persons reject the idea that there is a need for a theory of accounting and are cynical toward attempts to state specific principles.

James (2008) advocates a critical theory and postmodernist approach that makes full use of nonaccounting “tangential” material. With the classroom approach used by James, one conducts

classroom interactive activities which study theories and research results from a range of disciplines in order to illustrate key points that apply equally as much to accounting theories and the accounting research process. (p. 643)

### The Paton Approach

As one can see, various researchers diverge with regards to which approach Paton used, and Paton (1971c) himself was somewhat circumspect in identifying which approach he preferred, stating that his thoughts had evolved over the course of his life. Indeed, Paton’s approach to accounting does seem to combine many of the above thoughts. There is no doubt that the ethical approach influenced Paton (Hahn, 1972) and that he felt strongly that theory needs to serve the profession and not force the accountant into an infeasible, ineffectual foundation. Whatever the name of the approach, Frese (1971) states that:

It is the Paton philosophy with which I am most deeply impressed because it is this that continues to be of such great importance, and it is this that has had the most impact on me. (p. 1)

Primarily, however, Paton said he felt his approach to accounting standards was more postulational. While many in the profession considered this postulational approach new and untested, it was certainly not a recent innovation at the time; indeed, some have argued that it is simply a variation of the deductive approach. Deinzer (1965) also believed this postulational approach to accounting not to be new: he said that certain terms such as “principles,” “postulates,” and “assumptions” – had been used for many years prior to Paton’s use. As an example of this earlier writing, Jones (1841) writes that:

In all practical operations that have been formed into any theory or science, there are certain features in which the process is unlike, viz. details; but, where are other features that are entirely alike, which are called the principles. (p. 3)

Jones then goes on to discuss what he considers some of the basic “propositions” of accounting.

In Chapter 20 of his Accounting Theory textbook, Paton (1922f) himself first uses the expression “postulates of accounting” to describe what he would later call “underlying concepts.” The underlying concepts he mentions are the concepts of going concern, business entity, the accrual or attachment of costs, stability of the monetary unit, the representative status of the balance sheet for indicating current financial condition, and the notion that assets are independent and equal summations.

Paton (1922f) identified a postulate as an assumption upon which operational procedures and interpretations of significance are based. The postulates were to be accepted tentatively and were subject to testing for their suitability, as a means to “the end in view” (p. 109). Paton stated that only a few of the postulates if any can be wholly demonstrated.

Paton’s postulate approach has enjoyed widespread recognition in accounting. Paul Grady (1965), author of Accounting Research Study (ARS) No. 7, believes that in An Introduction to Corporate Accounting Standards, Paton and Littleton present the “first comprehensive exposition of concepts in accounting literature” (p. 23). Published by the AAA, the Paton and Littleton (1940) monograph discusses seven of the basic concepts used later in Grady’s (1965) study. Grady (1965) remarks that Paton discussed a “lesser number of concepts … in an accounting textbook written some twenty years earlier” (p. 23). Bedford and Ziegler (1975) feel that the 1940 monograph is an example of Paton’s postulate approach which the authors felt was roughly equivalent to the deductive approach and of Littleton’s inductive approach. The authors consider it important to understand a researcher’s approach in determining that researcher’s influence on a given project. They state, for example, that:

Although the influence of the methodologies of both authors is apparent in the 1940 Monograph, the stronger impact appears to have been Paton’s for this was the first framework developed deductively rather than inductively derived from accounting practice. (p. 440)

Paton’s (1921b) postulate approach can be seen throughout his career, beginning with “Assumptions of the accountant”. Taggart (1964) comments on Paton’s early thoughts when he says that:

Paton’s formal acquaintance with accounting began no earlier than 1912. The acquisition, in less than five years, of the amazing sophistication which characterizes this summarization of the logical basis of the accountant’s work is surely Paton’s greatest accomplishment. (p. 122)

## Development of the Paton Philosophy

A great many factors influence the development of an accounting thought. Salmonson (1969) listed these factors as being economic, institutional, legal, political, sociological, and technological in nature. Through Paton’s life, various factors acted to change and refine his thoughts and, accordingly, his viewpoint.

### Environmental Influences

There is no doubt that Paton’s early life exerted a profound effect on him (Paton, Jr, 1971). As stated earlier, he was reared in an extremely spiritual environment. At times, his family experienced real poverty, and he was forced to work hard to help the family. He was imbued with his parents’ philosophy of supporting oneself, earning one’s own way, and being honest with oneself and with others. For the majority of his life, Paton was a teacher. The contrasting viewpoints expressed in the writings of Paton and those of practitioners such as George O. May reveal Paton’s lifelong orientation toward accounting education compared to May’s lifelong orientation toward accounting practice (Zeff and Keller, 1964).

The accounting profession’s nascent stage of development at the time Paton became interested in it did have an effect on him. Most textbooks of the day took a piecemeal approach to accounting principles and practices. Paton, along with accountants such as Hatfield and John Canning, attempted to further develop the earlier works of Jones, Sprague, and others, to develop a more holistic approach to accounting education.

