Corporate governance and earnings management ... - CEREG

The second view, rather larger, concerned proponents of the dynamic approach (phase 3).
For them, the cost of goodwill should be spread systematically over a certain number of
periods reflecting the way it was used or calculated. This group includes Guthrie (1898, p.
429) who recommended the following basis for amortization: “the amount of the years’
purchase of the goodwill as originally paid so far as the excess profits”.
Finally, the third position, and at the time the only credible alternative to the purely static
approach, rallied authors who (also) proposed making goodwill disappear from the accounts
immediately, but by charging it to equity (variation of phase 2). This was the position of
writers such as Dicksee (1897), whose later influence was to be fundamental (see below).
To conclude for this phase, many who opposed the principle of the static view finally
changed their minds in practice once under its pressure. Browne (1902, p. 1342), for example,
after declaring his hostility to profit reduction, adds, “I do not go so far to say that it may not
be desirable in many cases to strengthen a concern by reducing… the book value of its
goodwill, but the application of profits in this direction would be more in the nature of a
voluntary appropriation than a necessary charge”. Pain (in Browne, 1902, p. 1344), who was
not very favorable to writing off goodwill against profits, finally said, “at the same time, the
old adage about providing for a rainy day furnishes a stronger argument in favor of arming
oneself against a contingency which is not impossible of realization in any concern” (our
emphasis).
Globally speaking this prudent accounting conception is not a surprise: it is in line with the
social and economic context of the period (Parker, 1965, p. 160). As it has clearly been shown
by historians at that time, in line with a situation coming from the 18 th century, it is no doubt
that the “horror of failure” (Hoppit, 1987, p. 16) still caught eye an imagination. For that
reason most business man prefer to rely on their own resources or provided by people they
know well (Wilson, 1995, p. 46). In that context personal credit could play a central role but
was associated with the moral obligation to reimburse and a severe penalty for ignoring
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