Charles T. Horngren: Mentor, Role Model, Colleague, and Friend

Abstract

Chuck Horngren, over the years, was tasked with introducing many of the leading lights in our profession before they made public speeches. He typically began:This expresses the feeling of inadequacy of doing justice to the life and career of Charles Thomas Horngren.Chuck, the son of William and Grace Horngren, was born on October 28, 1926, in Milwaukee, Wisconsin. His father worked for over 40 years as a railway mail clerk on the Milwaukee Road.His father was an avid baseball fan, a passion he passed on to his son. Chuck often reminisced about his dad taking him to the baseball games and meeting many of the day's baseball luminaries. He also had a collection of baseball memorabilia, including Yogi Berra's autograph in his book, Yogi: It Ain't Over… , co-written by Chuck's close friend, Tom Horton.Chuck graduated from Washington High School in 1944 and joined the Army. The Army sent him to pre-engineering classes at Ripon College and to engineering classes at what is today known as Texas A&M University. After over two years in the Army, Chuck enrolled at Marquette University and was elected to Beta Alpha Psi. While at Marquette he gained an appreciation for teaching after tutoring basketball players and disabled veterans. He graduated from Marquette as valedictorian in 1949 and remained very loyal to Marquette throughout his life.Upon graduation, he joined Peat, Marwick, Mitchell & Co. (now part of KPMG) as a staff auditor. A year later, he taught full time at Spencerian College, a commercial business college, where his workload was 30 classroom hours per week. He received an M.B.A. from Harvard Business School in 1952 and was certified as a CPA in Wisconsin the following year.In 1952, Chuck married Joan Knickelbine. They were very devoted to one another, as they were to their children and grandchildren. Joan passed away on May 3, 2010, and Chuck died on October 23, 2011. Four children survive them: son Scott and his wife, Yone McNally, of Portland, Oregon; and daughter Mary and husband, Dennis Wilson, and daughters Susan and Catherine, all of the San Francisco Bay Area. They are also survived by their grandchildren, Erik Horngren and Chelsea and Marissa Frost.After receiving his M.B.A., Chuck entered the doctoral program at The University of Chicago and received a Ph.D. in 1955. During his doctoral studies, he was also a full-time member of the faculty, serving successively as instructor and assistant professor.The title of his doctoral thesis was Implications for Accountants of the Uses of Financial Statements by Security Analysts (Horngren 1955a). In many ways the thesis foreshadowed the future changes in the profession's and the financial community's perspective regarding the role of financial statement data, the importance of disclosure, and elements of market efficiency. For example, well ahead of his time, Chuck observed:Chuck left Chicago to teach at Marquette (1955–1956) and then at the University of Wisconsin-Milwaukee (1956–1959). He returned to The University of Chicago in 1959 as an associate professor and became a professor in 1963.The 1960s were exciting times at Chicago, where major developments were taking place in accounting and finance. Following the successful launch of Sputnik into space by the Soviet Union in 1957, the U.S. became obsessed with accelerating mathematics, engineering, and science education, as well as kicking the development of its space program into high gear. The effects of generous grants made by the Ford Foundation during the 1960s to encourage the application of quantitative methods and advances in the social sciences to the organization of firms and markets and to business decision making were clearly in evidence at Chicago.The accounting faculty in the early 1960s was a powerhouse, including, among others, Sid Davidson, Nick Dopuch, George Sorter, and David Green, in addition to Chuck. The soon-to-be-influential Journal of Accounting Research was launched in 1963, and Chuck was a member of the inaugural editorial board. Tom Dyckman and Steve Zeff (1984, 233) refer appropriately to the 1960s as the Decade of Awakening in the accounting literature, and Chuck served as a major catalyst and cheerleader, both directly and through his influential students.The doctoral students at Chicago in the 1960s included Joel Demski, Philip Brown, Bill Beaver, and later Ray Ball and Ross Watts, among others. The accounting workshops generated much heat and often some light as well. Throughout the workshops, Chuck was a stabilizing influence, always insightful and well balanced in his comments. This group would go on to revolutionize both financial and managerial accounting research.Chuck remained at Chicago until his exodus for a visiting professorship at Stanford in 1965. He remained at Stanford until he elected emeritus status in 1995; he kept an office there until his death.1 Chuck had an enormous impact on the Graduate School of Business at Stanford. He, together with Bob Jaedicke, was responsible for building up the accounting faculty. Chuck was directly responsible for Joel Demski and Bill Beaver joining the faculty shortly after his arrival, known in some circles as the “Chicago mafia.” Chuck fully supported the younger faculty and doctoral students throughout