Corporate governance and earnings management ... - CEREG

Goodwill still had the bad reputation associated with it in the previous period: otherwise,
Sanders, Hatfield and Moore (1938) would not have been able to assert that there was a
“pervasive feeling” that goodwill added nothing to the balance sheet and a leading opponent
of this view would not have felt obliged to stress that there was “no reason to exclude it from
the respectable family of assets” (Paton & Stevenson, 1922, p. 409).
The dominant practice continued to favor “killing off” goodwill: “nobody seems to regret
its disappearance when accomplished by methods which fully disclose the circumstances”
(Sanders, Hatfield & Moore, 1938, p. 14; Catlett & Olson, 1968, p. 94). There was an “almost
universal feeling that the balance sheet looks stronger without it” (Sanders, Hatfield & Moore,
1938, p. 14).
Indications of a move towards the dynamic approach start to appear near the end of this
period, although those indications are slight: for instance, the AIA (American Institute of
Accountants), referring to the write-off treatment in its ARB 24 (AIA, 1944), considers that
“since the practice has been long established and widely approved, the committee does not
feel warranted in recommending, at this time, adoption of a rule prohibiting such dispositions.
The committee believes, however, that such dispositions should be discouraged, especially if
proposed to be effected by charges to capital surplus”. In view of conflicting opinions on the
matter, the AIA left its members the choice of the most appropriate solution, including the
possibility of keeping goodwill on the balance sheet with no reduction in value – although on
the whole, this was not a highly regarded technique. Significantly, at the end of this period,
Werntz, the SEC’s chief accountant, declared “in those cases in which a registrant has
retained goodwill indefinitely in its accounts, the staff has inquired into the propriety of this
accounting treatment. As a result of an analysis of the nature of the account, a number of
registrants have undertaken programs of amortization that will result in charging the goodwill
to income, or, in some cases, earned surplus, over a reasonable number of years” (Werntz &
Rickard, 1945, p. 5-6).
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