Corporate governance and earnings management ... - CEREG

Arthur Andersen came to the defense of these companies, and through its main spokesmen,
Catlett, Olson and Spacek, brought back the static theory: goodwill was not a (true) asset. It
was instead the unstable result of simple expectation, and as such should be removed from the
balance sheet immediately by charging to reserves or capital (Catlett & Olson, 1968).
Interestingly, these authors are taking up one of the fundamental arguments of the static
doctrine, that it is impossible to sell the goodwill separately: “the goodwill of a business may
be different in nature from the other elements in the value of the business in that goodwill is
not separable in the sense of being saleable apart from the business as a whole” (Catlett &
Olson, 1968, p. 12). Colley and Volkan (1988, p. 41) are also in favor of writing off goodwill
against equity, for the unidentifiable portion of the excess payment over fair values of net
assets acquired, the identifiable part being capitalized and amortized. Miller (1973, p. 280,
291), who contends that recorded goodwill exists because of an inadequate theory of
aggregation of assets, concludes that “the least harmful resolution appears to lie in the
immediate write-off against income”.
As one commentator on Catlett and Olson’s work remarked, their reasoning appears to be
“resurrecting the spirit of the late 20’s and early 30’s, when in the interest of conservatism, it
was popular to write off anything that might embarrass future reported results” (Defliese, in
Catlett & Olson, 1968, p. 118). In fact, despite appearances, the spirit of their thinking is very
different from the 1930s. In preferring a write-off against capital to a write-off against
reserves (1968, p. 92), Catlett and Olson are not really in line with the static approach. It is as
if the static doctrine was used only as an excuse for a particular objective – to avoid any drain
on profits – that has nothing to do with its traditional purpose.
In parallel to the “doctrinal resistance”, pressure was put on members of the APB, with a
certain degree of success. The result was a “modern” and “beneficial” version of the static
solution: pooling of interests. Until 1950, the only business combination method that existed
was the purchase accounting method (Catlett & Olson, 1968, p. 45). Pooling of interests was
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