his career, and served as a role model and mentor to many rising stars.Chuck's arrival at Stanford ushered in an exciting era. Besides Chuck, the accounting faculty included Bob Sprouse, Bob Jaedicke, Joel Demski, Bill Beaver, and Jerry Feltham. A few years later, they were joined by George Foster, Jim Patell, and Mark Wolfson, among others.While he is best known for his widely used textbooks, Chuck authored more than 50 other publications, and many were highly influential.Chuck was in many respects the father of modern managerial accounting, which was known as cost accounting until Chuck completely and dramatically changed the perspective of the field. In 1962, he published his path-breaking text, Cost Accounting: A Managerial Emphasis, which was the first managerial accounting text to be so widely used on a nationwide basis. The text was dedicated to Bill Vatter, who chaired his doctoral thesis and served as a mentor to him. Vatter's influence has been well documented (Dyckman and Zeff 1984; Zeff 2008, 197–201). Chuck acknowledged the important role that Vatter played, both in his autobiographical article (Horngren 1989) and in his tribute to Vatter (Horngren 1991).Cost Accounting was a master tome, and it fundamentally transformed managerial accounting, changing the field from a simple description of institutional practice relating to cost accumulation/record keeping to an emphasis on uses of accounting data for decision-making purposes. Every textbook in the field since has followed this paradigm. Fifty years later, and now in its 14th edition, it still dominates the field. And with a pair of superstar co-authors in Srikant Datar and Madhav Rajan, each of whom is a modern-day leader in the field in his own right, it seems likely to continue to occupy that position for years to come.Chuck was quite clear about the purpose of the book at the outset:In particular, one of the central ideas developed in the text, now well ingrained into our way of thinking, is that costs that are constant across alternative action choices are irrelevant for making decisions. It is only the costs that vary across alternatives that are relevant. In many decision contexts, this principle implied that fixed costs were not relevant costs.The importance of this broader, conceptual view was considered to be vital to the continued existence of accounting:As influential as the text became in the 1960s, it has evolved significantly over the years. Perhaps the biggest changes resulted from Chuck's close personal and professional relationship with Joel Demski. Joel's research and interactions caused Chuck to expand his emphasis on producing information useful for planning purposes to one that embraced the importance of information that would improve control (agency) issues in organizations. While it would take co-author Datar to bring the full agency perspective into the text, Demski's impact was very significant.Another area where Chuck's thinking evolved over the years is the importance of understanding the processes by which costs arise. For years, he seemed to have a love–hate relationship with the early ideas of activity-based costing championed by Bob Kaplan at the Harvard Business School. He was concerned that activity-based cost analyses were not only expensive, but also prone to significant estimation error that could undermine the theoretical benefit of the exercise. But during the 1980s, as manufacturing technologies evolved, product lines proliferated, and as the relative importance of overhead costs increased as compared to direct production costs, Chuck increasingly came around to the usefulness of such exercises.2In 1981, in the first edition of his textbook, Introduction to Financial Accounting (Horngren 1981), Chuck applied his same excellent writing talents and emphasis on the uses of financial statement data for decision-making purposes. The text is now in its ninth edition. Although less revolutionary than his 1962 cost accounting text, it was the first of a series of superb financial accounting texts.While Chuck is best known for his contributions to management accounting, he made a significant contribution to financial accounting as well. This is particularly true of many of his early articles.In October 1955, he published his first article, “Security Analysts and the Price Level” in The Accounting Review (Horngren 1955b). Drawn from his doctoral thesis, the article was based on interviews with 51 security analysts and his review of 123 written analysts' reports. This article ushered in the widespread use of empirical data to cast light on hypotheses, as opposed to exclusive reliance on theoretical reasoning or logic of those for whom a measure of true income was the Holy Grail. This article reported and sought to explain the somewhat surprising findings that analysts generally opposed price-level adjustments to financial statements, considering them irrelevant. In a prophetic statement, Chuck concluded, “Judgment as to usefulness is made ultimately by the user, not the producer” (Horngren 1955b, 581). In this conclusion, he modified the lens through which alternative financial accounting rules were to be viewed, first by academic researchers and eventually by regulators and the profession, to one of “usefulness to decision makers” that has dominated accounting