### Influence of the Corporation

Corporations significantly influenced the development of Paton’s thinking with regards to entity theory. The major development of entity theory during the first part of the twentieth century is credited to German writers, while US writers were still primarily influenced by the proprietary theory of Sprague and others. Paton’s contribution was that he was “largely responsible for the expansion of the entity theory in the United States” (Hendriksen, 1965, p. 31). Paton (1922f) writes,

As commonly presented in current textbooks and other writings, the theory of accounting is saturated with the “proprietorship” concept. In fact, since the adoption of this expression by Sprague in his admirable “Philosophy of Accounts” most American writers have couched their explanations of the system of double entry largely in proprietary terms. In this book, accordingly, an attempt has been made to present a restatement of the theory of accounting consistent with the conditions and needs of the business enterprise par excellence, the large corporation, as well as applicable to the simpler, more primitive forms of organizations. The conception of the business enterprise as in all cases a distinct entity or personality – and extension of the fiction of the corporate entity – is adopted, although not without important qualifications. (pp. iii–iv)

Most textbooks written since 1922 reflect the influence of both the proprietary and entity concepts; however, Hendriksen (1965) believed that these presentations cannot generally be classified as being purely of one or the other approach.

Paton continued to favor the entity viewpoint throughout his life. Paton and Littleton (1940), in An Introduction to Corporate Accounting Standards, argue that

if the corporation were viewed merely as an aggregation of individual investors, it would be consistent to hold that the earnings of the enterprise belong to the investors from the moment of original realization. Emphasis on the entity point of view, on the other hand, requires the treatment of business earnings as income of the enterprise itself until such time as transfer to the individuals has been effected by a dividend declaration. (p. 8)

The authors stated, furthermore, that during the interval of time after the profit is earned by the enterprise, and until the moment when profit assets are distributed to investors, those who contributed capital have a claim against the assets, in line with their contracts. “It is this claim and the profit itself that is expressed by the credit to some proprietary accounts” (p. 8).

Paton and Littleton emphasized that the concept of the entity is important for unincorporated and incorporated businesses alike. They stated that from the standpoint of administration, business affairs must be aggregated from private or personal affairs. Even if an enterprise were not a corporation and thus usually powerless to hold legal title to property the authors believed that accounting must consider all property dedicated to business purposes to be enterprise assets.

Under the entity theory, Paton recognized several types of equity. He is considered to have popularized Sprague and others’ concept of “residual” equity, wherein the owner’s equity is derived by subtracting liabilities from assets; this is the current definition employed in the Financial Accounting Concepts. In Accounting Theory, Paton emphasized the special relationship of the residual equity holder to the work of the accountant. Paton felt that changes in asset valuation, changes in income and retained earnings, and changes in the interests of other equity holders all reflect in the residual equity of the common stockholders.

Although the equities of the creditors, preferred stockholders, and common stockholders should be classified separately, according to entity theory, they are all equities. The effect of Paton’s early work is still apparent in some of the more modern developments in the basic approach to accounting theory, in that the fund theory and the enterprise theory are extensions of the entity theory.

In Paton’s (1917b) first article on accounting, he used the term “equities” to designate the right-hand side of the balance sheet. He was pessimistic about the probability of persuading any great number of persons to abandon the term “liabilities” and use “equities” instead. He wrote,

If instead of assets and liabilities, property and equities were used, there would be less danger of misunderstanding and bad accounting practice. But there is little hope of changing usage that is so well established as are these terms; and indeed there is little necessity for the change, as the distinction just noted between outside obligations and proprietorship, while of great practical importance in certain connections, is not fundamental. (p. 10)

Paton was right in his doubts, because the term “equities” is even now rarely used in published statements, except when referring specifically to owner’s equity. Taggart (1964) asserts that,

However, the use of ‘liabilities’ as the sole designation of the right-hand side is almost equally rare, proving that Paton’s basic lack of only slight hope of changing usage that is so well established was not well founded. (p. 2)

Paton’s substitution in this article of the word “property” for “assets” seemed to have offered so little advantage that even Paton abandoned it in his subsequent writings (Taggart, 1964).

### Influence of Taxation

Early in his professional career, Paton became interested in federal income tax laws. By 1920, Paton had already published an article regarding one area in which business and accounting practices were being adjusted in light of what were then brand-new tax law requirements. Paton felt that the new income tax legislation had made the question of proprietors’ salaries one of real importance. For Paton’s (1920e) purposes, Section 214 of the Revenue Act of 1918 stipulates

that in computing net income there shall be allowed as deductions all the ordinary and necessary expenses paid or incurred during the taxable year including a reasonable allowance for salaries or other compensation for personal services actually rendered. (p. 246)

Paton said that this statement specifically recognized the right of the taxpayer, in determining tax liability, to deduct not only the wages of ordinary employees, but also fair compensation for any services that the proprietors themselves might furnish. In other words, said Paton, for tax purposes gross income may be charged with the salary, bonus, commission, or other remuneration paid, or credited to a proprietor as compensation for his or her services as an executive officer, production manager, salesman, or other officer or employee (Paton, 1920e).

Paton contended that in applying the term “reasonable” to salaries, Congress clearly intended that the allowance for proprietors’ salaries should be controlled. Whenever an individual is in a position to vote on his or her own salary, said Paton, the possibility exists that the amount stipulated is likely to exceed a reasonable allowance. Paton pointed to extreme cases where owners had set their salaries to exactly the difference between gross revenue and other charges, with the result being no taxable income.

