Question

1. In the summer of 1999, Navigant consulting had a share price of $54 per share and was voted as one of the best companies. Within 90 days the stock price had collapsed and the CEO was fired. The culprit was “pooling of interests”. What is pooling of interests? Why and how does this differ from GAAP Accounting? How might this be considered fraudulent? What impact does this have on earnings? On quality of earnings? Why was this only abusive in the acquisition of private companies? Why and how did this impact the subsequent decision to outlaw the practice for any NYSE publically listed company?

Answer 1

pooling of interest is a technique of recording a merger or aquisition, whereby the assets and liabilities of the two companies are summed together and then netted.

Generally accepted accounting principle(GAAP) refer to a common set of accounting principle, standards, and procedures issued by the financial accounting standards board(FASB)

pooling of interest basically allows companies to combine their operations in amerger and avoid taking a hit to their earnings over a period of time by avoiding the use of goodwill. without pooling company can can only use the "purchase accounting" method, in which the buyer will have to include goodwill in their books.

the impact of pooling of interest is that they did'nt need to record any expences arising from the acquistion. this approach made earnings look better since no redctions of goodwill were recorded