since.Together with George Sorter, Chuck co-authored a series of articles while at Chicago on relevant costing and external reporting (Horngren and Sorter 1961, 1962, 1964). In the 1961 article, “‘Direct' Costing and External Reporting,” they adopted the path-breaking notion of a decision-making approach to accounting.This represented a dramatic departure from traditional views of the purposes of financial statements, such as Paton and Littleton's (1940) “costs attach” notion, which they argued was widely misinterpreted. They also introduced the notion of applying direct or variable costing to external financial statements. The article created quite a stir and elicited several rebuttal articles.In response to this criticism, they wrote a follow-up article, “Asset Recognition and Economic Attributes: The Relevant Costing Approach” (Horngren and Sorter 1962). Here, they elaborated on the concept of relevant costing for issues of asset recognition. After defining the key attribute of an asset as providing “service potential,” they directly attacked weaknesses in the prevailing interpretation that “costs attach” and laid out the principle that costs must be matched with revenues. The concept of relevant costs, which is central to their argument, was defined as follows:While they provided several examples where direct or variable costing would provide a better basis for asset recognition, they were careful to point out that their concept of relevant costing was much broader. In their concluding remarks, they stated:The 1962 article did not put the debate to rest and led to another series of rebuttal articles, defending full costing for financial accounting purposes, including articles by William L. Ferrara (1963) and by Philip E. Fess (1963). This led to the third in the Horngren and Sorter series in 1964, “An Evaluation of Some Criticisms of Relevant Costing.”While the goal of bringing “convincing and universally applicable answers” was an ambitious one and was not achieved, the notion that relevant costs could be pervasively applied to both managerial and financial accounting was an innovative and influential breakthrough in thinking.Chuck had an outstanding command over financial accounting. It helped that he had been certified as a public accountant and had worked in public accounting. In addition to his successful series of financial accounting articles and textbooks, Chuck was very active in the American Institute of Certified Public Accountants. In 1968, he began a five-and-a-half-year term as an academic member of the Accounting Principles Board (APB), the major private-sector setter of generally accepted accounting principles. He was also active in the work of its successor organization, the Financial Accounting Standards Board (FASB), and served on its advisory counsel (1975–1979) and its board of trustees (1984–1989).In 1972 and 1973, he authored a pair of classic articles in the Journal of Accountancy that were also path breaking. They were based not only on insights drawn during his academic career and from his public accounting experience, but also on those acquired during his term as a member of the APB. Hence, he wrote somewhat with the voice of an “insider.”The first publication, “Accounting Principles: Private or Public Sector” (Horngren 1972), shattered the myth that accounting standards were set entirely or even primarily by the private sector. It laid out simply and precisely the relationship between the Securities and Exchange Commission (as well as Congress and other regulatory agencies) and the accounting standard setters, the APB, and by implication, the FASB. It drew on the analogy of the relationship between top management and lower management, invoking the principle of management by exception.Drawing upon his APB experience and his managerial accounting expertise, he hypothesized a fundamental model for viewing the relationship between the SEC and the “private-sector” accounting standards body (APB or FASB). His model characterized the SEC as functioning as top management and the private sector accounting standards body as functioning as lower management. The SEC delegates the authority for standard setting to the private-sector body but maintains oversight. The SEC typically accepts the standard setter's pronouncements, but on occasion steps in to override them. The article used the recent controversy over the investment tax credit as an illustration.As he stated:In 1973, he elaborated his thinking in a Journal of Accountancy article entitled, “The Marketing of Accounting Standards” (Horngren 1973). As cited by Chuck in his article, it was written in part as a response to the strong opposition expressed by an Accounting Principles Board member, as well as the Securities and Exchange Commission. Here, the article explicitly characterized the relationship as central management (the SEC) and decentralized management (the APB). The article explicitly stated that the SEC had delegated much of the power to the APB (Horngren 1973, 62).It was also an extremely controversial article, but time has shown that it is an accurate description of the relationship. This perspective has important implications for the standard-setting process. In particular, Chuck noted:The SEC chief accountant, John (Sandy) Burton, stating he had the support of the SEC