This was one of those areas where Paton later changed his mind. According to Taggart (1964), Paton’s

attitude toward the accounting treatment of proprietors’ salaries is by no means so rigid now as this article portrays it. He is now quite willing to recognize circumstances in which partners’ salaries, for example, might be treated as ordinary operating expenses. (p. 52)

One of Paton’s principal concerns was that business and accounting decisions were being made not in terms of their inherent logic and merit, but rather with regard to their possible tax advantages or disadvantages. Paton felt that successive income tax law revisions had increased the complexity of the individual tax return to an almost intolerable degree. Although Paton believed that the tax laws should not be unreasonably inequitable, he felt, likewise, that they should not be unduly elaborate (Taggart, 1964). Paton (1923b) stated the first of many pleas that, while allowing for the necessity of allocating taxation between the large and small incomes, “we should have simply a clear-cut graduated tax with no trimmings” (p. 143).

Paton (1944a) believed that the basic weakness in the tax structure was found in the concept of the business corporation as an entity properly subject to taxation. Paton thought that the entity on which taxes must inevitably fall is the natural person, and that the manner in which taxes are levied should take account of this fundamental consideration. Paton (1944a) thought that, for tax purposes, the corporation should be nothing more than an organization or institution acting as a steward to handle the resources of a group of investor–members, and that the income of the corporation was basically the income of such members. Accordingly, Paton was very much opposed to the double taxation of corporations.

Paton agreed with Edwards and Salmonson (1961), who said that the problem with double taxation is that it results in the following problems:

1. An inequitable burden is placed upon stockholders.

2. An obstacle is placed in the path of business development and full employment, since our most effective institutional mechanism for the carrying on of large-scale production is penalized.

3. The tax structure is made increasingly complex, and the total cost of financing governmental functions is increased. (p. 207)

Paton offered two alternatives for moving from the corporation to the shareholders as a focus of income taxation. The first method involves taxing corporate income only when it is received as dividends by the stockholder. The second alternative is, for income tax purposes, to treat the corporation as a partnership. In Paton’s (1944a) opinion, the only truly equitable and practicable solution was the second method. Taggart (1964) observed that “Fourteen years after Paton wrote this … article, Congress amended the revenue code to permit a limited use of Paton’s suggested procedure” (p. 408). Few, if any, of Paton’s other suggestions have since been adopted.

Paton long recognized that certain accounting procedures allow for an inequitable tax relief. One example was the LIFO method of valuing inventories: Paton believed LIFO provided a tax advantage to inventory-heavy businesses that was not available to those companies with significant fixed assets. As will be discussed later, Paton long felt that a practical remedy might be to grant owners of long-lived properties a procedure akin to LIFO. Undoubtedly, Paton’s dislike for what he considered an overly burdensome tax structure greatly influenced some of his thinking towards many areas of accounting. Taggart (1971) felt that one reason Paton gave LIFO a qualified endorsement rather than outright rejection was because it offered some relief to the taxpayer. A more complete evaluation of Paton’s changing attitude toward LIFO is presented in Chapter 4 of this study.

### Influence of Economics

As stated earlier, Paton’s original interest in economics significantly influenced his thinking (Paton, Jr, 1971). Throughout his association with the Michigan School of Business, he retained his appointment as a member of the Economics Department. When he retired in 1959, he held two titles: Professor of Economics, and Edwin Francis Gay University Professor of Accounting. Throughout Paton’s life, economics was always his second interest, if not really his first. His biography in Who’s Who lists “economist” as his first occupation and “accountant” as his second (Taggart, 1964). Even years later, in 2008, when the University of Florida Smather’s Library created A Guide to the William Andrew Paton Papers, Paton was listed first as an economist and next as an accountant.

In an article published in The Accounting Review in 1931, Paton utilized economic theory as the basis for his thoughts on asset valuation. Paton also employed economic theory in other areas, since he felt that no sharp line of distinction could be drawn between economics and accounting (see, e.g., Paton, 1950a, 1950d).

Fagerberg (1971) felt that most accountants simply record economic data from a “microeconomic” viewpoint; he says that “There is a great need somehow to coordinate macroeconomics (the wealth of the whole nation) with microeconomics (the wealth of accounting entities)” (p. 1). Fagerberg felt that the works of Paton have done a great deal to bring about such coordination.

Paton’s well-known thoughts with regards to current valuations are revealed quite clearly by examining Paton’s economic theory. Paton (1931) liked to classify all assets as follows:

1. Repositories for funds (cash, accounts, notes, etc.)

2. Summations of costs (land, structures, organization costs, etc.). (p. 89)

In later writings, Paton would list some of the disadvantages inherent in this approach (see Chapter 4 of this study); he felt that, as a rule, the valuation of items in the first group is a relatively simple matter, depending primarily on legal conditions, simple arithmetical calculations, and judgments as to good faith and the responsibilities of debtors. Accountants generally agree that the more difficult valuation problems arise in connection with asset elements that represent the costs of developing and operating an enterprise. In connection with the treatment and valuation of these cost elements, Paton felt that reference to certain propositions and lines of reasoning of economic theory was especially appropriate and helpful (Paton, 1931).

Paton also believed that cost, as such, has no significance, other than its conduct-determining quality. When the original cost that is to say, the price paid on acquisition loses its conduct-determining quality, something else should be substituted. Cost becomes the substitute figure, in the economist’s terms, “because it is the figure which plays a part in determination of price policies and other managerial decisions” (Taggart, 1964, p. 232).

Paton, however, felt that accountants were failing to take into consideration the changing value of the dollar. The small amount of new equity financing in view of the huge demand for equity at any given time suggests that investors with funds understand that earnings are actually low. According to Paton, it was essential to effect a quasi-reorganization at the start of each year in order to obtain realistic and significant reports.

