Goodwill and ethics : evidence from Finland

Abstract

Goodwill appears as an intangible asset in the parent company balance sheet after purchasing a company, especially with big expectations of growth and synergy. However, there are ethical issues involved in presenting and accounting for goodwill. For example, if the manager pays too much for a company in the hubris of closing a deal in order to obtain his/her bonuses, the excess amount paid can currently be “hidden” into the parent company balance sheet under the name of goodwill. In this paper, we analyse the possible ethical dilemmas of goodwill accounting, valuation, impairments and risks. In particular, we ask, what ethical considerations are related to goodwill accounting, implied by goodwill changes and the relations between goodwill, risk and other fundamentals, such as profitability. Our empirical illustration, using Finnish small listed company data from 2007 to 2014, shows that high beta (indicating high business risk) correlates positively with high goodwill. This signals potential problems in the ethical and managerial practices and reflects heightened risks for the users of financial statements, such as analysts and auditors.