Corporate governance and earnings management ... - CEREG

(1897, p. 46). He arrives at the conclusion that this “undesirable” and “embarrassing”
asset should be eliminated “with all due speed” (1897, p. 45-46);
- on the other hand, he also has shareholder’s interests in mind, and believes that goodwill
“should not be written off out of profits” (1897, p. 46) because that comes down to
creating “a secret reserve” (1897, p. 47).
To settle this problem, Dicksee first raises the possibility of reducing the “Capital account”
by the whole amount of goodwill (1897, p. 46), although he acknowledges that this ideal
solution is not actually possible, and would not be acceptable to lawyers (1897, p. 46). Since
he would rather leave the reserves alone (1897, p. 46), he seeks unusual solutions (such as the
creation of founders’ shares) (1897, p. 47) but is forced to admit that they are probably
“unworkable” (1897, p. 48). Failing to find an optimum solution, Dicksee, in agreement with
Tillyard (1920, p. 106), appears to have finally accepted that acquired goodwill should be
charged to reserves, particularly if the goodwill was artificially inflated.
As in the precedent period, many authors are drawn to this view for practical reasons. One
such is Hamilton (1914, p. 218), who puts forward a theoretical defense of the actuarial
approach (no systematic reduction), before conceding that “as to the practical desirability of
writing off goodwill, I agree”. Another is Lancaster (1927, p. 146), who like Hamilton, thinks
there is no theoretical reason to reduce goodwill, unless it is to reflect an effective loss of
value. But “on the other hand, in view of its intangible nature and the fact that its value is
always dependent upon the financial stability of the undertaking, it is considered sound
financial policy to write down goodwill as and when profits are available”.
Some authors, as noted above, take a clearly dynamic position (Leake and Guthrie for
example), but this approach met with little success in practice, as we shall see.
Garke and Fells (1922) occupy a somewhat ambiguous position: in theory, they are against
systematic amortization of goodwill, but they consider that in practice it is “desirable to create
gradually a special reserve fund” (see Bryer, 1995, p. 306). There are also some “extremist”
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