### Influence of Regulation of Public Utilities

During the mid-1800s, when the railroad industry was developing throughout the United States, huge investments were made in relatively permanent assets. As a result, wrote Salmonson (1969), “Considerable attention … [was given] … to distinguishing between capital and revenue expenditures” (p. 29). Diverse methods were used to provide for the maintenance of capital until the late 1800s, when it became common practice to charge renewals and replacements to expense without recording periodic depreciation (Pollins, 1933).

In 1907, the Interstate Commerce Commission called for the recording of original cost on certain types of equipment. These orders raised two important questions:

1. Should property consumption and use be measured currently through depreciation charges or only when the property is retired?

2. On what basis cost or replacement cost should such charges be computed? (Pollins, 1958, p. 236)

Because Paton had consulted so extensively in the public utility field, he invested a considerable amount of time in seeking a solution to these problems. He felt that revenues should be charged each year with the current cost of plant capacity consumed during the year, as this is “actual cost.” Paton (1959c) deplored the fact that

many accountants have given their support to LIFO while closing their eyes to the more serious problem of the impact of inflation on the measurement of the cost of plant capacity consumed. (p. 40)

Paton realized that public utilities, because they are subject to rate regulations, were hard-hit by inflation and by tax laws regarding depreciation. In a number of instances, said Paton (1959c), management had considered employing economic analysts to convert the heterogeneous data of conventional accounting reports for price-level adjustments. Clearly, then, unless accountants prepare such reports, they are not providing management with all the information it needs. Paton (1959c) felt that accountants should insist on presenting comparative converted-dollar statements that cover long periods of time.

What was the effect of utility companies’ failure to recognize dollar depreciation? The AAA published a study by Jones (1956), which revealed the effect of price-level changes on the financial affairs of the New York Telephone Company. Jones’s application of purchasing power indexes to the company’s published reports resulted in some striking and disturbing conclusions.

For example, the book figures of return on investment for 1946–52 averaged 6 percent; the adjusted average was 3 percent. The nominal (book) income tax rate for the same period was 40.6 percent; the adjusted (real) rate was 52 percent, and the excess of the actual tax over a tax on real earnings at the nominal rate was $50 million. The depreciation deficiency totaled$108 million, or 35 percent of the charges booked. Book earnings per share in 1952 were 110 percent of 1940 earnings per share, but, as adjusted, they had only 34 percent of the purchasing power of earnings per share in 1940. (p. 562)

Paton and Greer (1953) felt that the policy of holding public utilities to a 6-percent return on investment without taking into consideration the depreciation of purchasing power was forcing many utility companies out of business. The general theory of rate regulation had always held that charges for services rendered by the utilities should be no greater than necessary, to provide a “fair return” on the capital employed. Extending this stated principle, most regulatory agencies avowed an intent to allow earnings sufficient to attract the additional capital needed to expand and improve service to the public.

Edwards and Salmonson (1961) stated that Paton thought that although these basic principles seem plausible, evidence indicates that their practical application has been wholly inappropriate with respect to the stated objectives. Returns to investors, according to Paton, have been much less than “fair,” primarily because of the decreased purchasing power of the dollar. Consequently, Paton thought utility companies were headed toward the same fate suffered by the railroads and traction companies namely, a loss of risk capital because of a lack of return on investment and maintenance of invested purchasing power. Edwards and Salmonson (1961) interpret Paton and Greer’s conclusion thus:

Unless the decline in the purchasing power of the dollar is recognized with respect to plant and equipment depreciation, power and communication utilities will eventually be owned by the government and subsidized by taxes, will not have the benefit of private management, and, will cause the public to pay more for utility services. (p. 226)

## Impact of Economic and Social Factors on Paton’s Thinking

Undoubtedly, during the more than 100 years of his lifetime, Paton’s thinking was influenced by the changing economic and social factors that dominated our society. Two world wars, the Great Depression of the 1930s, and the unparalleled inflation that followed World War II were only a few of the events that affected the US economy during Paton’s working years. Other, less-spectacular events, but certainly ones important to the accountant, included the appearance of the pension movement, the development of cost accounting, the expansion of the pooling of interest theory, and the increased attention accorded to the widely diversified conglomerate. Each of these factors created new problems for accountants. Edwards and Salmonson (1961) point out, for instance,

The search for proper accounting for pensions has produced a host of unresolved questions dealing with such fundamentals as the nature of assets, liabilities, and expense. Does a recordable liability exist when a pension agreement is signed which calls for pensions based in part upon prior service? If a liability is recognized, what account is to be charged? Is the interest paid on unfunded past service costs an operating or non-operating expense? (p. 31)

It could be argued that these questions have now been answered, but a review of ARS No. 8, APB Opinion (APBO) No. 8, and the latest statements of both the FASB and the International Accounting Standards Board would indicate that the final word on pensions has not yet been written.

Paton was always quick to adjust to changing economic and social influences. Zeff (1979), for example, says that Paton was “acutely sensitive to the shifting currents in the socioeconomic context in which accounting is performed” and that he “seemed to accommodate his vision of accounting to his changing perception of the economic, legal, and political forces in the accounting environment” (p. 91).

For many of those who lived through it, the Great Depression of the 1930s significantly influenced their way of thinking. Paton was no different, and it impacted him in many ways. Perhaps the most significant impact was on his way of thinking with regards to original cost and value. As will be discussed in chapter four, Paton’s attitude toward current costing was different during this period than during earlier and later periods. Paton (1932b) saw the Great Depression as having caused a number of problems, and he stated that “An extended period of reduced business activity, with its attendant financial difficulties naturally refocuses the attention of accountants on the underlying problems of valuation and income and surplus measurement” (p. 258).