chairman, rejected Chuck's description and preferred to refer to the APB-SEC relation as a “partnership.” The opposition to the articles was particularly strong, because the position was taken by someone of extensive professional and academic experience and someone who was not prone to making extreme remarks.Besides the objection to the characterization of the private-sector standard-setting body as lower management, there was strong opposition to another implication of Chuck's model highlighted by the wording in the title, the “marketing” of accounting standards, and the statement that setting of accounting standards was a product of political action.3 Calling the standard-setting process a political process was highly controversial at the time, and still is in some circles.Chuck was a major contributor during his term as an APB member, providing a unique contribution from an academic viewpoint. For example, as chairman of the drafting committee, he played an important role in persuading the APB to issue APB Opinion No. 21, Interest on Receivables and Payables, in 1971. At the time, present-valuing was not a part of GAAP. The debt discount related to bonds payable was routinely shown as a deferred debit in the balance sheet. The role of interest in financial accounting was ill understood by practitioners then. While the Opinion looks innocuous today, it was an important breakthrough in 1971.Chuck was an outstanding teacher. Every one of his students we have met has raved about his teaching ability. Obviously, he had a distinct advantage over the rest of us, because, after all, he wrote the textbook. But his command of the classroom was legendary, including his well-timed witticisms and stories.He was, without exception, patient and supportive in the classroom. His teaching ability was eloquently summarized in the AAA's Outstanding Accounting Educator Award citation:Chuck was eminently fair with everyone, and everyone trusted him. This was true not only of his students, but also of his colleagues and, it seemed, of everyone he met. As a result, Chuck was universally admired, respected, and loved throughout the universities with which he was affiliated and across the entire profession.4Chuck received every honor that his profession had to offer. He was very active in the American Accounting Association. He valued highly his participation in the AAA and viewed it as an essential component in his role as an accounting educator. He strongly encouraged doctoral students and novice assistant professors to become active in the AAA as early in their careers as possible. He served in a number of positions in the AAA, but most prominently as research director (1965–1966) and president (1976–1977).In 1973, the American Accounting Association instituted a new award, the Outstanding Accounting Educator Award. Chuck was one of the two inaugural recipients of the award. In 1985, the American Institute of Certified Public Accountants instituted a new award, the Outstanding Educator Award, and Chuck was the first recipient of that award, as well. In 1990, he was inducted into the Accounting Hall of Fame. Among his honorary degrees, the honorary doctorate from his alma mater, Marquette, was truly special to him.Chuck was extremely devoted to his family. He spent a great deal of time with his children and grandchildren, whom he loved and who loved him dearly in return. He was an outstanding role model, demonstrating that you can excel both professionally and personally.Without exception, when receiving his many honors, Chuck praised Joan as an instrumental part of his success. We are fortunate to have been in attendance at many of those occasions, where Chuck demonstrated his wry sense of humor. On these important occasions, he would always begin honoring Joan, saying, “Behind every successful man is a surprised mother-in-law.” He would then proceed to lavish heartfelt praise on Joan, his “balance wheel.”In addition to Chuck's extraordinary professional and personal contributions, the Horngrens were generous philanthropists in support of the activities of Marquette, Chicago, and Stanford.At Marquette, they endowed a professorship in accounting in 1994. In 2005, they established the Joan Horngren Accounting Fund “to provide support for the faculty in the college of business administration [and] … to enhance the recruitment and retention of quality faculty.” The goal was to support faculty development in teaching and research. Their financial support funds other activities as well through the Horngren Family Fund.At The University of Chicago, he created the Horngren Doctoral Fellowship Fund to provide funding for outstanding Ph.D. students in accounting. In addition, generous contributions were made to the Sidney Davidson Endowed Professorship and the Booth Annual Fund.At Stanford, he endowed the Joan E. Horngren Professorship in 1984. They also established the Horngren Family Vitreoretinal Center at the Byers Eye Institute and the Horngren Family Alzheimer's Research Fund at the Stanford School of Medicine.Chuck and Joan were always close friends to Sue and me. We especially recall the dinner they held for us one week before our wedding in 1965. Every year for the past several years, we would celebrate our respective birthdays with an evening out for dinner. Our restaurant of choice