Objectivity or advocacy: probability theory and capital costing at the Bell System

This paper investigates the Bell Telephone System's blending of depreciation knowledge and probability theory in order to control debate before government regulators in the early 1900s. By combining statistics and accounting, Bell created a system for estimating capital cost expiration firmly grounded in mathematical science, developing methodologies which used averaging techniques to determine trends in asset life obscured by random fluctuations in actual retirements. Concurrently, complexity derived from the application of probability theory gave the telephone company significant advantages in regulatory debates. The advanced mathematics employed formed a knowledge barrier, inhibiting potential encroachments by regulators on corporate prerogatives. This study expands our understanding of the acquisition and use of knowledge within the firm by investigating advocacy's role in the development of depreciation accounting. As depreciation knowledge spread beyond Bell, regulators examined equity issues related to the firm's depreciation practices, resulting in some relatively minor changes to Bell's depreciation policies.