During the Great Depression, Paton (1932b) deplored the desperate efforts of business management to “sugar coat” the pill of disappearing profits. One popular device was to charge operating items to capital and to write off plant assets, all in an effort to reduce future depreciation. These economic and social influences impacted Paton’s thinking, because Paton felt it necessary to distinguish operating costs from nonoperating charges, or losses. He defined operating costs as “charges which can be logically imputed to the regular activities of the enterprise during a particular period … [while] … non-operating charges or losses … are those expired values which cannot … be assigned or so imputed” (Paton, 1932b, p. 258). Here again, the similarities between Paton’s (1932) distinction between operating and nonoperating costs and the definitions of “expenses” and “losses” in the Financial Accounting Concepts over 40 years later are easy to see.

Paton realized, however, that formulating definitions is easier than applying them. The tests commonly used to determine the character of particular items included the following:

1. Does the charge represent a service actually received and utilized in a normal way?

2. Does the charge represent a regularly recurring item?

3. Was management responsible for incurring the charge or was it out of its control?

4. Was the charge, although not representing effective service from an economic or engineering standpoint, nevertheless necessary from the standpoint of the legal and social conditions under which we are operating? (Paton, 1932b, p. 259)

In formulating these tests, Paton recognized certain instances wherein charges could be made directly to capital. He also believed that, unfortunately, business managers frequently used these charges merely to relieve the profit and loss statement. Paton conceived of the solution as having two parts: first, a distinction between the departmental viewpoint, as he designated it, and the business viewpoint. Paton (1932b) said,

In other words, the income sheet or income report should be conceived broadly enough to make it possible for us to display the distinction between operating charges in a relatively narrow technical and departmental sense, and charges in the sense of losses which impinge upon the enterprise in the current period, but which cannot be assigned directly to the volume of business of the period. (p. 260)

Furthermore, said Paton (1932b), the solution rested

upon an insistence that all charges to the surplus account must be displayed in the income report or in a special statement appended thereto to which attention is definitely called in the body of the income statement. (pp. 259–260)

Such thinking would certainly be in conformity with current requirements for the income statement, where operating and nonoperating costs are clearly displayed and it is no longer possible to “hide” losses by classifying them as extraordinary items.

Another concern of Paton closely related to the above. Paton thought that there was an increasing tendency on the part of management to insist on what were then referred to as a “preferential recognition of operating charges.” Paton (1932b) was emphatic in stating that:

I have always objected strenuously to the theory that depreciation, depletion, and similar accruals are recognizable in the accounts only in the event that and to the extent that they are earned. (p. 260)

While this is not always possible in current practice, it was an accepted practice of the day, and management used it, in Paton’s opinion, whenever doing so was to their advantage. Paton became very resolute during the depression in opposing this practice which, with the exception of the units of activity depreciation method, is no longer acceptable.

Paton went further in his mistrust of the above practices, citing all the “statistical devices” used to smooth out income. While recognizing that stable earning power tends to promote credit standing and stable dividends, Paton (1932b) felt that:

When a management becomes liberal in its use of deferred charges, minimizes or omits depreciation, neglects to retire assets which have lost their economic significance, charge losses which are recognized directly to either true surplus or to surplus specially created for the purpose, the real object is usually the shielding of the current income report from some of the shocks of reduced business activity …. (p. 262)

Perhaps Paton’s greatest concern during this time, and what he called the “major phenomenon of the depression,” was the amortization of plant assets by means of charges to capital. Paton did not believe that accountants should completely condemn this practice, even though he felt that the motivations behind the writing down of assets were no more praiseworthy than those that brought about many of the write-ups in the preceding “boom years.” It seems here that Paton returned to his earlier years of value accounting, by saying that if management is making the adjustment “on the basis of sound long-run policy and sound methods of procedure” (p. 264), then such methods are acceptable.

### Impact of Inflation

Zeff (1979) examined Paton’s evolving view of current-cost accounting and found that environmental conditions did impact his thoughts on the subject. Inflation was a problem during Paton’s early career after World War I, and also in the years after World War II. Paton long recognized that measuring profits under inflation conditions was a serious problem for accountants. In a paper presented at the Stanford University Graduate Study Conference, Paton (1950c) again argued that there was substantial justification for the view that corporation profits or, the amount of the earnings of stockholders had been materially overstated in the years prior to that 1950 study, and that the level or rate of earnings in many companies was being even more grossly misrepresented.

In Paton’s opinion, a careful analysis of corporate earnings during the years following World War II would show that the suppliers of risk capital, the stockholders, were not faring well. He felt that the records being set in dollars of dividends payment at that time did not necessarily indicate that stockholders were receiving increased purchasing power (Paton, 1953e).

Paton felt that a major cause of this misrepresentation was the neglect of the depreciation deduction. In a statement in 1953 to the Ways and Means Committee of the House of Representatives, Paton advanced his contention that the purpose of the depreciation deduction was to permit the owners of depreciable property to charge to revenue the actual cost of property consumed in the process of acquiring revenue. Paton (1953e) stated that:

This objective is not being achieved. The plain fact is that owners of depreciable assets are not deducting in their tax returns the actual cost of facilities being consumed in serving their customers, and as a result, capital invested is being confiscated on a large scale, under the guise of taxes on income. (p. 23)

This situation, according to Paton, stemmed from a failure to convert the varying dollars of plant cost to the common denominator of the current dollar when determining depreciation.