was usually the Olive Garden restaurant.In addition to his many profession-wide contributions, Chuck was an essential element in my career. Almost 50 years ago, I first met Chuck when I entered the M.B.A. program at The University of Chicago. Throughout my time at Chicago, he advised me on coursework, on my decision to enter the Ph.D. program, on my thesis (serving as a member of my thesis committee), and on my decision to remain at Chicago after completing my doctoral studies to accept a faculty appointment. Whenever I needed his help, he was there.In 1969, the Stanford Graduate School of Business made me an offer to join its faculty. It was Chuck who made the initial phone call, on a dark February day when we had not seen the sun in Chicago for 13 consecutive weekends. As always, Chuck was a master of timing.Throughout my Stanford years, Chuck continued to be a major influence in my career. I drew on him continually for advice on teaching and research. I could not have survived my term as AAA president in 1987–1988 had it not been for Chuck's advice and support.Chuck was a master of writing a textbook or an article. For example, he invited me to attend a meeting of the Accounting Principles Board when he was a member. It was an eye-opener for me. After the meeting, Chuck suggested that I write up an article for the Journal of Accountancy based on my security price research. My original title was “Potential Implications of Security Price Research for Accounting Standard Setting.” Chuck was concerned that the title would limit the readership. He suggested, “What Should Be the Objectives of the FASB?” (Beaver 1973). In subsequent years, I have taken a lot of heat for the title, as well as the article. However, it is, without doubt, the article on which I received the most number of comments.Chuck was an unparalleled example of outstanding achievement and humble demeanor. If anyone had the right to be arrogant, it was Chuck. Given that he was not, none of the rest of us would even contemplate acting any differently than he. Chuck was my mentor, my role model, my colleague, and my friend.As early as my undergraduate days at the University of Illinois, where I majored in accounting, I came to regard Chuck as a god. After all, he not only wrote the textbook I used in my cost accounting classes, but he also had a hand in crafting a number of pronouncements I read in my financial accounting classes. I can still remember one of my college roommates sending me a congratulatory note after I had performed well on an examination. He had forged the signature of Charles T. Horngren at the bottom of the note, a remarkable precursor to many authentic handwritten notes that Chuck would send me (and many others) over the years.When I first joined the Stanford faculty in 1977, after obtaining my Ph.D. at The University of Texas, I was awestruck by the presence of so many faculty whose work had been so influential to me. At the top of that list were Chuck Horngren and a fellow who eventually would become the Joan E. Horngren Professor of Accounting, Bill Beaver.But it did not take long for Chuck to make this youngster feel warm and welcome in his and Stanford's embrace. I participated as often as I could in a daily 10:00 a.m. coffee break with Chuck and a few other senior faculty, feeling as though I held the winning lottery ticket entitling me to listen to the wise and humorous stories of my elders. I also loved sitting with Chuck at lunchtime in the faculty lounge, where he brought a hard-boiled egg and a container of salt in the form of a mini Schlitz beer bottle (his loyalty to Milwaukee clearly in evidence) nearly every day for many years.As mentioned earlier, Chuck inherited a love of baseball from his father. For many years, Chuck invited my son (named Charlie, of course, the same name Joan often used in referring to Chuck) and me to an annual outing to watch the San Francisco Giants play baseball. We routinely sat in the skybox just behind home plate, a perk from one of the boards of directors on which Chuck served—these were magical times. Once Chuck encouraged my son to borrow his prized classic photo of Babe Ruth, late in the Babe's career, leaning heavily on a bat in Yankee Stadium, so my son could bring it to his grade school for “show and tell.” I was short of breath from anxiety all day, worrying that something might happen to this great piece in Chuck's memorabilia collection, while my son and Chuck were just thrilled with their collaboration.Spending time with Chuck, and with Joan for that matter, was always like wearing a comfortable sweater. And that applied just as much to the infamous fondue dinners at the Horngrens as it did to other occasions. Chuck loved a good story, he loved a good joke, and he loved hearing about the latest developments in the lives of people he knew. He wished everyone well, an enviable dividend from keeping his ego so well in check.My wife Sheila served on a nonprofit board with Chuck and, like me, she adored him. They often invited each other out for lunch and enjoyed lively chit-chat by telephone.Throughout both Bill Beaver's and my careers, Chuck was a major influence: a mentor, a role model, a colleague, and, most of all, a friend who will be deeply missed. It was such a blessing to have had this extraordinary man in our lives.