Corporate governance and earnings management ... - CEREG

“discovered” in 1950 with ARB 40 (AIA, 1950), but was not of great interest until 1957
because the write-off method was neither yet discredited nor prohibited. But starting from
1957, in a high-inflation context that saw goodwill values shoot up, pooling began to play a
strategic role for companies who were reluctant to amortize and wished to carry on using
practices similar to write-offs (Catlett & Olson, 1968, p. 3-4). Throughout this period there
was great pressure to broaden the criteria for application of the pooling of interests method,
which paid off in 1957 when ARB 48 (AIA, 1957) “provided greater endorsement of this
accounting” (Catlett & Olson, 1968, p. 4). As it has been emphasized “the unanimity with
which the leading public accounting firms, the SEC and the NYSE have acquiesced in the
process is evidence that accounting under the pooling method operates as a safety valve and
fills a real need” (Kripke, 1961, p. 1036). As in this era net income figures are the life blood
of the capital markets (Kripke, 1961, p. 1038), the pressure continued nonetheless, and in
1965 – only one year before the write-off method was eliminated! – the APB stated that the
limits for use of pooling (resulting from ARB 48) were simply “for guidance”.
The struggle was not yet over: in 1969, the APB considered prohibiting pooling in a
political environment calling for checks on mergers, seen as bad for national employment
(Spacek, 1972). But once again, under pressure from businesses the APB backed down, in
two stages:
- initially, it agreed to the continuation of pooling of interests provided restrictions were
introduced, principally a required minimum size (one third) for the main company;
- subsequently, it gave more ground over the question of the restrictions themselves, so that
not only was pooling of interests recognized as a practice, but it was more flexible in
application.
To conclude, the pooling of interests method could be used by any group undertaking a
merger by exchange of stock. While this meant that the write-off technique was no longer as
widely accepted as in the previous period, it remained possible to use it in a particularly
48