Paton took exception to what he considered a then-popular misconception: the object of depreciation was to provide funds for the replacement of plant assets. Depreciation, he said, must be recognized, even if the asset is never replaced, or even if there is no intention to replace it. According to Paton, replacement cost, when properly defined, does have some significance for management. However, the determination of the actual cost of property consumed poses a real measurement problem for accountants. A partial solution to the problem, as seen by Paton (1955) and mentioned earlier, is to apply somewhat the concept of LIFO to depreciable assets. Paton (1959c) spoke of the “irony of supporting LIFO” while closing one’s eyes to the “more serious problem of the impact of inflation upon the measurement of the cost of plant capacity consumed” (p. 40). Paton also said, that in resolving the problem, the accountant can choose from several alternatives:

In the first place, corporate accounting staffs and the public accountants with whom they work should … prepare all the special analyses and statements, in current dollars, which management needs to facilitate a clear understanding of past results and make sound decisions for budgeting and planning purposes (p. 41).

Paton carried his argument for some form of constant dollar accounting to other areas, including inflationary accounting. Accountants, he said, should encourage the use in periodic reports of supplementary statements made in current dollars (Paton, 1959c). Indeed, Paton generally advocated that in comparative statements covering an extended period, accountants should insist on presenting the data in common dollars, because statements figured in heterogeneous, unconverted dollars were seriously misleading in virtually all cases.

Unfortunately, Paton’s pleas fell on deaf ears. According to Taggart (1964),

The Committee on Accounting Procedure, in issuing Accounting Research Bulletin 33 and again in a special communication to the members of the Institute on October 14, 1948, rejected any basic change in the accounting treatment of depreciation. Paton dissented from both statements. When Accounting Research Bulletin 33 was incorporated into No. 43 as chapter 9A, no less than six members of the committee dissented, believing that the time had come to take a different stand – a forthright recognition that cost and profit figures which do not reflect increased replacement costs of depreciable assets or the shrinkage in the purchasing power of the dollar are misleading. (p. 608)

The APB, successor to the CAP, continued to refuse to address this problem, in spite of there being an ARS that favored a price-level adjustment resembling one proposed by Paton long before. The Board stated that it was of the opinion that the price level was not yet fluctuating enough to make the change necessary. Apparently, the APB did not feel that the benefits of price-level adjustments justified their cost.

The price-level issue has continued to challenge standard-setters, with new standards being issued or removed in response to inflation, or to a lack thereof. Beginning in the 1970s, the United States was experiencing double-digit inflation and the SEC began to address the problem, eventually issuing Accounting Series Release No. 190, which required certain large companies to provide additional information based on replacement cost. Shortly after this, the FASB issued its Statement of Financial Accounting Standards (SFAS) No. 33, titled Financial Reporting and Changing Prices. Several requirements in SFAS No. 33 are similar to what Paton had proposed in the past.

By the mid-1980s, inflation had all but disappeared in the United States, and the FASB responded by issuing SFAS No. 89, which made the reporting of inflationary calculations a voluntary action. As a result, practically all companies stopped reporting the effects of inflation. A more detailed discussion of Paton’s changing attitudes toward value accounting is presented in Chapter 4.

### Impact of the Pension Movement

Paton does not appear to have been significantly impacted by the pension plan movement in the United States, and took little notice of it, except with regards to its economic aspects. Writing in the Michigan Certified Public Accountant, Paton (1950d) summarized his attitude toward pension plans and their economic aspects. He considered the basic accounting question regarding pensions to be on the treatment accorded to past service accruals. He voiced serious reservations about any plan that requires an immediate recognition of a definite liability, because this method would, in effect, transfer a part of the existing stockholder equity to the employees. Considering the many uncertainties involved in calculating past service accruals, he believed a better way would be to make no definite estimate of the liability.

Paton recognized, however, that many accountants considered it necessary to recognize a liability. One possibility for establishing this liability, he thought, was to set up the estimated present value of the obligation required to make payments to an employee during the estimated years of his or her retirement. Paton suggested either financing on a strict pay-as-you-go basis or setting up an intangible asset with a value equal to the estimated present liability acquired. The most reasonable approach, said Paton, was to consider the pension plan an arrangement whereby present workers as a group would be compensated for services to be rendered in the future. Paton (1953a) seemed to emphasize that any system of pensions must be based on an overall pay-as-you-go basis, and that funds accumulated must be invested in productive resources and not in government bonds.

In this area, Paton’s beliefs have not been well accepted. There has never been a serious attempt to force companies to embrace a pay-as-you-go system, where they are required to set aside the full amount of the pension expense. Rather, current practice requires the pension liability to be shown in total. Still, Paton’s suggestion that companies provide for the establishment of a liability equal to the present value of the future obligation does conform with the requirement to set up a pension benefit obligation to match the obligation required to make payments.

### Accounting Organization Influences

Virtually all of the large accounting organizations have, at one time or another, attempted to influence accounting theory and practice. Paton’s influence on the accounting societies is discussed in Chapter 6, but in considering the development of Paton’s philosophy, one cannot overlook the effect accounting organizations exerted on Paton’s thinking.

