Corporate governance and earnings management ... - CEREG

eserves, turned out to be less than “optimal” despite its merits, because it eliminated reserves
that were useful for dividend distribution. This appears to be confirmed by the opinion of one
of the leading professional actors of the time, the audit firm Arthur Andersen. One of its bestknown
partners declared quite unambiguously that pooling of interests, a method that was to
develop subsequently (see below) was invented for two reasons:
- to prevent goodwill appearing;
- to make it possible to “maintain the earned surplus” (Spacek, 1973).
The second reason, mentioned by Spacek, but also by Kripke (1961, p. 1029, note 3), is
particularly interesting, because it shows that the write-off approach is not optimal given its
sudden impact on retained earnings.
Another problem for the write-off solution was that it reduced the financial surface:
“killing” of the balance sheet at a time when it was more and more important to show the
creation of value on the stock markets (see below) was not so good. Some companies, taking
this view, sought another “acceptable” if not better approach.
b) The rise to dominance of the dynamic approach
The move towards the dynamic approach happened slowly. It probably began in the 1930s,
a period of serious economic depression when businesses tried to reassure shareholders by
providing a “smoothed” (to apply a modern term) presentation of income. This is what is
apparently suggested by the Correspondence between the Special Committee on Co-operation
with Stock Exchanges of the American Institute of Accountants and the Committee on Stock
List of the New York Stock Exchange: “Some method, however, has to be found by which the
proportion of a given expenditure to be charged against the operations in a year, and the
proportion to be carried forward, may be determined; otherwise, it would be wholly
impossible to present an annual income statement” (Correspondence, 1932-1934, p. 6, quoted
in Catlett & Olson, 1968, p. 32). But in a context of economic crisis with conservative
approaches still very strong at the time (Kripke, 1961, p. 1032), it was too early for full
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