For several years after its creation, the AICPA made a concerted effort to define uniform accounting procedures. Stabler (1968) believed that the Special Committee on Cooperation with Stock Exchanges of the American Institute of Accountants (AIA) was responsible for introducing the expression “accepted principles of accounting.” He credits May with introducing the term, in correspondence with the SEC. At that time, the terms “rules,” “methods,” “conventions,” and “principles” were used interchangeably. The Committee members hoped that “a select group of corporate officials, lawyers, and accountants” could formulate a number of basic accounting principles that would be accepted by all accountants (p. 25).

In the years immediately following the Committee’s pronouncements, many Institute members believed that it had failed to perform its objectives. The following statement appears in the Statement of Objectives published by the AAA (1936a):

After a quarter of a century and more of active discussion and experimentation in this country, many of the simplest and most fundamental problems of accounting remain without an accepted solution. There is still no authoritative statement of essential principles available on which accounting records and statements may be based. Public accountants … have been asked to certify to the correctness and adequacy of accounting statements when no satisfactory criteria of correctness and adequacy have been agreed to. (p. 2)

Disenchantment with the work of the Institute stemmed primarily from its approach in developing the principles. Bierman (1979) believed that standards could be set by taking two different approaches. The most direct and easiest approach was to take a specific business transaction that required an accounting entry and recommend the exact way to record the transaction. Bierman’s second approach to setting standards was more in line with the Paton approach – not surprising given that Paton had chaired Bierman’s dissertation. This approach involved defining a general set of operating guidelines that could be used to evaluate the accounting for a specific transaction. Many felt it unfortunate that the first approach was the way in which the Accounting Research Bulletins (ARBs), APBOs, and SFASs were prepared. In the beginning, this piecemeal approach seemed practical in providing immediate help to practicing accountants who faced specific problems. Storey (1964) commented on this approach as follows:

Lengthy discussion of an overall set of principles would merely delay the service the committee on accounting procedure could provide in reducing controversies, and there was considerable doubt that a comprehensive program could be carried to a successful conclusion. The committee therefore decided to consider specific topics as they arose and, if possible, to recommend one or more alternative treatments as definitely superior to other recognized procedures. (p. 43)

When the AAUIA formed in 1916, one of its main objectives was to provide a forum by which to exchange ideas about accounting instruction. Until 1925, however, only token research projects had been undertaken, despite the strong efforts of Paton and others to encourage research.

An event that would change the development of accounting standards was the establishment of the SEC by the US Congress, in 1934. This 1934 Act gave the SEC authority to create accounting standards. It was perhaps this event, more than any other, that forced the accounting profession to begin the process of working together to create a coherent body of standards. Flesher et al. (1996) stated that the accounting community felt that a

consensus among practitioners would give their representatives greater leverage in negotiating with political leaders to countervail the undesired extension of federal regulatory authority. One champion of this view was Robert H. Montgomery, who as president of the AIA in 1936 called for a merger with the American Society of CPAs and a closer association with the state CPA societies. The recombining of the rival bodies helped strengthen the profession and led to the SEC’s acceptance of the AIA as promulgator of standards for financial accounting and auditing. This was an important precedent, because it reflected the government’s willingness to accept a degree of professional self-governance, provided the public interest was protected. (p. 53)

One of the results of this “recombining” of rival bodies was the creation of the CAP, which issued ARBs. Flesher et al. (1996) stated that these bulletins were “soon a source of ‘substantial authoritative support,’ which the SEC demanded all public companies employ in their financial reporting” (p. 53).

Shortly after Paton stepped down as director of research for the Association, it published “A Tentative Statement of Accounting Principles Affecting Corporate Reports” (AAA, 1936b). According to Taggart et al. (1992), many believe it was the appearance of this statement that caused the AIA to organize the CAP “in an endeavor to make sure that upstart academicians did not monopolize the business of formulating accounting principles” (p. 4).

Four years after the publication of the Tentative Statement, Paton and Littleton collaborated to publish An Introduction to Corporate Accounting Standards, which was praised by Hendriksen (1977) as “the most significant contribution to the development of accounting theory” during the 1920s and 1930s (p. 68). In this monograph, Paton and Littleton elaborated and expanded upon the basic concepts set forth in the earlier tentative statements, which were acknowledged to be essential to a sound fundamental structure of corporate accounting. The authors stated in the monograph that its purpose was to build a framework upon which a subsequent statement of corporate accounting standards could be developed (Paton and Littleton, 1940). Ravenscroft and Williams (2009) believed that this work showed that Paton and Littleton recognized the challenges of corporate accountability, and that they

argued that corporations created unique opportunities and responsibilities for accounting practice because corporate owners were separated from managers and because of the economic power that the increasing size and freedom of public corporations engendered. (p. 773)

The solution to the accounting problems prior to the stock market crash was the adoption of Paton and Littleton’s (1940) income determination model, which focuses on cost allocation and the matching of revenues with expenses. Through focusing on cost, Paton and Littleton (1940) argued that accounting can use an objective and verifiable means of assessing the performance of management. Paton and Littleton (1940) asserted that any accounting standard should be principles-based in nature and have a conceptual foundation that guides the direction of standards. (p. 79)

Paton and Littleton attempted to weave together the fundamental ideas of accounting, rather than state standards per se. In contrast to the Institute’s piecemeal approach, they sought instead to build a framework within which a subsequent statement of corporate accounting standards could be enclosed. Had the Institute, clearly the leader in accounting research, formulated its research procedure on a more conceptual basis in line with the postulate approach endorsed by Paton as early as 1922, then perhaps Paton would not have felt compelled to attempt to organize a research program within the Association.

Paton often criticized the research activities of the Institute. Paton served for 11 years as a member of the CAP, and frequently dissented with regards to various bulletins issued by the Committee. This criticism intensified when a new research arm of the Institute, the APB, was created. That Board was specifically constituted to construct a framework of principles, or guidelines, for accountants. The creation of the APB was a recognition of the CAP’s failure to follow the SEC’s instructions to limit the available alternatives in accounting a problem that derived from the CAP’s problem-by-problem approach to standards-setting (Previts and Merino, 1998).

The APB’s function was not merely to “put out brush fires,” as the old CAP had so often done. Rather, this Board was to oversee research conducted by an ARS group and use its studies as a basis in crafting accounting principles pronouncements. Paton reacted unfavorably toward some of the Board’s activities, which he felt impaired, rather than advanced, the professional status of accounting and the quality of service rendered by accountants.

Paton (1971f) objected to what he calls the “unfortunate tendency of the Board to explore details and to take a positive position on all sorts of minor points” (p. 41). He recalled early accounting textbooks that had devoted considerable space to directions for using black and red inks and for handling a ruler in the process of drawing single and double lines. While the APB had not yet attacked such routinely clerical matters, it had issued a 189-page booklet discussing the computation of earnings per share. The booklet was ostensibly designed to explain and interpret the provisions and applications of APBO No. 15. Paton criticized not only the obscurity and unnecessary detail of the publication, but deplored the fact that the subject was ever tackled in the first place. In his opinion, the computation of earnings per share had little, if any, relation to accounting principles and fundamentals.

Paton’s second objection to the Board’s attitudes and activities was, in Paton’s mind, much more serious. Paton (1971f) believed that the Board was “no longer content to express opinions,” and was “now issuing hard-and-fast rules and directives” (p. 43). Paton cited several examples to bolster his claim that the Board had quit suggesting and started prohibiting. He mentioned one opinion that had been supported by only the minimum number of members (i.e., 12) required for passage, while six men that Paton considered to be of high caliber namely, Messrs. Milton Broeker, Leo Burger, Davidson, Charles Horngren, Jacob Seidman, and Frank Weston had dissented. Paton argued that that opinion, as it was issued, must have possessed several faults and limitations if these six distinguished accountants could not support it.

In chiding the APB, Paton stated that he was not suggesting that the AICPA abandon its efforts to support the development of accounting as a truly professional field or scrap the APB arm of its overall program. Moreover, he supported the Institute’s program of sponsoring special studies conducted by competent persons, as a basis for appraising alternative accounting procedures and making recommendations regarding the preferred course of action or treatment in the case of controversial matters of major importance (Paton, 1971f).

Paton thought that a number of minor changes might improve the APB’s stance and methods. First, he suggested a change of name from the Accounting Principles Board to the Accounting Procedures Board, admitting that after all his years of study, he was still unsure of the exact meaning of the word “principles.” As a part of this first suggestion, Paton felt that the Board should issue a statement repudiating the view that it was designed to take a dictatorial stance. Paton’s second suggestion was that the Board state its intention to concern itself only with fundamentals, and to avoid in its official statements minor details. The third suggestion was that the Board no longer write and issue lengthy opinions. He suggested that official statements be confined to brief announcements regarding the results of research studies sponsored by the Board and published with its authorization (Paton, 1971f).

Paton’s fourth proposal stated that a responsible scholar in the field of accounting should be assigned to each sponsored study, to conduct the major work of investigation and writing the results. In Paton’s (1971f) thinking, the term “scholar” was not to be confined merely to professors of accounting or other persons holding advanced degrees; he also considered a number of practicing accountants to have been true scholars.

Paton’s fifth and final suggestion favored continuing the practice of designating an advisory group of six or seven persons for each authorized study. This advisory group would be active in constructively supervising and assisting, but not dictating to, the selected author and major investigator (Paton, 1971f).

Several interesting similarities exist between the APB as envisioned by Paton and the work of the Association’s old research groups. The Association never considered taking a dictatorial stance, and it avoided the use of ambiguous words such as “principles.” Certain individuals were recognized as primary researchers and authors, and they were advised by a committee that formulated the tentative statements.

A review of the literature reveals no significant amount of writing by Paton with regard to the FASB. Paton was in his eighties when the FASB was created, and by that time he had significantly reduced his volume of writing about accounting issues. However, given his earlier statements, it would not be unreasonable to assume that the FASB would have impacted his thinking, and that he would have heartily endorsed the Board’s use of research personnel to study a problem carefully and to set up a due-process method that any new standard was compelled to endure. On the other hand, Paton would likely have disapproved of the apparent “dictatorial stance” of the FASB. It would seem also intuitive that when he saw certain standards (such as SFAS No. 4), he would have bemoaned again the significant level of detail inherent in such standards.

Nonetheless, the FASB has endorsed many of Paton’s beliefs. Bloom (2007), for example, cited an early conceptual disagreement between Spacek, an early managing partner of the Arthur Anderson CPA firm, who strongly opposed the presentation of forecast oriented accounts (such as current values) in audit opinions, believing that “making predictions and reaching economic decisions are the responsibility of the investor and other users of financial statements” (p. 436). The Arthur Anderson Company further felt that accountants should not attempt to relieve statement users of this responsibility. Bloom (2007) felt that these views contrasted with those of many of the leading accountants of the day, including Paton himself. Eventually, Paton and others were shown to be correct, when the first Statement of Financial Accounting Concept recognized that the first objective of financial reporting was decision usefulness.